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“South Australians should be concerned”: Treasurer's grim economic warning

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Treasurer Rob Lucas has painted a grim picture of South Australia’s economic fortunes, flagging further increases in already-record levels of state debt as he seeks to deliver the Marshall Government’s infrastructure commitments.

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Lucas – who last year handed down a budget that forecast a new state borrowing record of $21.2 billion for 2022-23 – today warned state debt would further spiral as he sought to keep his spending pledges on track, having already conceded his prized surplus would likely evaporate.

Australian Bureau of Statistics figures released today showed South Australia recording negative state final demand figures, a 0.2 per cent decline after consistent falls across 2019, driven in large part by a drop-off in commercial construction.

The figure prompted Labor to invoke the spectre of recession, noting the state already qualified according to the definition adopted by the Liberals when in Opposition. But it was a word Lucas refused to accept today, despite acknowledging the dire prospects not just for SA but Australia more broadly, and blaming the double whammy of summer’s bushfire crisis and the coronavirus outbreak.

“I’m not saying we’re heading for a recession, they’re not words I’m going to use… but clearly South Australians should be concerned that our economy – nationally and in SA – is slowing,” he told reporters.

“But these are issues I think South Australians would understand – there’s nothing South Australians or the SA Government can do about the impact and ramifications of coronavirus, and they’re impacting not just Australia but countries around the world.”

He said travel bans were “significantly impacting the visitor economy, the tourism industry sector and international education”, which were “important growth sectors not just for SA but the eastern states as well”.

“Add to that the bushfire impact and I think South Australians understand that these are actions that have occurred beyond the control of the SA Government or the national government,” he said.

He reiterated it was “highly unlikely we’ll be able to deliver a budget surplus this year and increasingly unlikely we’ll be able to deliver one next year”, adding that he was willing to wear yet higher debt to maintain the Government’s agenda.

“We’re not going to slavishly deliver a modest surplus at the expense of being able to provide the money we said we’d provide for bushfire recovery, and also whatever expenditure we need to keep infrastructure spending going,” he said.

“We will increase massively infrastructure spending but you actually have to borrow money to do that… and the Government is prepared to defend increases in state debt to fund the hospital builds, the school builds, the transport builds we’re committed to.”

He said the state final demand figures were “concerning not just for SA”, with “four of the six states all seeing a decline in state final demand”.

However, he argued, “it’s not the best measure of growth”, favouring Gross State Product, which also accounts for exports.

But he agreed that “given not only bushfires but particularly now coronavirus, we will see further softening in terms of economic growth measures, for this first quarter at the very least and possibly the second quarter” of 2020.

“There will be very significant impacts on economic growth,” Lucas said.

Pressed on whether that meant a technical recession, he said: “Economists generally estimate that national figures of economic growth – more particular GSP which take into account exports – are indicators of recession [and] there are a number of respected national commentators predicting not just Australia but potentially some of the other economies around the world will be facing significant declines in growth for at least a couple of quarters.”

He said he was more concerned about the March and June quarters, but was downbeat, noting “lower consumption expenditure would mean less GST in the national pool” so “we’re likely to see a further reduction since last year’s budget”.

“If the government’s given a choice, do we drive the economy further backwards by further slashing expenditure as opposed to running a modest deficit? We’re not going to be heading down the path of slashing the budget and driving the economy further into difficulties by overnight changes in the budget parameters,” he said.

Asked when he expected the outlook to improve, he said: “If you can tell me firstly when the coronavirus finishes, I’ll be able to answer that.”

But he added that even then “there’ll still be a flow-on impact because clearly you can’t turn the tap back on”.

Lucas was facing media to discuss the implications of a draft determination on water pricing by the Essential Services Commission of SA, which proposed an 18 per cent ($547 million) revenue reduction in SA Water’s drinking water revenue and a 13 per cent ($164 million) cut in its sewerage revenue over the four-year period starting 1 July.

The Treasurer said it “makes it entirely clear that there will be significant reductions in water prices for households and businesses” but couldn’t say whether the final figure will be greater or less than the draft estimate.

The Government is yet to make a decision on where to set SA Water’s Regulated Asset Base – a key factor in ESCOSA’s final price determination – after Lucas established an independent review to ascertain that the figure had been overinflated under the previous Labor Government to prop up the state budget.

He said he couldn’t speculate to what extent that figure would come down, saying “we’ve indicated we’ll be reducing the level of the Regulated Asset base, but we haven’t said by how much”.

He said it would depend in part on “the impacts on the state budget”.

Asked whether he would then be using SA Water as a cash cow as he had accused Labor of doing, he said: “No, we’re not going to do what Labor did, we’ve not said that – so don’t verbal me.”

SA Water had proposed to recover an extra $456 million in capital expenditure and $121 million in operating expenditure over the next four-year period, but ESCOSA “found that some of the proposals are neither justified nor consistent with customers’ clearly expressed main priority, which is that prices should be kept as low as possible while maintaining current levels of service”.

The Draft Determination instead allows $190 million in additional capital expenditure and a decrease of $115 million in operating expenditure over the four-year period from 1 July 2020.

SA Water however will seek to challenge the determination during the next round of consultation, with General Manager of Customer Delivery Kerry Rowlands saying: “We do need to seek to understand some of the differences to the plan we submitted [and] will provide additional information through to ESCOSA to enable them to support those proposals as part of the final determination.”

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