Local Governments have endured a challenging period, with costs rising at a rapid rate, primarily because of skyrocketing construction costs in response to global supply chain pressures and COVID-19 inducted stimulus.
 

  • The Local Government Cost Index increased 0.9% in the March quarter and 4.5% in the last year
  • Official data shows that construction costs have eased from their pandemic-induced highs and are expected to stabilise at a higher level
  • Wages are rising, with the WA Wage Price Index growing at its highest rate in more than a decade over the year to March 2023
  • While CPI growth remains at historically high levels, there are signs that inflation has now peaked, and is beginning to track downwards
  • Population growth both nationally and in WA has exceeded expectations in the past year
  • After recording its highest rate of growth in almost a decade, Western Australia’s economy is forecast to slow in coming years

 
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Local Government Cost Index

  • The Local Government Cost Index increased 0.9% in the March quarter and 4.5% in the last year.
  • Looking forward, growth of the LGCI is set to slow to 3.3% in 2023-24 and 2.7% in 2023-24
  • The slowdown in the index reflects an easing in supply-chain constraints that have driven sharp increases in construction costs in recent years. However, a pick up in wages will see new cost pressures emerging for the sector.

Local Government costs increased 0.9% in the March quarter, dropping below 1% quarterly growth for the first time since June 2021. The LGCI increased 4.5% in the last 12 months, down from its peak of 5.8% in June 2022. The LGCI is expected to end 2022-23 at 4.4% before slowing to 3.3% growth in 2023-24 and 2.7% in 2024-25.

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Construction Costs

  • Official data shows that construction costs have eased from their pandemic-induced highs and are expected to stabilise at a higher level.
  • The slowdown in prices growth in the construction sector reflects some relief from strong increases in some materials and input costs, particularly in relation to fuel – as supply chain pressures ease. However other materials costs – particularly road materials – continue to record strong growth.
  • Feedback from Local Governments suggests many are not yet feeling relief, with ongoing challenges with tender pricing and availability of labour and materials and equipment.
  • The construction sector will remain competitive in the near term with a significant volume of public and private sector projects still to be completed, which may create ongoing challenges particularly in areas where there are limited suppliers.

 
Construction costs are continuing to ease according to the official data. However, this is little comfort for Local Governments finalising their budgets, as prices are still well above levels seen just two years ago.

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Labour Market and Wages

  • Wages are rising, with the WA Wage Price Index growing at its highest rate in more than a decade over the year to March 2023.
  • Wage pressure is emanating from competition for workers in the State’s extremely tight labour market.
  • Labour market conditions are forecast to moderate over 2023-24 as economic conditions ease and overseas migration increases the available labour pool.
  • Despite the forecast softening of labour market conditions, wage pressures are expected to persist in the coming year with the WPI predicted to grow by 4% in 2023-24.

 
After years of subdued wages growth, employee costs are now on the rise. This is particularly relevant for Local Governments, given that employee costs represent around a third of the sector’s overall cost base.

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Inflation and interest rates

  • While CPI growth remains at historically high levels, there are signs that inflation has now peaked, and is beginning to track downwards.
  • Moderating inflation reflects improved global supply chains, the impact of higher interest rates on consumer demand, and slowing growth in the price of new housing and travel.
  • However it will be some time before prices growth returns to more acceptable levels, with RBA estimates showing that inflation will not return to its target band until 2025.
  • Interest rates are expected to remain elevated for some time, with the RBA concerned that there still remains an upside risk to inflation.

Cost of living pressures, fuelled by high inflation and rapidly increasing interest rates, have dominated the news in recent times and were a key focus of the Federal and State Budgets handed down May.

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Population Growth

  • Population growth both nationally and in WA has exceeded expectations in the past year, on the back of an influx of international migrants now that the COVID-19 related restrictions on the movement of people have been wound back.
  • While overseas migration is currently the primary driver of population growth in WA, the State also continues to benefit from high levels of interstate migration, as people take advantage of our relatively strong labour market.
  • Population growth is expected to increase pressure on the provision of infrastructure and services by all levels of Government, including Local Governments.

Following the removal of COVID-19 related border restrictions, population growth has picked up sharply and exceeded expectations in recent times.

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WA Economic Outlook - forecasts and drivers of growth

  • After recording its highest rate of growth in almost a decade, Western Australia’s economy is forecast to slow in coming years.
  • The slowdown is expected to occur as production from key export industries stabilises and households tighten their belts in response to interest rate rises.
  • Government investment will remain strong for the next few years as the State Government’s record asset investment program is delivered, which will mean that some Local Governments may still feel the impacts of competing for labour and materials on major projects.

In a year of significant economic challenges both globally and locally, WA’s economy has been strong and is expected to grow 4.25% in 2022-23, the highest since 2013-14. However, WA Treasury forecasts in the May State Budget show WA’s economy will slow in coming years.
 
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