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Budget shocks in iron ore price woe
Budget shocks in iron ore price woe

The tumbling iron ore price threatens to punch a $1.5 billion hole in the State Budget, putting widespread public service lay-offs, cuts to services and delays in major projects on the agenda.

The March election could be a battle of austerity with Premier Colin Barnett and Opposition Leader Mark McGowan facing a tide of red ink from the mining downturn that is already hurting the WA resources sector.

Analyst UBS estimates the 30 per cent drop in the spot iron ore price in the past two months has cost the State $150 million in lower royalties since July 1.

By the March 9 election, even with a small recovery in the iron ore price, the cost to the Budget could be more than $1 billion.

For the full year, the WA Budget, based on current trends, would be short by $1.5 billion.

Without offsetting cuts in programs and capital works, such a collapse in revenue would sweep away this year's expected surplus of $196 million and destroy the forecast $345 million surplus of 2013-14.

When the Budget was handed down in May, it forecast $4.3 billion in iron ore royalties. That was based on an average price of $US127.30/tonne and an Australian dollar averaging US99ยข.

Yesterday, the iron ore price fell to $US88.70/tonne and the dollar was about $US1.03.

Iron ore prices have tumbled more than 30 per cent in the past six weeks on fears the Chinese economy is slowing and demand for steel is ebbing.

UBS analyst Matthew Johnson said unless the Government pared back spending there would also be an increase in WA's debt.

He said despite the looming shortfall, the WA Budget was in a much stronger position than its interstate counterparts.

WA Chamber of Commerce and Industry chief economist John Nicolaou said the shortfall was likely to be near the UBS estimates, which put enormous pressure on the Government and Opposition before the election.

"The Budget is clearly tied too much to fluctuations in royalties so it means both sides have to look at winding back their capital and recurrent spending measures," Mr Nicolaou said.

Treasurer Troy Buswell declined to comment but shadow treasurer Ben Wyatt admitted it would be an issue for both sides.

It would pose a huge challenge to the Government and Opposition at the poll with long-term impact if the decline continued.

A sharp fall in revenue would mean WA would not lose as much GST to other parts of the country as expected.

But Mr Nicolaou said extra cash could take up to three years to return to WA because of the way Commonwealth Grants Commission allocations worked.