Iron ore keeping WA afloat

The WA economy will face its toughest year since the depths of the global financial crisis, with only soaring iron ore exports preventing the State's output shrinking.

Treasurer Mike Nahan's first Budget forecasts that State final demand - economic activity excluding imports and exports - will be flat through 2014-15.

That sharp slowdown, from growth of more than 5 per cent just two years ago, will push up unemployment and filter on to wages, which will then weigh on the rest of the economy.

BUDGET HITS FIRST HOMEBUYERS | REVIEW MAY INCREASE ELECTRICITY PRICES | OPPOSITION, CCI ATTACK BUDGET | DUMPING FEES SKYROCKET | $60m FOR COUNCIL MERGERS | HOUSEHOLDS TO BE SLUGGED | TOUGH LAWS LOST IN POLICE BUDGET | HIT FOR MOTORISTS, COMMUTERS | HEALTH GETS $447m TOP UP | PRIVATE SECTOR TO BUILD SCHOOLS | LITTLE JOY IN ARTS | FULL COVERAGE - WA BUDGET 2014

The unemployment rate, which through April was 4.9 per cent, is tipped to average 5.5 per cent through the coming financial year.

It is forecast to edge back down to about 5.25 per cent the following year.

Median house prices, which add to the Budget through stamp duty, are expected to grow slower than inflation over the next few years.

After growing about 6 per cent through 2013-14, house prices are tipped to edge up 2.5 per cent in the coming financial year, by 1.4 per cent the year after that and then just 0.8 per cent in 2016-17.

Through that period the inflation rate is expected to average about 2.5 per cent, which in real terms means a fall in house prices.

Although those house prices may decline, wages are expected to stay slightly in front of inflation, growing 3.25 per cent in the coming year and then 3.5 per cent the year after.

Overall business investment will put the biggest dent in the economy as the mining sector winds back its stellar spending of recent years.

After falling 7.5 per cent in 2013-14, business investment is forecast to decline another 8.5 per cent next year.

However, the slowdown in both public and private wages will hit one of the State's strongest growth taxes - payroll tax. Over the past decade payroll tax receipts had grown 12 per cent a year.

This year it will grow just 4 per cent.

Dr Nahan said the investment super-cycle of the past decade was clearly slowing down.

But he pinned his hopes on the surge of iron ore and liquefied natural gas production that is coming on-stream.

"We're in a good state of play, but it's throwing up some challenges we have to deal with," he said.

Gross State Product, which includes exports and imports, is tipped to grow 2.75 per cent.

That would be down on this year's expected 3.5 per cent but still stronger than most other States and Territories.

Treasury is expecting the effective price of iron ore to remain comfortably above $US100 a tonne, although it has revised upwards the expected value of the Australian dollar, which in 2014-15 is forecast to average above the US90¢ mark.

Iron ore royalties are expected to lift to a record $5.6 billion this year, on their way to more than $6.2 billion in 2015-16.