Prime Minister Julia Gillard declared war on Colin Barnett and the WA Premier accused the Federal Government of "gobsmacking" financial standover tactics in a day that saw relations between Canberra and the west turn poisonous over GST payments.
Ms Gillard and Mr Barnett were last night refusing to back down over the State's move to increase the royalty rate paid on certain types of iron ore and whether the change should trigger a fall in Federal payments to WA.
The high-stakes standoff shows no sign of ending soon. The WA Government needs the $1.9 billion in extra mining revenue to balance its books, while Canberra cannot afford to refund the money to the mining companies when they claim it as a Federal rebate.
Ms Gillard ignored the risk of an electoral backlash in WA by threatening to withdraw funding earmarked for the State, with $250 million which Mr Barnett wants to help pay for a new sports stadium shaping as a likely casualty.
She accused Mr Barnett of kicking an "own goal" by raising the royalty rate on powdery iron ore, which was historically worth less than golf ball-sized "lump" ore but is now a sought-after commodity.
"He knows how GST works and he knows that this means the GST money will be moved away from WA," Ms Gillard said. "They will also lose infrastructure funds that would have flowed from the minerals resources rent tax.
"We will deliver that Budget surplus and, as a result of the actions of Premier Barnett, of course we will be adjusting infrastructure expenditure for Western Australia to protect the Federal Budget."
A defiant Mr Barnett said he would prefer to have the extra royalty money than rely on increasingly unreliable payments from Canberra. "It's raining. It's a good day. I'm happy. You're happy. Wayne Swan's not happy. Bad luck," he told a breakfast meeting of WA business leaders.
He later accused the Federal Government of denying WA money for hospitals and roads.
"I haven't had many experiences in my 20 years in politics where senior ministers in a Federal government have actually threatened the people of a State," Mr Barnett said.
"I am gobsmacked by some of the comments that have been made."
Mr Barnett's royalty decision won an unlikely supporter when the boss of high-profile WA company Atlas Iron, David Flanagan, said some sections of the industry could afford to pay more.
"At the moment it is hard to argue that an industry like iron ore cannot afford to pay an extra $1.50 a tonne," he said.
Mr Flanagan said the Government should be open to lowering the rate if there was an economic downturn and should consider allowing mining companies to invest directly in community infrastructure instead of paying royalties. The change would sidestep the problem of extra royalty revenue being eaten up by decreased GST payments, he argued.
Treasurer Wayne Swan yesterday opened a new front in the financial fight with WA by accusing Mr Barnett of handing down a Budget that contained wobbly figures.
The State Government has assumed a relatively low value for the Australian dollar, which could have a big impact on the Budget because every 1¢ increase in the Australian dollar against the greenback costs WA $60 million in royalty revenue due to the iron ore contracts being in US dollars.
State Treasury officials have used a model they say has proved the most accurate since the Australian dollar was floated to forecast that the local currency will average US97.5¢ through 2011-12 before dropping to US76.9¢ in 2014-15.
If the dollar averages $US1.07 through the next financial year, in line with predictions by Federal Treasury and the RBA, the State Budget will take a $600 million hit, wiping out the expected surplus of $442 million.
AMP Capital chief economist Shane Oliver, who believes the dollar will average between $US1 and $US1.10 this year, said if the State Treasury's forecasts were to be believed then the mining boom would be coming to an end.