The Barnett Government will have to make even more Budget cuts or risk adding to the State's mounting debt, one of the nation's most respected forecasters has warned.
A slowing mining sector - coupled with easing commodity prices - is likely to cut the royalty income propping up the State Budget, according to Deloitte Access Economics.
But the WA housing sector is set to grow strongly, helping to offset weakness in mining construction, aided by suggestions commercial banks could cut mortgage rates even if the Reserve Bank leaves official rates steady.
In its first outlook report for the year to be released today, Deloitte argues a combination of factors means the economy will grow well below trend over the next three years.
That absence of strong growth would have a direct impact on the Federal and WA budgets, with not enough tax dollars flowing into government coffers.
Deloitte director Chris Richardson said Federal Treasurer Joe Hockey faced revenue shortfalls of $25 billion a year, with the Abbott Government unlikely to have the political mandate to make the cuts necessary to balance the Budget.
WA Treasurer Troy Buswell faced similar problems with mining construction slowing and prices for key commodities edging down.
"The downturn in mining royalties in WA suggests further cutbacks will be needed in that State at some stage," the report noted. "The bigger they come, the harder they fall. And WA's construction boom has been very big, meaning risks are too."
There has already been a fall in iron ore prices over the past week, tied to global concerns that demand out of China for WA's single biggest export will soften this year.
The strong growth in mining construction over the past five years has also pushed up Australian production costs, making the country less competitive compared with other producers.
Deloitte believes some of the pain will be offset in WA by a lift in the housing sector, which is likely to grow strongly for the next three years.
That could be aided by unexpected interest rate cuts by the nation's major banks.
Mr Richardson said with global financial markets normalising there may be scope for banks to cut mortgage rates even if the Reserve Bank does not.
"There's a chance the receding global crisis will take enough pressure off the big banks that they'll cut rates even if the Reserve doesn't," he said.