Markets put strain on WA surplus

Mike Nahan's first Budget is already under serious strain, with the falling price of iron ore and stronger-than-forecast Australian dollar eating away at the Treasurer's skinny $175 million operating surplus.

Already grappling with changes to Federal Government grants and un- favourable iron ore and currency movements relative to Budget forecasts, Dr Nahan faces finding more spending cuts or tax increases to ensure he keeps the Budget in the black unless circumstances improve.

Dr Nahan's Budget was predicated on iron ore averaging $US111.30 a tonne for the coming year, with the Australian dollar to average US90.6�.

The iron ore price was $US100.70 a tonne at the weekend - a price that would punch a $519 million hole in the Government's revenue were it to be maintained across 2014-15.

The dollar traded at US93.5¢, ripping a further $251 million out of the Budget were it maintained across 2014-15.

The losses would be slightly offset by higher-than-projected petroleum royalties, $17 million up based on the weekend's global oil prices.

There are divergent views among analysts on the future trajectory of the iron ore price, with recent guidance by ANZ indicating recent price falls were "overdone".

A drop in the iron ore price between last December and last month punched a $286 million hole in three years worth of Budgets as Treasury revised its forecasts. It has fallen further since then and is now around its lowest levels in 18 months.

Dr Nahan said the volatility underscored his recent commentary that WA increasingly relied on a volatile source of revenue, which was one reason for the loss of the State's AAA credit rating.

"The GST provides States with a predictable, stable form of revenue, iron ore royalties do not," he said.

"We have said consistently that the GST model is broken, that it leaves WA at a severe disadvantage and that it needs to be reformed."

Shadow treasurer Ben Wyatt said the relationship between iron ore prices, exchange rates and revenue was well understood by observers of the Budget, meaning the Government's move to increase royalty rates on iron ore fines had made the problem worse.

Treasury estimates that for every dollar of extra iron ore royalties collected, 90¢ is redistributed to other States through the GST carve-up.

The West Australian

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