Public sector bosses are facing deeper cuts than the 2 per cent efficiency dividends announced in the May Budget as Treasurer Troy Buswell tries to plug a big hole in the State's finances caused by falling iron ore prices and the high Australian dollar.
Though iron ore prices have rebounded since investment bank UBS warned this month that the WA Budget was facing a $1.5 billion revenue hit, the current iron ore spot price of $110 a tonne was still well below the $127.30 price assumed in the Budget papers.
Each $1 change in the iron ore price is worth about $33 million annually to the Budget bottom line, according to the WA Treasury.
And the Aussie dollar has remained stubbornly above parity with the US greenback, trading yesterday at $1.04 compared with the 99¢ assumed in the Budget papers.
It is a problem because iron ore contracts, and thus royalties, are denominated in US dollars and Treasury analysis says every 1¢ difference in the exchange rate is worth $60 million a year.
The volatility in the iron ore price means Treasury has been dealing with wild swings of more than $1 billion on revenue projections for 2012-13.
Royalties make about 20 per cent of total government revenue. On yesterday's iron ore price and exchange rate, the Budget would suffer an $890 million revenue hit.
While Mr Buswell said volatility in the markets made it incredibly difficult to predict precisely how the Budget would be affected, he revealed the Government was looking hard at recurrent spending ahead of December's mid-year review.
"There is significant revenue-related pressure on our bottom line," he said. "We're going to have to look at recurrent spending and understand where we can trim our cloth."
Mr Buswell refused to speculate on where the cuts could come from but he ruled out deferring or cancelling any infrastructure projects, or embarking on another round of voluntary redundancies. He said the Government was still "working towards" delivering its skinny $196 million Budget surplus.
"We're not contemplating the Campbell Newman-esque changes to public sector employment levels," Mr Buswell said, in a reference to mass sackings of public servants in Queensland.
Shadow treasurer Ben Wyatt said the looming hole highlighted the "absurdity" of creating a future fund at this time.