The delusional iron ore forecasts underpinning the Western Australian Budget – which forecast an average spot price of $122.70 over 2014-15 and only minor downward adjustments in the out years – have come back to bite, with The Western Australian newspaper today reporting that the State Budget faces a $1.7 billion hole that could last for years:
WA Treasurer Mike Nahan has already signalled that without an iron ore turnaround, he would have to look at more Budget cuts.
Ratings agency Moody’s, in downgrading WA’s economy to Aa1 last month, highlighted the risks in optimistic iron ore forecasts.
Dr Nahan said the fall in iron ore prices would reverberate for years.
Of course, none of this is unexpected, and was foreshadowed on this blog when the Western Australian Budget was first released in early June.
It’s worth noting, however, that the State Budget forecast that for every $100 gained (lost) in iron ore revenue, there would eventually be a $90 offset through decreases (increases) in the GST distribution (see below table).
Hence, the pain from falling iron ore revenues is likely to be spread across Australia’s states, just as Commonwealth revenues will decline from falling company taxes.
