Western Australia has been such a driver of growth for the country’s overall economy that politicians have often half-joked of seceding, as foreign workers flocked to the iron-rich region and companies poured money into its vibrant mining sector.
Now, a drop in iron-ore prices has humbled the state and robbed the country of that economic life raft.
In Port Hedland, an iron-ore export center in the country’s Pilbara region, the average advertised housing-rental price dropped from 2,544 Australian dollars a week in the third quarter of 2012 to A$1,236 two years later, according to the Pilbara Development Commission.
The state capital, Perth, where commercial real-estate markets boomed two years ago, meanwhile is experiencing its weakest office market demand in two decades, according to a Property Council of Australia report released this year.
Gary Katz, owner of Bagels & Beans, a cafeteria in downtown West Perth, has witnessed a gradual emptying of commercial properties nearby, as hard-pressed mining companies scout for cheaper offices away from the city center.
Hay Street, where Mr. Katz’s café is located, used to be buzzing by 8 a.m. as workers flooded in, he said. “Now it’s a bit of a ghost town,” he added.
Last week, Western Australia forecast its first deficit in 15 years—a graphic illustration of the havoc that plummeting commodity prices are causing to the wider 1.5 trillion Australian dollar (US$1.2 trillion) economy as China’s slowdown dams up a decadelong surge in mining.
As recently as May, the state’s conservative government was forecasting a A$175 million surplus in the fiscal year through June, a rosy estimate based on iron-ore prices averaging significantly higher than they stand currently.
Western Australia revised that forecast to a deficit of A$1.3 billion based on new expectations that iron ore will average US$75 a ton, not US$122.70.
Credit agencies in recent months stripped the state of its top rating.
Worried lawmakers are seeking to sell assets worth billions of dollars, ranging from ports to a wholesale fruit-and-vegetable market, but analysts say the state’s balance sheet will remain stretched unless iron-ore prices recover soon.
Growth in the state’s population of foreigners has slowed to the lowest rate in eight years. And while low interest rates helped to lift house prices in the country’s other state capitals in the third quarter from the second, in Perth they fell.
The reversal of fortunes has come as a hard reckoning for Western Australia, whose size would cover about a quarter of the continental U.S. The state has always seen itself as different, so sure of its importance to the national economy that it has threatened—just half in jest—to break away and join industrializing Asia, which buys its resources.
“Under no circumstances could this deficit have been avoided,” Western Australia’s premier, Colin Barnett, told reporters last week.
He blamed not just plummeting iron-ore prices but also a A$7.1 billion collapse in revenue from mining-royalty payments, including from gold resources that are also found extensively in the state.
It is a huge contrast from as little as two years ago, when investment in iron-ore mining in the state reached A$20.7 billion as resource giants such as BHP Billiton Ltd. , Rio Tinto PLC, and the midtier Fortescue Metals Group , were expanding mines and ports around the iron-ore rich Pilbara region.
To cope with the drop-off in revenue, the state said it would reduce wages paid to government workers, which have hovered above national averages.
Replacement workers on government projects will be paid only about 60% of the salary of their predecessors—saving around A$1.3 billion, said Mike Nahan, the state treasurer.
Those measures are intended to help Western Australia return to a surplus in two years, even if iron-ore prices stay at current levels.
Western Australia’s economic woes have also derailed the federal government’s own spending plans.
The government recently dashed hopes of returning the country to a surplus within the next five years, as Prime Minister Tony Abbott promised ahead of the last election.
Treasurer Joe Hockey said falling iron-ore prices would wipe from its coffers A$14.4 billion in tax revenue from businesses and an additional A$8.6 billion in income-tax receipts over the next four years.
Mr. Abbott this month reshuffled his cabinet inner circle, promising to focus next year on the economy and jobs, as he confronts opposition to planned cuts in health, welfare and education spending.
Source: The Wall Street Journal
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