It’s not often you hear an Australian politician grumbling about increases in mining production, but that is just what the Western Australian premier, Colin Barnett, has been doing of late.

He has accused the two big miners, BHP Billiton and Rio Tinto, of flooding the market with iron ore and thus bringing down the price. The collapsing iron ore prices are set to smash the WA and Australian government’s budgets. But the governments can’t blame the miners when both budgets anticipated much higher iron ore prices than we now have.

As Wayne Swan often found out during his period as treasurer, government budgets are hostage to their forecasts. If the forecasts of various aspects of the economy – whether employment, inflation or the exchange rate – are too optimistic, the end result is often a much reduced level of tax revenue.

Lower iron ore prices affect both state and federal governments. State governments lose revenue from mining royalties whereas the federal government sees its company tax revenue fall (and other taxes if the lower prices result in workers being retrenched).

So the drop in iron ore prices over the past nine months is of concern not just for those who may have shares in BHP, but also government depending on strong iron ore prices to feed their coffers.

As I have noted a few times recently, demand for iron ore from China has weakened and as a result the iron ore price has fallen. But Barnett is saying BHP Billiton and Rio Tinto have increased their supply of iron ore in order to further reduce prices.

He told the Western Australian parliament on 16 October: “The major companies are pushing increasing volumes on a month-to-month basis into the market very conscious that they are contributing to price falls in an already depressed market.”

Except Barnett professed not to being worried about the impact on revenue, but instead the impact on smaller mining companies and employment in the industry.

He expressed concern for “the impact that this will have on smaller iron ore producers” that have higher cost margins. He argued that he wanted “to see a competitive structure for iron ore in Western Australia, which will include the two big producers, some mid-level producers such as Roy Hill and Fortescue Metals Group (FMG), and a smaller brigade of producers that are by nature higher cost but finding their way into the market”.

It was a noble sentiment, but really it disguised his big concern – that the lower prices would send his budget figures to the dust heap.

The Western Australian budget estimated iron prices to average US$122.70 in 2014-15. Currently, the spot iron price is around US$80 – 34% lower than forecast:

Western Australia was budgeting to take in $5.598bn in mining royalties from iron ore production this financial year. Mining royalties are based on both the volume and the price of iron ore, but even though production is increasing, it is easily being offset by the massive drop in price.

The hit to revenue has been estimated by the West Australian’s Shane Wright at $49m for every $1 drop below the estimated price. This financial year, the average price for iron ore has been around $86. At such a price, the hit to the WA budget would be around $1.7bn – a rather large amount given the forecast surplus for WA was just $175m.

No wonder Colin Barnett is looking for someone to blame.

The problem is, if he wanted to complain about increased production he also needs to target those medium to smaller mining companies he was so eager to defend.

FMG’s most recent quarterly report noted that in the June 2014 quarter it mined 43.8 million tonnes of ore, which was 48% higher than the previous quarter.

So it was with perhaps a bit of hubris that FMG CEO Nev Power stepped into the debate, saying he agreed with Barnett that BHP and Rio Tinto were flooding the market.

In reality what is happening is increased competition. BHP Billiton and Rio Tinto are trying to gain advantage as any company would do in their position and FMG and other miners are doing their best to churn out as much iron ore as they can as well.

Welcome to capitalism, Premier Barnett.

It’s also a bit rich of Barnett to gloat over new mining operations and then complain about increased production. In April this year he was only too happy to open the new BHP Billiton Jimblebar iron ore mine and remark that it “demonstrates BHP Billiton’s ongoing confidence in the strength of WA’s iron ore industry”.

Gee, who would have thought increased investment in mining would lead to more mining?

In hindsight, the WA’s May budget estimates seem woefully optimistic, but they aligned with the advice provided at the time by the Bureau of Resources Energy and Economics (BREE).

In its March quarter update BREE estimated that in 2014 the price for iron ore minus freight would “average US$110 a tonne” which works out at around US$122 a tonne including freight – the same figure in the WA budget.

By June however, BREE had dropped that estimate to an average US$105 a tonne, and it forecast in 2015 the price would average US$97 a tonne. By contrast, the WA budget had forecast the price in 2015-16 to be a still very high US$120 a tonne.

In its September update, BREE further revised down the average 2014 price to US$93.60 a tonne and US$94.30 a tonne in 2015.

The federal budget is also going to be hit by these downgrades. The May budget forecast of around US$95 a tonne minus freight was lower than the WA budget.

But still, the impact will not be good. The May budget also forecast Australia’s terms of trade (the price of our exports compared to our imports) to fall by 6.75%. But that estimate was made in May before BREE revised down its iron ore price estimates.

Since May, the RBA’s index of commodity prices – which aligns well with the terms of trade – has fallen 7%, suggesting a big hit to the federal budget revenue.

How big is up for debate. But the May budget itself anticipated a scenario were the terms of trade fell by 4% more than predicted. In such a situation it suggested tax revenue could be $2.6bn less in 2014-15 and $5.4bn lower in 2015-16. At the moment, that seems to be a conservative estimate.

In September, when criticising the former ALP government for the final budget outcome of 2013-14, Joe Hockey responded to questions of why he could be confident that his figures were “more reliable” by saying that “I think if you get some of the fundamental forecasts right and instead of taking an overly optimistic approach to forecasts, you take a more realistic approach to forecasts”.

Since then he has told the Australian that “lower commodity prices do have an impact on our budget” and that “we’ll have more to say” in the mid-year economic and fiscal outlook.

In September, he also suggested the revenue downgrades occurred under the ALP despite no “single shocking event”.

It seems by the end of the year Hockey will be looking for a reason why his budget figures don’t add up. In lieu of a shocking event he’ll be looking for a fall guy – Colin Barnett has already blamed the miners. Given how hollow that appeared, Hockey will need a better response.