Federal treasurer goes into bat for Western Australia’s GST entitlement, but he alienates Colin Barnett by calling for economic deregulation in the west

Western Australia is heading into its 2015-16 budget almost $3bn poorer than it was last year, thanks to a tumbling iron ore price and a failure to convince other states that it should retain more than 30 cents in the dollar of what it collects in GST.

But the WA premier, Colin Barnett, told the West Australian that federal treasurer Joe Hockey’s attempt to link the state’s GST share to broader economic changes, such as privatising the electricity network, was a “huge mistake in my mind and he will not be popular in WA because of that”.

Hockey argued for Western Australia at an acrimonious treasurers’ meeting on Thursday, saying that to stick to the recommendation of the Commonwealth Grants Commission and drop WA’s GST share from 37 cents in the dollar to below 30 cents risked “massive damage” to the federation.

However he said WA should in turn restructure its economy by deregulating trading hours, removing anomalies – like the potato marketing corporation – and privatising its electricity network.

Hockey is expected to decide between four options – taking the commission’s recommendation, freezing WA’s GST share at last year’s rate, putting a floor in the GST share of 50 cents in the dollar, or making a one-off payment to WA – by next month.

The WA treasurer, Mike Nahan, said forcing Hockey to make the call was preferable to leaving the decision up to the states, telling the ABC that if it were left to the states he would lose not only the GST revenue but the shirt off his back.

“If I relied on my fellow state treasurers I would come out with just my underwear on,” he said.

However he supported Barnett’s comments against federally-enforced economic restructuring, saying the GST was not tied to privatisation and deregulation, and “mixing them up like Joe has is not helpful”.

Nahan referred reporters on Friday to the 1933 secession referendum where WA came close to splintering off on its own, which ironically was the catalyst for the creation of the Commonwealth Grants Commission. That was, as the commission itself puts it, “a time when the growing disillusionment of the less populous states with the policies of the central government threatened the very fabric of the federation.”

“The grants commission started as a result of Western Australia’s secession movement,” Nahan said. “Maybe we have to be more clear on this.”

WA has threatened not to cooperate with the Commonwealth on other planned tax changes if the GST distribution model is not addressed. New South Wales, Victoria, and Queensland have supported WA’s push for a per capita distribution model, and WA is also pushing for a floor to be put in the GST distribution so that no state receives less than 75 cents in the dollar.

Nahan said he told other state treasurers at Thursday’s meeting that under the horizontal fiscal equalisation scheme they had “become mendicants living off someone else’s hard work”.

Further accusations of mendicancy followed. The Victorian treasurer, Tim Pallas, said Western Australia had “the mentality of an unreconstructed mendicant”. Nahan countered by saying that everywhere except Western Australia was a mendicant state, but especially South Australia and Tasmania, and that all other states were “profoundly jealous” of WA’s mining wealth.

“They see buckets of money and ignore the costs,” Nahan said. “And they’re also profoundly jealous. They have viewed Western Australia for years as the most isolated capital in the world and perceive us just to be a lucky state.

“They do not know that we have made our own luck by hard work and focusing for decades on developing our resources and putting in the policies that are necessary.”

Those policies have proved little armour against the falling iron ore price, which has dropped 80% in the past 15 months to just $US48 a tonne.

That’s a problem for Western Australia, which derives almost 20% of its revenue from mining royalties, most of which come from iron ore. The price crash has seen the WA budget forecast drop from a $200m surplus for 2015-16 to a projected almost $2bn deficit.

The falling iron ore price has already hit WA miners. Australian-owned company Atlas Iron Ore shut up shop this week, announcing on Friday that it would stop production at its three mine sites in the Pilbara.

Atlas’s share price had fallen 90% in the past 12 months to just $0.12 on Tuesday, when it requested a voluntary suspension from the ASX. In a statement released on Friday, it said its Mount Webber, Abydos and Wodinga minds would be wound down by the end of April and “put on care and maintenance, pending future iron ore market conditions.” It said 575 employees would be affected.

The junior miner said it needed to sell its iron ore for about $US60 a tonne to break even. On Friday the price was less than $US48 a tonne.

Another miner, Citic, is currently embroiled in a legal dispute with joint venture partner Clive Palmer over allegations he misappropriated $12m from the project to allegedly spend on the Palmer United party election campaign.

John Nicolaou, chief economist for the WA Chamber of Commerce and Industry, told Guardian Australia that while the state had been able to predict and prepare for a slowing down of its resource sector as major projects moved from construction into production, it had neither predicted nor been prepared for the swift fall in iron ore prices.

And, he said, the three-year average used to calculate GST relativities was not able to accurately reflect that shock.

However he said Hockey’s call for economic restructuring would not be unwelcome in the business sector, saying that despite leading in growth, WA lagged behind when it came to some basic market deregulation.

Sunday trading is just three years old in Perth and is still restricted to 11am to 3pm – even at the supermarket. The taxi-industry is highly regulated, potato growers can’t go above their quota, there’s state-owned lottery and insurance companies, the electricity and water networks are state owned and the state still owns a gold refinery.

Nicolaou said there was “no reason in a 21st century economy” why most of those things should be publicly run.