Low iron ore prices will likely blow a $1 billion hole in the Western Australian budget, it has been revealed, just hours after it emerged the state had suffered another downgrade of its credit rating due to spiralling debt.

Iron ore is sitting at about US$90 a tonne, more than $30 less than what state Treasury used to calculate expected revenue for this financial year.

WA Treasurer Mike Nahan told ABC 720 he did not expect the price of iron ore would climb back above US$100 a tonne.

"That will lead to about a billion dollar difference in our budget this year, in that vicinity, there will be some variations up and down, but in that vicinity," he said.

"We have a budget of about $28 billion in total revenue, so it's one out of 28, but it's significant."

The Treasurer's revelation came on the same day credit rating agency Moody's followed Standard and Poor's decision to strip WA of its AAA rating, pushing it down to Aa1.

It was the second credit ratings downgrade in less than a year, and followed a period of strong growth of the resources sector and increased reliance by the State Government on mining royalties.

Moody's has also changed the state's outlook from negative to stable on the back of WA's strong economic prospects and "supportive" Federal Government grants.

In a statement, the agency said its decision to downgrade was due to current debt levels and an over-reliance on volatile mining royalties.

It also cited a weak policy response by the State Government in dealing with its debt problem.

It is the worst assessment by a ratings agency since the Government came to power in 2008.

Then, debt was just over $3 billion, but it now sits at $22 billion.

Deficit tipped to increase in government sector

Moody's said the government sector had experienced "persistent" deficits, averaging 5 per cent of revenue from 2008/09 to 2013/14.

This year it is expected to hit 6.2 per cent, as spending continues to outpace revenue.

Moody's commended the Government's pledge to increase tax rates, and its introduction of a new wages policy for the public sector which caps salary rises to inflation, but warned these steps were not expected to lead to "significant improvements" in the near term.

"Minimal improvement is expected in the financial performance in [financial year] 2014/15, with the gap budgeted to be $1.6 billion or equal to 5.7 per cent of revenues, as revenues are forecast to ease in line with slower economic growth," the statement said.

According to the statement, the Government hopes to lower deficits to an average of 2.5 per cent over the next four years.

But Moody's notes the state will be challenged by "an increasing reliance on more volatile mining royalties".

Mining revenues are forecast to amount to nearly one quarter of WA's revenue by 2017/18, up from around 8 per cent in 2006/07.

"The state's assumption on royalties is underpinned by a fairly optimistic forecast for iron ore prices," the statement said.

Moody's said while the Government planned to cut spending, it would be difficult.

"The state will be hard pressed to meet its very low spending growth targets, unless the government's fiscal resolve strengthens and new measures are identified."

Government hints at tax hikes, calls for GST change

Mr Nahan blamed falling GST revenue and a sharp drop in the iron ore price but conceded there would need to be big changes.

He hinted at tax hikes and spending cuts.

"The Government will look at all the issues available to us, and we will consider what needs to be done," he said.

The Government said any changes would be outlined in its mid-year review in December.

"Our task is to affect changes to our own revenue and expenditure but most importantly the way the GST revenue is shared," he said.

"It is now a must."

Opposition calls for Colin Barnett to resign

Shadow Treasurer Ben Wyatt said the assessment by Moody's was extraordinarily bad, and Premier Colin Barnett's legacy would be debt for generations to come.

"If there were any creditials left, Moodys have now destroyed Mr Barnett's capacity to manage the state's finances," he said.

"Mr Barnett's financial action plan has no credibility. His weak policy responses have been highlighted."

Mr Wyatt said the downgrade was embarrassing, and called on the Premier to step down.