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Ratings agency further cuts WA's credit rating -

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MARK COLVIN: The West Australian economy has taken another blow, with the ratings agency Moody's downgrading the state's credit rating.

Moody's has cited rising debt and deficit as the reason for cutting the state from Aa1 to Aa2 status.

The WA Treasurer has repeated his claim the state deserves a bigger slice of the GST.

Anthony Stewart reports.

ANTHONY STEWART: As iron ore and oil prices continue to fall, Western Australia's economic pain deepens.

In 2014, the state had a AAA credit rating; today it's been cut two steps lower, to Aa2 status.

Debra Roane is a vice president at Moody's.

DEBRA ROANE: Today Moody's decided to revise down the ratings of Western Australia. The rating had been a Aa1, with a negative outlook, and we revised it to Aa2, but we changed the outlook to stable.

ANTHONY STEWART: Why did you make that decision?

DEBRA ROANE: Clearly the state has very exposed to the decline in commodity prices, and specifically the price of iron ore, as well as more sluggish performance in the state taxes, has led to the actual declines in revenue.

So absent any offsetting expenditure measures, this has resulted in a widening of the deficit position of the state, and this then leads to a higher debt burden, which is rising to a level that's really higher than the other Australian states.

ANTHONY STEWART: In December last year the deteriorating economic conditions were clear, when the Government was forced to revise budget figures.

It revealed the state deficit had blown out $3.1 billion, with net debt forecast to rise to $31 billion.

The situation could worsen if falls in both iron ore and oil prices continue.

DEBRA ROANE: Falls in commodity prices, and indeed in state taxes - that is clearly a risk, and really depends to a large extent on the response of the Government to further falls in those revenues.

So if they were to fall, and if the response was not more robust, then we would expect further deterioration, yes.

ANTHONY STEWART: The West Australian Treasurer Mike Nahan warns the Moody's revision in the credit rating will force WA to pay higher rates to borrow money.

He says it's a gut-wrenching position when combined with State Government's falling revenues.

MIKE NAHAN: The loss of revenue is from all fronts, from GST, to iron ore, to petroleum revenue and of course our own taxes.

We have made substantial reductions in expenditure, but unfortunately the revenue loss each time we look at it has exceeded our efficiencies.

And Moody's highlights all these issues.

It's gut-wrenching because it won't substantially increase our cost of debt too much, debt costs are low, and most of our debt is longstanding - however, it does signal the significant fiscal challenges facing the state, particularly deficits, over the next three years, and with those deficits, high borrowings to fund those deficits.

ANTHONY STEWART: He's again called for the formula used to distribute the GST to be revised to recognise WA's deteriorating position.

MIKE NAHAN: Our fiscal system, where we share - GST in particular - but other things, is busted.

That Western Australia, that during the boom times, was contributing $20 billion a year to the other states and the Commonwealth, now has to borrow $4.5 billion to fund payments to Tasmania and South Australia so they can have higher credit ratings, and have a balanced budget, is outrageous.

ANTHONY STEWART: The State Government has also flagged further asset sales could be needed to address the state's budget problems.

MARK COLVIN: Anthony Stewart.