THE state government has slashed its budget forecast surplus by more than half to $209 million, blaming weaker royalties, stamp duty and global financial instability.
The mid-year economic review for 2011/12 predicts a $215 million fall in the 2011/12 surplus and a $1231 million drop over the next four financial years.
Despite this, Treasurer Christian Porter said WA will still record the nation's highest surplus, and the outlook for the state's economy remained positive.
But Mr Porter said the European economic crisis, volatility in the US exchange rate, a slow housing market and falling commodity prices were all affecting the WA economy.
"Risks to the global economic outlook have intensified significantly since the May State Budget," Mr Porter said.
"Global financial instability has intensified on the back of ongoing concerns with the European debt crisis and a slower than expected recovery in the United States economy.
"They are having a very large effect on global economic circumstances... and levels of confidence. That is flowing through to the West Australian economy."
He said while forecasts for the next four years had been "significantly revised down", the forecast was still healthy, thanks largely to the $137 billion worth of projects planned for the state.
Pay roll tax remained strong, and is the government's only growth source of revenue, which Mr Porter said pointed to WA's strong jobs market.
But he said the perception WA was "rolling in revenue" was not true, as the forecast of a 6.2 per cent increase in revenue was "significantly blow" long term averages.
WA's share of GST revenue is predicted to increase slightly to 36 per cent, up from 33 per cent, but Mr Porter said this was still a "grim and unacceptable figure."
"WA is still forecast to lose $12 billion in GST revenue over the five years to 2014-15 and this is a significant financial barrier to providing strategic infrastructure to benefit both the WA and national economies," he said.
"Recent moves by the Federal Treasurer to request the GST Review Panel examine options to penalise States that increase royalties presents a further potential threat to WA's finances."
The mid-year review predicted that business investment would continue to drive economic growth in WA, thanks to projects such as the recently approved $29 billion Wheatstone LNG project.
It also found that households are displaying less conservative spending patterns, with strong growth in wages and discretionary spending, particularly on hotels, cafes, restaurants and recreation.
Despite this, conditions in WA's housing market were found to be weaker than expected, and house prices are forecast to fall by 2.2 per cent in 2011/12.
WA's net debt was projected to be $16.6 billion, $709 million lower than predicted at budget time.
Mr Porter said the key contributing factor to WA's net debt was the need to borrow to build critical infrastructure to offset the federal government's decreases in GST revenue to WA.
But he said projected future borrowings remained affordable and consistent with WA's triple-A credit rating.