West Australian Premier Colin Barnett says federal Treasurer Wayne Swan has shown little understanding of the iron ore industry in his attack on the state's budget.
The WA government's decision to lift the royalties on iron ore fines, a crushed form of the mineral, from the current rate of 5.625 per cent to 7.5 per cent by 2014 has angered Mr Swan.
Under the proposed Minerals Resources Rent Tax (MRRT), the federal government will have to reimburse mining companies for the increase in royalties.
Both Mr Swan and Prime Minister Julia Gillard have said the decision means the government may have to withhold infrastructure funds earmarked for WA to ensure the federal government's planned surplus is not jeopardised.
On Monday, the WA premier said he was surprised by the federal government's reaction as they had known about the planned royalty hike for months.
"I think the federal government's reaction was way over the top," Mr Barnett told reporters in the industrial suburb of Henderson.
"It displayed a lack of understanding about the royalties system and a lack of understanding of the iron ore industry."
Bringing the royalty rate on iron ore fines in line with that charged for lump iron ore was in response to growing demand, with the grainy form of the mineral preferred by some Asian markets, he said.
Mr Barnett said the royalty rate hike would increase the price the government charged for iron ore fines from $8.60 a tonne to $11.50.
The mining companies that then sell the mineral they dig up are charging anywhere between $150 and $170 a tonne.
"It's an increase of less than $3...I don't think it's a real issue for the companies," he said.
While the royalty increase could blow a $2 billion black hole in the federal budget, Mr Swan has raised doubts about the WA budget figures due to its outlook for the Australian dollar.
The commonwealth budget predicts the Australian dollar will be worth $US1.07 in 2011-12 and 2012-13 before falling to $US1.05 by 2014-15.
The WA budget predicts the Aussie currency will be worth 98 US cents in 2011-12 and then gradually fall to 77 cents in the following three years.
Mr Barnett admitted a high Australian dollar would reduce the revenue the state received in royalties, but he said the reduction would be offset by the ability to pay off the state's overseas debt at a lower cost.
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