Wayne, they stole your surplus

ONE week after Wayne Swan proudly declared we would be "back in the black" by 2012-13 - with a projected $3 billion budget surplus - more than half the surplus has been stolen by the West Australian government.

By increasing the royalties on iron ore, the state government hopes to raise an extra $1.9bn over three years, punching a hole in the federal Treasurer's all-important surplus target. It's good for the Barnett Coalition government's budget bottom line, but shocking for federal Labor's.

It's a case of checkmate, and it's hard to see what Swan can do about it.

Desperate to secure a deal with the big mining companies, the federal government crafted the new mineral resources rent tax so it guaranteed state royalty increases would be rebated to the miners. Yesterday, the West Australian government took advantage of that blank cheque, raising royalties without the danger of being hit by any backlash from the mine bosses, who will look to Swan for the promised compensation.

This has left Swan with three choices as to how to react, all of which are unpalatable.

He can lump the West Australian government's decision, which makes Labor's surplus target even more rubbery (and smaller) than it already is. And it would open the door to other states such as Queensland doing the same thing. "Back in the black" would become a sick budget joke.

Swan could renege on his commitment to repay miners royalty increases. That would open up the war with the miners, a highly unlikely scenario for a government under pressure. And it would represent a broken promise, which on the back of the carbon tax backflip would be political poison.

The final option is the one Swan is most likely to go for: find cuts in the commonwealth transfers to Western Australia to offset the rise in royalties.

That could come in the shape of less GST revenue flowing the West's way - already a sore point with the Barnett government - or by new methods of limiting federal money going west.

This final option would guarantee that Western Australia was a political write-off for Labor. It could even cause the existing three federal Labor MPs in the state problems in retaining their seats at the next election.

And the state Labor Party might take aim at federal Labor, causing further political pain for Julia Gillard.

Federal Labor has its fair share of problems at the moment; yesterday they got much worse.