Australians have lived through this story before, many times, and always after a big boom. The result is almost always the same – as this headline demonstrates: "Australia frightened: a people accustomed to easy living alarmed by an unusual depression."

This wasn't in Perth's The West Australian or Brisbane's The Courier-Mail – the two big papers of the country's latest boom-and-bust states. It wasn't a response to the staggeringly rapid collapse in iron ore prices this year. It wasn't even written this century.

Some 122 years ago The New York Times sent a correspondent to report on Victoria's devastating 1890s property collapse.

Aside from the old-fangled writing style, most of the dispatch reads like something in today's The Australian Financial Review.

Fuelled by the "results of an abnormal land boom" that saw prices rocket to "such fabulous and utterly absurd values," the Colony of Victoria has found itself mired in debt, financial scandal, unemployment and bankruptcy, states the report, dated August 15, 1892.

"Everywhere is seen a lack of confidence," while unions "refuse any concessions in the prices of work."

The significance now of the 1890s depression is that it followed a property bust that had its roots in the frenzied wealth generated by the 1850s gold rush, not unlike today's ebbing iron ore super boom.

The subsequent economic catastrophe led directly to the creation of Federation in 1901 – the very same union West Australian Premier Colin Barnett threatened to "disengage" from.

In a piece of absurd political theatre unseen since the days before the Howard government bought peace with the states and territories by introducing the goods and services tax, Barnett declared this week that WA was facing its "Boston Tea Party moment."

The Premier's preposterous reference to the trigger for the American Revolution that led to independence from Britain was caused by a Commonwealth Grants Commission recommendation that WA's share of the GST be cut to 30c in every dollar.

While laughable, it's also a sign of just how desperate the scramble for revenue has become – not only in WA, but around the country as governments are forced to confront the reality that the money is no longer there.

While the latest GST carve-up appears unfair to WA at first glance, it is based on a sound formula that has served the state well in recent years and takes into account each state's strengths and weaknesses.

The Grants Commission – whose job is to ensure states have the means to deliver the same level of services to Australians regardless of where they live, a process awkwardly known as Horizontal Fiscal Equalisation – takes into account the fact that the West has been collecting massive royalties from iron ore, an endowment that effectively belongs to all Australians.

Using a "three-year lagged approach," the commission seeks to smooth short-term fluctuations in prices such as the critical steel-making material as a way of giving states and territory treasurers greater budgeting stability.

This system flattered WA when iron ore prices were rising. The state received a larger portion of GST revenue because the formula was still being influenced by earlier years when royalties were far lower.

Barnett – under huge political pressure at home – wants the formula to become annually adjusted to reflect the fact iron ore has collapsed over the past year from well above $US120 ($154) a tonne to less than $US50 this month.

The plunge has devastated Barnett's bloated revenue expectations, wiping about $3 billion from his budget. At the same time, there are few signs his government has cut the state's cloth to fit its long-run realities, and stories have abounded at the lack of serious economic reform.

The pin-up examples include WA's archaic shopping hours and even a potato watchdog that the state's Economic Regulatory Authority blames for keeping spud prices artificially high.

Writing in The Australian Financial Review this week, Deidre Willmott, chief executive of the Chamber of Commerce and Industry of Western Australia, argued the failure to prepare the state's economic future "would be funny if it weren't so serious".

She warned that the slump in ore prices and declines in the share of GST have left its economy vulnerable. "The truth is that our black swans are really ostriches with their heads in the sand when it comes to reform," she wrote.

Furthermore, had the GST methodology sought by Barnett been in place when the China-driven iron ore price boom was inflating, WA would have missed some $7 billion in payments from other states, according to the commission.

On top of that, WA has benefited as net taker of payments from the eastern states for most of the past century.

As Saul Eslake, the Bank of America Merrill Lynch economist – and a Tasmanian – likes to point out: WA is akin to a pensioner who strikes it rich by winning the lottery and then complains about having to pay income tax.

Eslake points out that while it is often claimed WA's share of the GST carve-up has fallen to an unprecedented low, its residents have become vastly wealthier than any one in history.

The per-capita gross state product of WA is 50 per cent higher than the national average, he says. When NSW led the nation, the per capita wealth of its people was never more than 10 per cent greater than the rest of the country.

There is also evidence the WA government may have deliberately set about making the current system look far worse than it is.

Tim Colebatch, writing for Inside Story, a website hosted by Swinburne University of Technology, suggests Barnett and his then treasurer Christian Porter deliberately sought to inflate royalties in early 2011, taking advantage of a weakness in federal Labor's doomed mining tax, which reimbursed companies for royalties paid to the states.

"Western Australia's actions since 2011 suggest that once it saw that the system would begin working against its interests, it set about escalating the stakes to the point where the distribution of grants would seem manifestly unfair and the system would be scrapped," he wrote.

Barnett disputed that claim on radio on Friday, while his Treasurer Mike Nahan says the grant commission's estimate, that an extra $7 billion flowed in during the good times, failed to recognise costs incurred by the state in developing the iron ore industry.

Conversely, as the Australian Institute's Richard Denniss has countered, this is a bit like South Australia or Victoria demanding extra GST when they subsidised their car industry.

Even worse, Barnett's inflaming the sense of entitlement some Western Australians have about the boom ignores the fact that many on the east coast paid a price during the good years, when the Australian dollar soared above parity with the US currency.

While this was great news for anyone shopping or holidaying abroad, it devastated the competitiveness of vast swathes of the economy – from manufacturers, to tourism operators and education providers.

They were forced to make painful adjustments. To cut costs and sack workers. Australia's car-manufacturing industry in Victoria and South Australia, an employer of tens of thousands, is closing shop.

At the same time, some are asking what the boom's legacy will be in WA, now that it is fading.

Eslake says the state should have created a sovereign wealth fund, and he unfavourably compares Perth today with what happened to Melbourne during the debt-fuelled property boom of the 1880s.

While the subsequent collapse took decades to shake off, it left Melbourne with some of Australia's finest institutions and structures, he argues.

"Perth doesn't have a lot to show for the biggest boom in 150 years. There are a few more peculiar shapes on the foreshore; some tarted-up railway stations."

Victoria, by contrast, built its landmark Melbourne Exhibition building in 1888 for a world exhibition that showcased a city founded just 52 years earlier – effectively putting it on par with London, Paris, Vienna and Philadelphia.

Walk the broad boulevards of Melbourne and you'll see the legacy of that boom in its sought-after terrace housing, complete with cast-iron balconies, decorative parapets and cornices.

"Without wanting to be disrespectful to the Aborigines, Melbourne went from nothing tangible in 1836 to 1888 holding the world's fourth expo," Eslake says.

There's another point Barnett seems blind to. With NSW and to a lesser extent Victoria taking over from WA and Queensland as the big engines of national growth and job creation, it won't be long before the West is again a net beneficiary of eastern GST revenue, returning their status to – as Victorian treasurer Tim Pallas put it this week – "professional mendicants."

The spectre of a WA Premier demanding to be bailed out for mishandling the boom is not too far removed from Greeks expecting Germans to forgive their gargantuan debt because of the Second World War.

Luckily for Australians, their federation appears more resilient and well-founded than Europe's.

Yet there is no doubt Barnett's temper tantrum is symptomatic of a broader problem.

The collapsing iron ore price has happened faster than even the loudest Hanrahans anticipated. The pace is forcing a torturous re-calibration of the political economy across the nation.

Luxuries and largesse showered onto voters at the height of boom – whether they were tax concessions or spending measures – have been exposed as unsustainable now that the tide is flowing out.

As the Financial Review highlighted this week, the latest International Monetary Fund projections suggest Australia now has the world's worst government debt trajectory.

Net debt to gross domestic product will grow 32 per cent to 22.4 per cent by 2020, the fund estimates. While this is still low by global standards, it adds to what is already the world's largest pile of household debt.

In the ultimate humiliation, the figures even indicate New Zealand's debt will fall below Australia's by 2018.

"It has been a long time since Australia has had to worry about such things and few people now in policy making circles have any experience, let alone any institutional memory of how to manage spending in a downturn," says Sean Keane, a highly-regarded analyst for Credit Suisse.

"The pressures created by the funding squeeze are starting to break out into the open now as the political environment turns more poisonous in Australia."

With the 2015 budget less than four weeks away, the focus has understandably swung to what Treasurer Joe Hockey will do with the new fiscal reality.

Confronted by another $30 billion in revenue write-downs because of falling iron ore since last year's budget, the government is trying to craft a softly-softly narrative on budget repair, which Prime Minister Tony Abbott promises will be easy on families and small business.

Both men are downplaying the urgency of budget reform - by implication - because much of the hard work has already been done. Unfortunately this week's unseemly COAG brawl underscores that is is far from true, with growing concern about how the states will cope once Canberra cuts about $80 billion of their funding in 2018, as outlined in last year's budget. The iron ore crunch is only making that calculus worse.

The Coalition won an unexpected ally this week in a major essay by Reserve Bank of Australia board member John Edwards, a former adviser to Labor Prime Minister Paul Keating.

Edwards argues last month's Intergenerational Report shows that fixing the budget won't be "too difficult" so long as governments start the groundwork some time during the next five or six years.

He downplays the long-term fiscal challenge, saying "despite all the blather and hype … addressing Australia's fiscal problem does not require a fiscal or tax revolution, it is very far from crisis, and it is not beyond the capability of our political system".

One weakness in the argument, however, is that Edwards – and the government – base their projections and confidence on an assumption that nothing bad will happen, either at home or abroad. That 24 years of uninterrupted growth will continue into the forseeable future.

As Reserve Bank of Australia governor Glenn Stevens has pointed out, the deficit could double to $90 billion "in a heartbeat" if there is a serious economic setback.

Standard & Poor's put WA on notice this week that it faces its second credit rating downgrade in less than two years, largely because of a lack of political will. The same agency has said Australia's gold-plated AAA rating will be threatened if debt rises above 30 per cent of gross domestic product.

Based on the idea that over the last 40 years recessions have tended to boost debt by 4.75 per cent of GDP, Eslake believes the country is close to "one recession away from breaching that threshold".

As always, the way out will involve a combination of good luck and hard work, particularly at the political level. The New York Times reporter's 1892 conclusion fits today's story perfectly.

"Whether the colony has seen its best days or not remains to be determined, but it is at all events evident that it must turn to new and soberer methods if it is to replace the seeming prosperity of the past with one that, although less glittering, shall be more substantial."