Western Australia has retained its AA+ credit rating from Standard & Poor's (S&P) in the face of massive iron ore price volatility.

The rating agency removed the mineral-rich state's "negative credit watch" – which relies on a 90-day outlook – in light of an eventual return to surplus underpinned by a larger share of the goods and services tax pool.

The state, which has already lost its AAA rating, remains on a "negative outlook" – giving it a one in three chance of losing its AA+ in the next two years.

S&P analyst Craig Michaels attributed the removal of the negative credit watch to the clarity obtained in the state's May budget. The state's operating position, which is in deficit, is forecast to improve when its GST revenue starts increasing from 2016-17.

This is due to the "equalisation" methodology of the distribution system that channels money away from wealthy states to poorer ones. As the former boom state's mineral royalties decline, its share of GST will increase.

"We think the key weakness in the budget is likely to be temporary," Mr Michaels said.

"We will be looking closely on how it implements its savings measures."

S&P has previously criticised the Liberal state government for lacking the "political will" to enforce potentially unpopular savings measures.

Western Australia's forecast cash deficit, which shows the shortfall between income and spending, is predicted to surpass $5 billion this financial year, which is the worst on record. It is forecast to return to a cash surplus in 2018-19.

Iron ore prices have a dramatic impact on the state's finances given its reliance on mineral royalties. The price has jumped this week after the commodity crashed 11 per cent in just one session last week.

Chamber of Commerce and Industry Western Australia economist Paula Gadsby said the state needed to cut spending, deliver microeconomic reform and ensure all infrastructure projects delivered value for taxpayers.

"Increasing taxes is not an option given the current low level of business confidence and softening labour market," Ms Gadsby said.