HAVING the learned the hard way, the Treasury is now expecting the price of iron ore, Australia’s biggest export, to stay at five-year lows for the next two years, helping to insulate Joe Hockey’s budget projections from any further slowdown in China’s economy.
The unexpected 30 per cent plunge in the price of iron ore since May to under $US70 a tonne, owing to a malaise in China’s steel-hungry construction sector, has sapped the government’s expected company tax receipts of $14.4 billion over the next four years, almost half the total tax shortfall that has underpinned the $44bn blowout in planned deficits announced yesterday.
The government is now assuming the iron ore price stays at $US60 a tonne on average for two years, which would be the lowest level since mid-2009, more than 50 per cent lower than the price in May and $US10 lower than the current price. Yesterday’s budget update also showed the government has trimmed its growth forecasts for Australia’s three largest trading partners — China, Japan and the US — and expects the lowest Australian national income growth, measured by nominal GDP, for 50 years of 1.5 per cent this financial year underpinned by sluggish wage growth and a terms-of-trade slump.
“Wage growth has been very subdued, reflecting the spare capacity in the labour market and a significant reduction in wage growth in the mining sector,” the Treasury said, while revising upward to 6.5 per cent the expected peak in the unemployment rate.
“With wages growth the weakest it has been for decades, and barely keeping pace with inflation, the usual fiscal bracket creep pushing workers into higher tax brackets over time is just not occurring to any real extent,” said Commonwealth Bank economist John Peters.
Sharp falls in the prices of iron ore, coal, oil and wheat will cause the terms of trade to fall 16.7 per cent over the next two years, the Treasury has estimated, which would be the biggest slump since records began in 1959.
Strong export growth and weaker imports will help insulate the real economy from slower growth: the Treasury is still expecting 2.5 per cent this financial year and 3 per cent in 2015-16.
“With interest rates at historic lows, the decline in the Australian dollar and new market opportunities becoming available, the Australian economy is expected to strengthen,” Treasury said, assuming the Australian dollar will remain at US84c for the next two years.
The slump in the global oil price to below $US60 — the lowest level since early 2009 — will cut revenue from the petroleum resource rent tax by $760 million over the four years to the 2018 financial year, the budget said.
“The global oil price will become particularly important as Australian LNG export capacity starts to come online … and become our second-largest export,” the Treasury said.
Source: The Australian
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