Plummeting iron ore prices have cut economic growth expectations and slashed the federal government’s expected tax revenues.
Last night’s budget assumptions are based on a conservative estimate of the price of iron ore of only $US48 per tonne. This half the price used in last year’s budget.
The estimates used are below the recent market prices of iron ore of more than $US62 a tonne. If the price is sustained it could give the government much needed boost to income and growth in next year’s budget.
The budget paper’s highlighted the sensitivity of the Federal
Government’s revenues to the sharp swings in the world iron ore price given Australia’s dominant position in the world market, with Federal Treasury slashing some $20 billion over the next four years based on its latest ore estimate.
World iron ore prices peaked at around $US185 a tonne in 2011 and the government estimated iron ore prices would be around $US96 a tonne in last year’s budget.
If the price of iron ore were $US10 a tonne lower than the new budget estimates, at $US38 a tonne, the Federal Treasury estimates that nominal gross domestic product would be down by $9.8 billion or 0.8 per cent in 2015-16.
Nominal economic growth would be down by $ 13.4 billion in 2016-17.
The lower than expected iron ore price would cost the Federal Government some $2.1 billion in revenues in 2015-16, a year when it is expecting a deficit of $35 billion. The lower iron ore price would cut another $4.4 billion off expected revenues in 2016-17.
On the other side, if the iron ore price averages $US58 a tonne it would add $9.8 billion to estimates of nominal economic growth in 2015-16 and $13.4 billion in 2016-17.
The budget revenues would be boosted by $2.1 billion in 2015-16 and $4.4 billion in 2016-17.
In his speech last night Treasurer Hockey said the latest budget had been brought down amid the largest fall in Australia’s terms of trade in half a century which had contributed to a significant fall in tax receipts.
The Treasury’s economic outlook comments describe the sharp fall in the iron ore price as the “most significant development” since the last Budget.
It attributes the fall to the “substantial increase in global supply coinciding with an easing in steel demand from China.”
“Inherent uncertainty around both demand and supply factors means that the price outlook is subject to considerable risk,” the Treasury warns.
The Treasury paper notes that the price of iron ore fell to $US43 a tonne in April but has partly recovered in recent weeks “with signs that some major iron ore producers may delay elements of their expansion plans.”
But it warns that despite the sharp fall in prices over the past year “expansion of low-cost supply is set to continue for some time.” Iron ore investment and exports directly contibuted 15 percentage points to economic growth over the past decade while export values are $14 times higher at $75 billion.
Source: The Australian
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