Welcome to Wayne’s World, Joe Hockey. From The Australian:
“Lower commodity prices do have an impact on our budget — we’ll have more to say in MYEFO,” Mr Hockey told The Australian. “As a result of the fall in iron ore and coal prices, there’s been a hit to the budget.”
“We’ve got to be realistic about the state of the economy and the state of the budget. Our forecasts will be more realistic than what previous governments have had.
“And because they’re more realistic, it means we’re better informed about what we can and can’t do.”
The May budget included a very conservative estimate for export prices, anticipating they would fall by 6.7 per cent this year, relative to import prices, and by a further 1.7 per cent in 2015-16.
However, the sharp drop in iron ore and coal prices means that average export prices could be 8 to 10 per cent lower.
Treasury estimates that a fall in export prices that is four percentage points greater than expected would translate into a $2.6bn increase in this year’s deficit and a $5.4bn increase next year, mostly a result of weaker company tax.
Personal income tax may also come in below budget estimates, with the latest official survey showing wages rising at 2.6 per cent against a forecast increase for the year ahead of 3 per cent. The May budget was also counting on a big recovery in superannuation taxes that may be hard to achieve unless sharemarkets recover.
Hockey is right. His estimates were more conservative than Wayne Swan’s. As a quick aside, one should also recall the panning he got for it from the Pasconomic crew at Fairfax and Crikey, who mocked his conservatism.
The test now is will he be conservative enough second time around? If he follows the dills at BREE then he won’t, and it will not be easy to honestly forecast what is coming. The terms of trade (ToT) are getting absolutely smashed as oil, gold, iron ore, coal, base metals and soft commodities all keep falling. The settings are for greater falls yet as China rebalances it’s growth drivers and the US recovery drives up its dollar, turning on its head what was a virtuous cycle of high demand and monetary revaluation of commodity price rises post-GFC.
Here is the MB forecast for the ToT in the next twelve months:
The Budget forecast for 2015/16 ToT falls of 1.7% will need to be quadrupled and the implications are recessionary. Over to you, Joe.
