Everything must be learned the hard way by Jim “chicken” Chalmers:
Treasurer Jim Chalmers regards a second surplus in the May budget as “still our goal”, but has revealed Treasury analysis showing a recent fall in iron ore prices will punch a $9 billion hole in the nation’s books over the next four years.
Appearing on the ABC’s Insiders program, Dr Chalmers said there will be a degree of difficulty for the May 14 budget that is a “bit higher” than the first two Labor budgets. He is also citing international conflict, a softening of the Australian labour market, and a “substantial” slowing in the economy of Australia’s largest trading partner, China.
Why can’t you run a surplus with an iron ore projection in the budget of $70 and iron ore averaging well above $100?
This is because spending has not been calibrated to the projected price. This is called a structural deficit, masquerading as a surplus.
So, what will happen if the iron ore price falls to $50?
The hole in the budget is going to gape into a Grand Canyon. Why? The lower the iron ore price goes, and the more it crimps low-cost iron ore producer profits, the worse the effect gets.
A fall from $140 to $110 seems nasty, but it still represents massive profits and budget receipts. At $50, nearly all of the profits and receipts are gone.
Indeed, you can be sure that the begging bowl will come from the major minors to cut royalties and taxes so that they can survive. So, the public purse will suffer a double whammy.
A budget surplus based upon highly volatile commodity prices is a fool’s budget.
The right approach is to save every penny above a nominated price—say $70—which still offers immense returns for the miners. But it also operates as a stabilization mechanism when the cycle turns, and the money disappears.
At that point, you can reverse the flows out of the savings – perhaps kept in a soverign wealth fund, which amplifies returns – and then release savings in times of stress.
Smart budgets, like those in Norway or Chile, accomplish this rather than Australia’s foolish strategy of dodgy politicians boosting their chances of winning re-elections with structural overspendnding.
And when the cycle turns, as it is now, you have a crisis, as the economic good times hit a brick wall and the budget is forced to retrench at the worst possible time.
We can’t blame all this on Chicken Chamlers. Both sides of politics have been doing it for twenty years.
But we are reaching the end of the China boom when iron ore will fall to unimaginable lows and stay there.
Therefore, the opposite is true in a recession, with tax increases to make up for all the pork and tax cut giveaways we’ve enjoyed in marginal electorates.
It’s just another reason why those who think that Australia now has structurally higher interest rates are smoking crack.
