Joe Hockey faces a Wayne Swan moment

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By Leith van Onselen

The ABC’s Ian Verrender has published an interesting article today on the challenges facing the Budget as iron ore prices and Australia’s terms-of-trade slump:

Joe Hockey is facing his very own Wayne Swan moment.

It is the point in time when it suddenly dawns on a treasurer that all those revenue projections in that budget way back in May are disappearing into a deep and very dark hole.

…on the commodity front, prices are unravelling at a brisk pace, particularly for iron ore, the nation’s biggest export earner. That spells bad news for our nominal income and the Federal Government’s pledge to bring the budget back to surplus by 2017.

Even if the current iron ore downturn lasts only this year – and there is mounting evidence that it will be protracted – the reduced income will resonate through the estimates well into the future…

The latest ABS data, the June quarter national accounts, showed a 7.9 per cent seasonally adjusted decline in the terms of trade from a year earlier, with a 4.1 per cent drop from March. It’s only deteriorated since.

According to Stephen Anthony, a director of consultancy firm Macroeconomics, that could slice at least $5 billion directly from budget revenue.

Then there is the question of West Australia…

Unfortunately, that is about to become Joe Hockey’s problem… the Commonwealth will be forced to help fill the gaping and ever-expanding hole in West Australia’s budget deficit with a larger slice of GST payments.

Ian Verrender is spot on. Nominal GDP is the dollar value of what’s produced and earned. It’s also the measure that drives taxation revenue.

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Nominal GDP grew by just 3.3% in the year to June 2014, which is well below the 6.8% average growth experienced throughout the Howard Government’s rein (see next chart).

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The previous Labor Government was no stranger to slumps in nominal GDP. During its rein, it twice fell to below real GDP: during the GFC and in early-2013. But even then, Labor still managed to enjoy average nominal GDP growth of 5.6%, which is above the 4.2% average growth enjoyed so far under the Abbot Government.

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Unfortunately for the Coalition, the terms-of-trade has much further to fall, which means that the Federal Government will remain under heavy pressure. In turn, the Abbott Government’s claim of Budget superiority is likely to be put to the test.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.