From the Kouk:
The federal budget is less than three months old and already Treasurer Joe Hockey and Finance Minister Mathias Cormann must be smiling like Cheshire cats with several of the key economic parameters stronger than assumed by Treasury in May.
The budget bottom line will be getting a revenue wind-fall from the fact that the iron ore price is 10 per cent higher in Australian dollar terms than was assumed in the budget.
The iron ore price has been hovering around $US52 in recent weeks, compared to a budget-time assumption of $US48, while the Australian dollar has been fallen below 74 US cents, under the 77 US cents that underpinned the budget estimates.
According to Treasury modelling, this difference in the iron ore price is worth about $4 billion to the budget bottom line over the four years of the forward estimates.
The stimulatory impact of the lower dollar spreads further than just the iron ore price, of course, with the boost to exporters and import-competing industries adding to the upside to the budget forecasts. The lower dollar is also seeing the value of the Reserve Bank of Australia’s reserves increase sharply, which means a series of hefty dividends back to the Government are all but certain over the next few years. This is free money for the Government.
Another high profile item that is helping the budget bottom line is the labour market. At budget time, Treasury was forecasting employment growth of 1.5 per cent over the year to the June quarter 2015. It turns out that employment rose by 1.8 per cent over that time. While not a huge difference, it is enough to be adding close to half a billion dollars to the budget bottom line over each of the years of the forward estimates.
…Until now, Hockey as Treasurer has had to deal with similar budget write-downs, plus a hefty increase in spending it must be noted. But with the budget in May framed on what are a set of very conservative forecasts and the economy turning out to be a little better than expected, there is a strong chance than when the MYEFO is updated at the end of the year, Hockey will be crowing about a smaller budget deficit than estimated at budget time and maybe even a surplus in 2018-19.
From the top:
- the Budget assumption for iron ore was $48FOB which converts to $54-56CFR. The spot price is CFR and averaged $55 in July so there is no iron ore dividend;
- more to the point the terms of trade crash is already ahead on 2014/15 forecasts at -12.6% vs -12.25% in the Budget. Next year’s falls will likely be larger than the 8.25% forecast as well;
- the dollar is lower which is good for everything and helps offset these greater than expected falls but the falling TOT still ensures lower nominal growth than the Budget forecasts at 3.5% and 5.5% over the next two years. That was part of Glenn Stevens’ recent point about secular stagnation;
- then we get to the delusional business investment forecasts which are supposed to be -7% and -3.5% for the next two years but ABS data is suggesting -25% for next year alone.
The Budget was not conservative and if Bozo Joe is smiling then it will not last long.