No, Kouk, Bozo Joe will not be smiling

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.



  1. Tassie TomMEMBER

    The next 3 weeks will be big weeks of data: Aug 12 – Wage price index; Aug 13 – Average weekly earnings; Aug 25 – Household income & wealth; Aug 27 – Private capex expenditure & estimates.

    Let’s see how Bozo Joe’s feeling by then. He’ll probably feel just the same – he probably doesn’t know what all this data means anyway.

    • wasabinatorMEMBER

      Yep, doubt he cares all that much what with the how many dozens of properties he holds…

      Almost feels like he’s there just to ensure that Negative Gearing isn’t touched.

  2. Hill Billy 55MEMBER

    Until Helicopter Bronny upset the apple cart, there has been a really good news feel about life in Oz, purely from an LNP perspective. Of course, dellusional as it may have been, it seemed set up for an early (pre Christmas) election. I don’t like their chances now.

    • The worst part is even if they’re wrong, and always two steps behind sites like this, they’ll still have jobs while the rest of us end up unemployed..

  3. Might be about to get a little tougher for Bubbles Bozo.

    “The fervent search for yield [in Australia] is done,” saidMr. Whetton, whose view gets support from government data showing foreign investors now own just above two-thirds of Australian government debt. That compares with nearly 80% as recently as three years ago.

    Things may get worse if the Aussie dollar’s slide continues to reflect Australia’s weakening economy at the end of a decadelong commodity boom.

    “The tide may be starting to turn,” said Su-lin Ong, head of Australian research at RBC Capital Markets. “Australia may need to fight a little harder for that bond flow in the years ahead, and investors are likely to demand a greater premium.”

    • But that can’t be right… interest rates will have to be lowered to ‘stimulate consumption’. No interest rates are going to go up, the only question is by how much!

  4. mine-otour in a china shop

    As a left leaner, the Kouk might be incentivised himself to make Sloppy Jo’s task look easy, so when he F*cks up he looks even weaker than normal.

    I couldn’t care less though of these “laberal” party spin angles being taken, I prefer to concentrate on the economic and accurate and detailed facts presented, which MB do so much better than twitter spin.

  5. I’m inclined to agree with more negative forecasts, you only have to talk to people about Australia in general and you get the vibe something aint right. However if Bozo joe and Kouk end up being right, nowhere here will admit it lol