Will ScoMo gift himself $27bn in iron ore lies?

From UBS:

16/17 CW Budget Preview – the end of slippage? Treasurer Morrison will bring down the 16/17 Commonwealth Budget on May 3 (a week earlier than normal) – his 1st & the Coalition Governments’ 3rd. Overall, the deficits for the Commonwealth General Government sector appear to be tracking broadly in line with the MYEFO released in Dec-15 (Figures 1 & 2), which projected ongoing narrowing from $37bn (2.3% of GDP) in 15/16, to $34bn (1.9% of GDP) in 16/17, $23bn (1.3% of GDP) in 17/18, and $14bn (0.7% of GDP) in 18/19. The Budget also extends the deficits to 19/20, which we see at ~$8bn (0.4% of GDP). Notably, this could be the first Budget/MYEFO for a number of years that has minimal fiscal slippage – albeit after the projected peak in gross debt had already surged by a massive ~$300bn, or ~12%pts of nominal GDP, in the prior few years. The MYEFO projected the face value of Commonwealth Government Securities for the General Government sector would surge to a peak of $552bn or 29% of GDP in 18/19 (but with another ~$8bn deficit in 19/20 set to increase the peak of debt further to ~$560bn). This compares with the May-13 Budget which projected a peak in debt of ~$270bn or 17% of GDP in 14/15 (Figure 3).

A likely key support to this Budget is a surprising bounce in the iron ore price to an average of ~USD$50-55USD FOB in recent weeks, which is well above the Government’s MYEFO assumption of USD$39 FOB (Figure 4). Sensitivity analysis presented in last year’s Budget showed that each USD$10 rise in the iron ore price should raise tax revenue by $2.1bn in the current year and $4.4bn in the following year. Hence, we estimate this recent price move – if projected to be sustained – could improve the budget up to ~$8bn p.a., or a cumulative ~$27bn over 4 years. However, we expect this boost to be broadly offset. Firstly, the Government will probably decide to stall at least some of the unlegislated ‘savings’ from policy measures announced in prior Budgets – which the independent PBO estimates have a cumulative fiscal impact of $13.3bn over the 5 years to 19/20 (and a cumulative impact of $36.5bn over the decade to 25/26). Secondly, despite a recent bounce in commodity prices and real GDP, we still expect Budget forecasts for nominal GDP growth to be trimmed by a further ~¼%pt p.a. across the forecast horizon (Figure 5). Based on Treasury sensitivity analysis – where each 1%pt cut to nominal GDP deteriorates the budget by $2.7bn in the current year, and $5.7bn in the following year – we estimate the total hit to the budget is a cumulative ~$11bn over 4 years.

The Singapore 12 month swap (which the government should be using as its forward price) is today at $42.48:

Subtract freight charges of $5 and ScoMo should be downgrading his Budget forecast from $39 to $37.50FOB. Alternatively, ScoMo could go with the Department of Industry forecasting propaganda:

All ScoMo need do is change nothing in Treasury’s currently spastic iron ore forecasting method so I give the truth very long odds.