It’s an odds on bet. With iron ore falling again last night another -2.5% to $54.20 (-$5 freight for Budget FOB price) the Budget outlook is now roughly 20% underwater in a week and futures are forecasting that it will in actuality be more like -40%, -$8 billion in Budget revenue and -1.5% in nominal GDP:
As you can see, Treasury’s outlook price of $60 FOB has enjoyed a full six days in the black in the past year. Even the insane recent bubble in Dalian futures did not get anywhere near Treasury’s outlook price. Bloomberg described the futures bubble as an “extreme mania”. The AFR today describes it as akin to “tulips in the Netherlands”. Yet this extreme, tulip bubble fell well short of Treasury’s forecast for the next 14 months as the key input price into it Budget. So what do you call that?
I’ll tell you what you call it, political assassination and economic vandalism.
Treasury’s disastrous iron ore and terms of trade forecasting has been a key input into the massive Budget misses that have dogged and destroyed four prime ministers. Sure, it’s not the only one. The pollies have only themselves to blame, not least for failing to bring Treasury to heel.
But, equally, it is clear that Treasury’s Macro Group has had absolutely no idea what it is doing since the bust began and has repeatedly used the laughable methodology of averaging recent prices to forecast both the iron ore price and terms of trade which, during the great bust, has torn political Budget repair scripts to shreds over and again within months. This is made far worse when one considers that the futures markets of day have been in consistent and deep backwardation, forecasting big price falls all along.
If some random anarchist planned to destabilise Australian government for a generation he could have found no better way. One can’t even say that it’s partisan having been done to both political parties.
Now it is Malcolm Turnbull’s turn. Of course he may flop over the line but if he does he will be at severe risk of losing power as his Budget and polls collapse and internal challengers mount. Not least because Treasury’s latest shocker has all but guaranteed that the AAA rating is lost by year end. Both Moody’s and Standard and Poors are gathering to strip it on the basis that the Budget is one gigantic lie.
Even if Labor wins it’ll be gone, there is no incentive for a new government to try save the rating given they’ll fail anyway as iron ore keeps falling. Much better to let it go and blame the Libs.
The media is full of slack-jawed gawking at the iron ore price and its falling below the Budget outlook today, but that is not the story. The scandal is in Treasury (and Scott Morrison) pissing away the nation’s AAA rating on an eight week gamble to win power.
It deserves to ignominiously fail.
