Iron ore is at ridiculously inflated prices around $100. But if you spend what you don’t have, then even a small pay cut pulls your pants down:
Speaking to Sky News Australia Chief Anchor Kieran Gilbert on Tuesday, Mr Chalmers was asked how concerned he was about the drop in iron ore, and its impact on the May budget.
“Quite concerned. There’s no use pretending it doesn’t have an impact on the budget bottom line,” he said.
“It is concerning to see the iron ore price a bit lower than we have been used too…it’s fallen by about a third just this calendar year alone, obviously that will flow through to the budget.”
“I think particularly with this one, which is probably a bit harder to land than the first two, because we are not getting the same kind of revenue upgrades, the balance of risks in the real economy has shifted and is shifting,” he said.
The budget forecast price for iron ore was $60. But it is FOB, not CFR, so we need to add another $10 or so.
A $30 drop is worth about $1.5bn to the budget, so it is hardly the end of the world.
But, if you run structural spending benchmarked to optimistic commodity prices then you are really running structural deficits, which is poor budget management.
It will be fun when iron ore drops to $20 and rips $20bn out of the budget, as well as $100bn out of the nominal economy.
Treasurer Jim “Chicken” Chalmers will then be naked, tarred and feathered.
