Ore price hits Hockey hopes
Plummeting iron ore prices will trigger a $9 billion slip in Joe Hockey's Budget, possibly delaying a return to surplus into the next decade.
_The West Australian _believes the Treasurer's mid-year economic and fiscal outlook, to be released next week, will forecast iron ore to average about $US60 a tonne in 2015-16.
It represents a 36 per cent fall from the $US94 forecast in the May Budget, which at the time Mr Hockey believed was a conservative figure.
It is understood that Mr Hockey once again asked Treasury to provide conservative estimates for iron ore for MYEFO and that the Treasurer subsequently tested his department's numbers with market experts.
One in every five export dollars comes from iron ore. Consequently, big changes in prices can have a huge effect on the Federal Budget.
Every dollar change in the price of iron ore hits the Budget bottom line by between $210 million and $250 million.
In May, Mr Hockey forecast the Budget coming to balance in 2017-18, with a surplus the following year.
The gloomy iron ore price forecasts, along with falling prices for other commodities and lower-than-expected wage increases, are expected to push this time- table back by two years.
The Budget is now facing a deficit of about $35 billion. In May, Mr Hockey forecast it would be less than $30 billion.
Apart from bigger deficits, the blowout will also drive up total government debt.
If Federal Treasury's new forecasts prove correct, the State Budget will be severely affected as will several higher-cost iron ore producers across WA.
Every $1 fall in iron ore makes State coffers $49 million poorer.
Iron ore was trading for $US69 a tonne yesterday, well short of the $US122 that forms the basis of the State Budget forecasts.
While lower iron ore prices will deliver the biggest Budget blow, another problem that will linger for years is slow wages growth.
Bank of America senior economist Saul Eslake said the sluggishness of wages would plague the Budget for some time, reducing the amount of income tax collected by Canberra.
He said income tax could be $1.5 billion lower than expected this year, feeding into lower tax takes in coming years.
Job figures out yesterday also confirmed an economy travelling worse than expected, with the total number out of work at its highest level since mid-1997.
The jobless rate through November edged up to 6.3 per cent.
