The tumbling price of iron ore could cost Australia more than $15 billion in export revenues and punch a $3 billion hole in the Federal Budget
New economic research from Barclays Bank suggests that a sustained ebb in iron ore prices will also cut the nation's company profit take by almost $17 billion and hurt the Federal Budget well into 2014.
Prices for iron ore, which accounts for about a fifth of all Australian exports, have slumped more than 30 per cent since early June.
After hovering around the $US125 ($120) a tonne, they are now below $US90 ($86.5) a tonne.
The sharp drop has been driven by increasing evidence of a slowdown in China that accounts for 70 per cent of Australia's iron ore sales. Already the fall has cost the WA Budget about $150 million, with warnings that if prices do not improve the State's revenue will be cut by $1.5 billion this financial year.
While iron ore prices are not as important to the Federal Budget as the State, economist Kieran Davies believes it will have a material impact on the Commonwealth's bottom line.
"If the drop in iron ore prices is sustained, we estimate that it could have broad effects on the economy," he said.
Mr Davies estimates even if iron ore export volumes remain stable, the fall in price will cut the value of exports by 25 per cent to around $45 billion.
Australia's total export earnings would drop about 5 per cent from their current estimated level of $310 billion.
Company profits before tax would fall 6 per cent while the size of the Australian economy would be trimmed by one per cent. All of this would cut revenues to Canberra in 2013-14 by $3 billion and by $7 billion in 2014-15.
A $3 billion drop in revenue this year would see the forecast surplus of $1.5 billion become a deficit of $1.5 billion. The expected surplus of $2 billion in 2014-15 would become a $5 billion deficit.
As recently as last week, Federal Treasurer Wayne Swan conceded if the fall in some commodity prices continued it would make it tougher to deliver a surplus.
However, he said the Government was "absolutely committed" to delivering a surplus even if it required further spending cuts.
Yesterday, Mr Swan said the country was still benefiting from solid growth, low unemployment, healthy consumption, contained inflation and low interest rates."While some parts of our economy are under pressure from global uncertainty, the high dollar, lower commodity prices and other structural changes, we need to keep things in perspective," he said.
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