The Morrison government will push out the timeframe for an anticipated drop in iron ore prices until the September quarter next year despite the ongoing uncertainty associated with the escalating trade war with China.
Thursday’s mid-year economic forecast (Myefo) will contain an assumption that iron ore prices will decline steadily from their current record levels to US$55 (A$73) a tonne by the end of the September quarter 2021 – which is one quarter later than assumed in the October budget.
Iron ore prices have skyrocketed in recent weeks, recently reaching US$150 a tonne free on board (FOB) for the first time since 8 January 2013, reflecting strong demand in China for steel, fuelled by domestic stimulus.
Brazil is the second-largest supplier of iron ore to China after Australia. There is anxiety that China could launch retaliatory action against Australian iron ore, and market jitters have driven up spot prices, but the government anticipates supply disruptions in Brazil will continue as the country battles the coronavirus pandemic.
Amid contention about a mooted coal export ban, the trade minister, Simon Birmingham, confirmed on Wednesday that the Morrison government will take action through the World Trade Organisation to contest China’s tariffs on Australian barley exports.
While the trade war with China is casting a pall over Australia’s economic recovery post-Covid, the pre-Christmas economic update to be unveiled by the treasurer, Josh Frydenberg, on Thursday will be rosier than the picture painted in the October budget.
Economic growth forecasts will be revised up, unemployment projections will be revised down, and the deficit will not be as large, reflecting both increased revenue from income and company tax receipts and savings from anticipated expenditure on programs such as the wage subsidy jobkeeper.
High iron ore prices benefit the budget’s bottom line. The government says a sustained $10 rise in the iron ore price means nominal gross domestic product (GDP) would be $4.4bn higher in 2020-21 and tax receipts would be $300m higher for the year.
The flip side of that is disruptions and price shocks have the opposite effect. At budget time, Treasury said if the iron ore price fell immediately to US$55 a tonne FOB rather than next year, then nominal GDP would be $24.8bn lower than forecast and tax receipts would be down $2.6bn.
Deloitte Access Economics predicted on Monday that because of a range of factors, including the better than assumed performance of the Australian economy and lower spending on jobkeeper wage subsidies, Myefo would likely confirm the 2020-21 deficit would be $3bn less than the $213.7bn level that was forecast in the October budget.
Deloitte also estimated the improvement in the bottom line may rise to $15bn by 2023-24.
The government also confirmed this week it will fund a further 10,000 home care packages for elderly Australians at a cost of more than $850m in Thursday’s economic update.
The interim report of the aged care royal commission found the government needed to act urgently to reduce waiting times for older Australians seeking in-home support.
While the government has been increasing funding for in-home care ahead of the final pronouncements of the aged care royal commission in February next year, officials from the health department told a Senate committee in September that more than 30,000 elderly Australians had died before receiving home care packages for aged care in the past three years, despite being assessed as eligible.
Officials reported that 102,000 people remained on the home care waiting list.
In a statement issued ahead of Thursday’s Myefo, Frydenberg said the government would take “a prudent approach to its commodity price assumptions in the budget as the global economic outlook remains uncertain”.
“It is unclear how long Chinese stimulus will persist and when normal production levels will resume in Brazil, which has contributed to iron ore price increases over recent months,” the treasurer said.
“In the face of a one-in-a-century health and economic shock, Australia remains among one of the best performing developed nations in the world, supported by a resilient economy and world-leading resources sector.”
