Iron ore price shock to deliver $3bn hit to federal budget
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The news: Declines in the iron ore price amid a longer and more severe downturn than expected in China’s steel industry are putting the Australian federal budget under pressure. A Treasury analysis of steeper declines in the iron ore price than previously forecast shows this could have a $3 billion effect on tax receipts over the forward estimates.
The numbers: The iron ore price was USD81.80 a tonne at close on Thursday, down 7.5% over the week to their lowest levels since November 2022. Treasury’s previous estimates were for about USD83 a tonne at this point and then decline to USD60 a tonne by the end of the March quarter next year. The sharp decline is on the back of warnings about a sharp and protracted downturn from Chinese steelmaker Baowu Steel Group. Treasury now thinks the long-run anchor price will be reached by the end of the September quarter 2024.
The federal budget forecasts relating to tax receipts and therefore the bottom line hinges on a number of assumptions and forecasts. One of the most significant estimates is the iron ore price. Another major contributor to revenue upgrades in recent years has been the labour market, which is contributing to a higher tax take through higher levels of employment and bracket creep.
There was a $27 billion upgrade to tax receipts in the latest 2024-25 budget, of which $21.6 billion came from tax receipts. The iron ore price is tied to the broader economic performance of major trading partner China. China’s real GDP increased 0.7% in the June quarter, to 4.7% over the year. This fell below expectations, with a beleaguered property sector and record home price falls behind much of the softness. Residential construction has been down significantly in the past year and home building is a source of significant demand for steel.
What they said: “Softness in the Chinese economy and the recent fall in iron ore prices are another reminder that we are not immune from volatility and uncertainty in the global economy,” Treasurer Jim Chalmers said in a statement.
“We’re following these developments very closely because of their potential impact on our economy and our budget. We’ve delivered the first back-to-back surpluses in almost two decades at the same time as we’re easing cost of living for Australians,” he said.
“We've always put a premium on responsible economic management, and that's especially important amidst all this global uncertainty.”
The source: Treasury media release
