A rise in iron ore prices won’t be much help in getting the budget to surplus

A long climb. Chris McGrath/Getty Images)

Delotte Access Economics says the current jump in iron ore prices won’t be much help to the federal government in getting the budget back to surplus.

“Australia’s headwinds howl loudest for the Federal Budget,” says partner Chris Richardson in Delotte Access Economics’ quarterly business outlook.

He says weak national income growth hurts a budget powered by income taxes.

“And while the housing price boom has made life easier for the NSW and Victorian budgets, history suggests that’s a temporary fix,” says Richardson.

“Finally, at the same time the economy is (or will) be doing few favours to the tax take, the cost of past policy promises is still ramping up.

“So if you hoped the iron ore price rebound meant the long nightmare of tax writedowns has now run its course, then you’d better keep hiding under a blanket — or risk major disappointment.”

Iron ore is now around $US60 a tonne versus the December mid year budget update, the MYEFO, assumption of $US39. A rise in the price of iron ore increases the sales take of miners, meaning they then pay more in taxes.

Shane Oliver, head of investment strategy and chief economist at AMP Capital, thinks there’s reason for some optimism.

“The cycle of each successive budget update pushing out the return to surplus may not be repeated in the May Budget as a higher iron ore price and stronger employment growth provide a bit of a boost to revenue,” says Oliver.

However, Oliver says it’s hard to be optimistic about meaningful spending cuts unless the government faces a more cooperative Senate.

Ratings agency Moody’s Investor Services says the government’s aim of balancing the Federal Budget by 2021 is “unlikely” without revenue raising measures.

That means Australia’s AAA rating is at risk. Moody’s says “government debt will likely continue to climb, a credit negative for Australia”.

However, Oliver asks: Would a downgrade to AA1 really matter?

“The experience following downgrades in other countries suggest the impact on bond yields would be limited but it could boost private sector borrowing costs marginally,” he says.

“And it would be a blow to the national psyche and would be a sad outcome given how long it took to regain the AAA rating after the downgrades of the late 1980s.”

Here’s how budget forecasts keep missing deadlines to return to surplus: