Iron ore is so huge for the Australian economy that a $10 price move shifts the budget position by $3.6 billion

Fortescue’s iron ore carrier Nicola.

The good folks at Treasury are getting good at clarifying how volatility in global markets can effect Australia’s economy, and the federal budget position.

Assumptions on commodity prices are required to calculate anticipated mining company profits and the resultant taxes. So, all things being equal, higher prices for Australian commodities mean more revenue for the budget.

Iron ore markets have become volatile in recent years, and with this being the nation’s biggest export this introduces a new level of uncertainty into budget planning.

It is so big that it could derail the plans announced by Treasurer Scott Morrison to return the budget to surplus in 2019-20.

Treasury explains why, concisely, with this paragraph and accompanying table in the budget papers:

An increase of US$10 per tonne FOB in the iron ore price results in an increase in nominal GDP of around $5.5 billion in 2018-19 and just over $12 billion in 2019-20. Similarly, a decrease of US$10 per tonne FOB in the iron ore price results in a decrease in nominal GDP of an equivalent amount.

Source: Australian Treasury

Note the impact on revenue. If Treasury’s assumptions are wrong by $US10, the difference to the budget bottom line is $3.6 billion.

Scott Morrison plans to deliver a tiny surplus of $2.2 billion in 2019-20. If, for whatever reason, iron ore prices were sustained at $US45 rather than the $US55 used to forecast the budget, Scott Morrison’s surplus plan would be derailed.

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