Fast-falling iron ore prices, combined with slower wages growth, may trigger a blowout in the budget deficit this financial year, from a forecast $30 billion to $40 billion, according to estimates by Citigroup.
Treasurer Joe Hockey acknowledged the impact of the mining industry on the budget and said the tempering of Chinese manufacturing could also prove challenging for the Australian economy.
“The falling iron ore price obviously has a significant impact on the nation’s finances, because it represents $1 in every $5 we earn in exports,” the Treasurer told The Australian.
The government’s May budget forecasts of an “easing” iron ore price over the next few years has been discarded since prices have halved over the past 12 months.
Citigroup economist Paul Brennan said the swift decline in recent days meant prices were moving faster than originally estimated.
“If the iron ore price keeps moving closer to our forecasts in this way, the deficit could be close to $40 billion,” he said.
Earlier this month consulting firm Macroeconomics predicted that falling prices would cut revenue by $52 billion over the next four years.
The benchmark price for iron ore was trading at around US$70 a tonne yesterday, down 7% in the past two days, the lowest it’s been in five years.
HSBC chief economist Paul Bloxham warned this year’s budget deficit may even exceed the 2013-14 $48.5 billion recorded deficit.
“Combined with slower growth in wages, the fall in iron ore prices could mean that the budget deficit is larger in 2014-15 than it was last financial year,” Bloxham said.
Hockey said next month’s mid-year economic and fiscal outlook (MYEFO) would outline savings measures to cover the cost of new policies, including the $630 million in increased funding for security agencies to help combat terrorism.
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