The government remains on track for a second straight surplus but the recent slide in iron ore prices and an uptick in the jobless rate mean the budget will report a much smaller revenue upgrade than in recent years, the federal treasurer, Jim Chalmers, says.
The coming budget, to be released on 14 May, will aim to address slowing economic growth, “persistent cost of living pressures”, and increased global uncertainty, Chalmers will tell a Committee for Economic Development of Australia lunch in Sydney on Thursday.
“In each of our first two budgets we benefited from more than $100bn in revenue upgrades. This year, we won’t see anything like that,” he said, according to an excerpt of his speech circulated to the media. “In fact, we are even looking at much less than the $69bn we booked in the latest mid-year budget update.”
Chalmers said the government was “still shooting for a second surplus”, compared with the $1.1bn deficit projected in December. While inflation was still the “primary focus”, other changes were also being watched closely.
While the labour market remained “pretty resilient”, it was now softening “so we won’t get the very substantial revenue upgrades we’ve seen from outperforming expectations here”, he said.
Australia’s economy expanded throughout 2023 even as interest rates rose to 12-year highs. The pace of growth, though, slowed in each quarter and ended the year at just 0.2%, the Australian Bureau of Statistics said earlier this month.
Excluding population growth, per-capita GDP contracted 1% from a year earlier. The unemployment rate also rose to 4.1% in January, a two-year high, or notably higher than the 3.8% rate expected by the Reserve Bank.
The economy’s performance to close out 2023 would have been even worse if not for trade. Net exports contributed 0.6 percentage points of the December quarter’s GDP growth, a boon that may not last as some commodity prices sink.
Chalmers noted the price of iron ore, Australia’s biggest export, had fallen almost 10% in the past week alone “due to concerns about the demand for steel in China”.
China’s government last week predicted that nation’s economy would expand about 5% in 2024, similar to its 5.2% expansion in 2023. Officials, though, spoke of challenges, and the accompanying work report noted “intensifying geopolitical conflicts”. China is easily Australia’s largest trading partner.
At the present so-called free-onboard price of $US94 ($A142) a tonne, iron ore was trading about a fifth lower than was “far out from last year’s budget”, Chalmers said.
Thermal coal burned in power stations was “more or less” tracking, according to Treasury’s December forecasts, to be down about a third from a year ago, he said.
In the mid-year economic and fiscal outlook (Myefo), the iron ore spot price was assumed by the Treasury to retreat from $US105/t to $US60/t. The thermal coal price would more than halve from $US144/t to $US70/t, according to the forecasts.
For every $US10/t decrease in the iron ore price, nominal GDP would lose $5.3bn this fiscal year and the budget $500m, Myefo estimates showed.
Chalmers noted some Treasury forecasts had been unduly pessimistic, such its pre-election estimate in May 2022 that the economy would have 14.2 million people in work by the end of 2023. That forecast turned out to be half a million short.
“We welcome this, but we don’t expect to get such upside forecast surprises this time around,” he said.
