Australia’s Budget Position to Be 25% Better Off Than December Estimate: Economists

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Australia’s budget position will be around 25% better off than Treasury’s December estimate, reflecting a rapid economic recovery, with a jump in commodity prices further bolstering the bottom line, economists say.

The underlying cash deficit in the 12 months ending June 30 will be A$152 billion ($117 billion), compared with the government’s December forecast of A$197.7 billion, according to the median estimate in Bloomberg’s survey of economists. Treasurer Josh Frydenberg is expected to hand down a budget on Tuesday forecasting an A$80 billion shortfall for fiscal 2022, they said.

The deficit could further narrow as the price of iron ore, Australia’s largest export, is set to hit an unprecedented high. Global steel consumption is surging in response to the world emerging from its pandemic-induced slump, and major miners are struggling to keep up with the frenzied pace of demand.

At a local level, Australia’s V-shaped recovery has sent the jobless rate tumbling -- boosting the tax take from the employed and cutting welfare costs for the unemployed -- and economists reckon it will drop to 4.5% in two-years’ time. Unemployment was 5.6% in March.

“Most significantly, unemployment is falling and there are more people employed now than pre-COVID,” Westpac Banking Corp. Chief Executive Officer Peter King said this week after announcing an increased half-yearly profit. “A strong labor market will continue to support growth in the economy.”

The economists surveyed expect gross domestic product will rise 4.1% in the 12 months through June 2022, before decelerating to 3% in the following fiscal year. That’s still well above the pre-pandemic decade-average of 2.6%.

Another leg up in the iron ore price will further improve the budget bottom line as a portion of the profits generated by miners is captured through corporate taxation and royalties.

Expectations are building that prices can reach $200 a ton -- topping the record $194 from more than a decade ago -- as Chinese steelmakers ramp up production. That could deliver an additional A$40 billion to Australia’s budget coffers over a year and set up an improved starting point for each subsequent budget along a forecast horizon that stretches out to fiscal 2025.

In its December mid-year budget update, Treasury forecast iron ore would retreat to $55 a ton in the third quarter of this year.

It also means less borrowing, improving Australia’s net debt position and helping shore up its AAA status held with all three credit-rating agencies. Economists see net debt reaching A$731 billion in the middle of 2022, climbing to A$806 billion at the end of June in 2023.

“We are going to see an increase in strength in the economy here in Australia,” Australia & New Zealand Banking Group Ltd. Chief Executive Officer Shayne Elliott said in a Bloomberg TV interview this week after also announcing an increase in first-half profit. “The economy is firing well on so many cylinders.”

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