How iron ore prices affect the budget

13_How iron ore prices affect the budget

By Prashant Mehra
(Australian Associated Press)

The federal government has forecast iron ore prices to average $US55 a tonne over 2016/17, up from its MYEFO estimate of $US39 a tonne in December.

The uptick reflects the rebound in prices of the steelmaking commodity over the past quarter, driven largely by expectations of a stimulus by the Chinese government.

Iron ore is Australia’s top export revenue earner, and every $US10 a tonne change in the price results in $A1.4 billion increase or decrease in tax receipts, and $A6 billion change in nominal GDP, according to the budget papers.

For 2017/18, the impact will be greater, with every $US10 a tonne change impacting tax receipts by $3.9 billion and nominal GDP by $13.4 billion.

Iron ore prices currently hover around $US65 per tonne but are still down two thirds from their peak levels in 2011.

While prices have increased in US dollar terms, the benefit on nominal GDP has been partly offset by a stronger Australian dollar, which has appreciated to 77 cents against the US currency compared to 72 cents at the time of MYEFO estimates, the government says.

But the increase in commodity prices will result in a slight improvement in Australia’s terms of trade. For 2015/16, the terms of trade are now forecast to fall 8.75 per cent, compared to the MYEFO estimate of 10.5 per cent decline.

In 2016/17, terms of trade will increase by 1.25 per cent, compared to the MYEFO estimate of a 2.25 per cent fall.


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