Australia's budget blows out as growth slows, ore prices slump

[SYDNEY] Australian Treasurer Scott Morrison is grappling with a budget blow out less than a year out from an election as the economy adjusts to plunging commodity prices and recession-level wage growth.

The underlying cash deficit will be A$37.4 billion in the fiscal year through June, wider than a May estimate of A$35.1 billion, the government said in its mid-year economic and fiscal outlook Tuesday. In the four years through June 2019 the forecast deficit will be A$26.1 billion larger than previously anticipated.

The deteriorating budget is due to "revenue writedowns of almost A$34 billion caused by falling commodity prices, a declining terms of trade, weaker global growth and the adoption of a more realistic domestic growth outlook," Morrison said a statement. Gross domestic product is now forecast to expand by 2.5 per cent in 2015-16 from a May estimate of 2.75 per cent.

Prime Minister Malcolm Turnbull's government is yet to gain much benefit from employment growth that's helping the economy weather a slide in mining investment. Slumping commodity prices and the weakest run of wages growth since the last recession in the early 1990s have hurt government revenue, while new outlays to support innovation and an intake of Syrian refugees have boosted spending.

"The budget will remain stuck in deficit across the forecast horizon with the deficits to be larger than anticipated," Andrew Hanlan, a senior economist at Westpac Banking Corp. in Sydney, said ahead of the release. "Commodity prices have surprised to the downside, notably for iron ore." The government said its budget repair strategy still aims to deliver budget surpluses, which would build to at least 1 per cent of gross domestic product "as soon as possible." The government lowered its assumed iron ore price to US$39 a ton, in line with current market prices and down from an estimate of US$48 in May. The benchmark iron ore price has slumped 45 per cent this year on faltering demand in China, the largest consumer, and as the biggest exporters continue to raise supply to lower production costs and defend market share.

Ore with 62 per cent content delivered to Qingdao dropped 4.3 per cent last week to US$38.30 a dry ton on Friday, a record low in daily prices compiled by Metal Bulletin Ltd. going back to May 2009. The price was at US$39.06 on Monday.

Iron ore will extend its decline into the US$20 a metric ton range by 2017 or even sooner as a global surplus swells, Axiom Capital Management Inc. said this month. The export market will be oversupplied until at least 2020, according to Bloomberg Intelligence. The steel making ingredient traded as low as US$10.51 a ton in 1988 when annual contracts were negotiated between the largest miners and steel producers, data from the International Monetary Fund shows.

Australia's government has also struggled to pass a number of budget savings measures through the Senate, where it lacks a majority, making its goal of returning the budget to surplus even more difficult. The median of 18 estimates in a Bloomberg survey was for a budget deficit in 2015-16 of A$38 billion and a reduction in forecast growth to 2.5 per cent for the same period from 2.75 per cent.

Policy decisions since the budget have been offset by savings measures, adding almost A$400 million to the bottom line, Morrison said.

"Our plan is straightforward - responsibly restrain expenditure while supporting economic growth to lift revenues," Morrison said.

BLOOMBERG