The way iron ore prices continue to trade above $US130 a tonne, there is every chance the 2023-24 budget will be in surplus by June 30 next year after a sharp improvement in the mid-year economic update.
Iron ore prices are currently around $US135 a tonne for the benchmark 62% Fe fines from the Pilbara (around $A200 a tonne) and have been above $US100 a tonne since August ($A150 a tonne).
But the government doesn't see the current high prices lasting – the mid-year update says over the year to the end of the September quarter 2024: the iron ore spot price is assumed to decline from a September quarter 2023 average of $US105/tonne to $US60/tonne.
Iron ore prices haven't been near the $US60 a tonne level now for some time – they fell to around $US71 a tonne 13 months ago.
The prices will depend on demand from China which has held up remarkably well this year.
Coal prices are forecast to fall sharply as well, with demand from Korea, Japan, Taiwan, and India more vital than China, which is now only taking Australian thermal coal shipments after the ending of the boycott earlier in 2023. But it's the continuing surge in tax from workers and companies that is making the difference – especially the still very strong labor market.
Both have helped deliver the Federal government a significant improvement in the budget position after only five and a bit months of 2023-24.
Economists expect a smaller surplus than 2022-23's record $22 billion surplus by the end of June 2024.
The mid-year budget update, released on Wednesday by Treasurer Jim Chalmers and Finance Minister Katy Gallagher, forecasts this year's deficit will be $1.1 billion, a $12.8 billion strengthening on expectations in May.
The Treasurer says the surge in revenues and good management had nearly wiped out the forecast deficit for this financial year, but he was not yet ready to forecast a second budget surplus in a row.
"We are not yet forecasting a second surplus, but we are within striking distance. We have given ourselves a chance, but we aren't there yet," he said.
Between 2023-24 and 2026-27, the government is expecting to run up $74.5 billion in deficits, compared to the May budget forecast of a cumulative $114.1 billion deficits expected to rise sharply from 2024-25 onwards thanks to a slowdown in the economy and a rise in unemployment and lower corporate tax revenues as a result.
That will see a small improvement in gross debt, which is expected to be $909 billion by next June – $14 billion lower than had been forecast.
The improvement has been largely driven by much stronger tax collections. This year alone, the government has upgraded forecast revenue from continuing high employment by $8.9 billion to a record $328.3 billion.
Company tax collections have been revised up by $9.2 billion to a record $137.9 billion.
The stronger tax receipts are due to a lift in wage growth, the better than expected jobs market (which is expected to be confirmed again in the November employment data today – Thursday), and continuing high prices for key commodities such as iron ore, with thermal coal kicking higher in the past month.
So large is the surge in tax that these receipts will reach 23.7% of GDP – the highest share since the final budget of John Howard's government in 2007-08.
It is then expected to fall as the stage 3 tax cuts start in the middle of next year.
Treasury has upgraded its outlook for the economy this year, tipping it to grow by 1.75%. In May, it had forecast growth of 1.5%.
Total employment is expected to grow by 1.5% (up from 1% in May), while the jobless rate is tipped to reach 4.25% by the middle of next year, up from 3.7% in October.
Inflation is now expected to rise 3.75% this year, half a percentage point higher than forecast in May. It is then expected to ease to 2.75% in 2024-25.
Wages are expected to grow by 4% this year before slowing to 3.25% the following year – and up to two years of meager real wage growth if the outcomes match the forecasts.
