The Pre-Election Economic and Fiscal Outlook, due to be released by the Departments of Treasury and Finance in the next nine days, looms as more important than in 2013. Back then, it emerged just days after an economic statement issued by Labor that substantially downgraded revenue forecasts from the 2013 budget. There was never going to be a surprise in the 2013 PEFO, and notionally the same logic should apply this time around given the budget was just days ago, and Treasury secretary John Fraser was defending its optimistic forecasts only on Friday.
Except, some problems loom. In particular, iron ore prices are on the slide. The budget forecast US$55 a tonne, but since then there’s been a 12% sell-off, including a 5%-plus slump on Monday, which took the spot price to US$54.99. The sell-off followed sharp falls in Chinese futures prices, driven by the crackdown on speculators by Chinese regulators and markets, a move that has been intensified in the past 10 days in response to fears madcap investment in commodities was inflating a nasty bubble along the lines of last year’s sharemarket bubble.
Bloomberg reported that the SGX AsiaClear contract for June settlement slid as much as 9.4% and, in Dalian, contracts fell 7.1%, retreating alongside contracts for steel reinforcement bar and coking coal. The sell-off in China had the country’s sharemarkets crunched for a second day in a row yesterday. Following the market’s nearly 3% slump on Friday, the CSI 300 index dropped 2.1%, to 3065.62, while the Shanghai Composite dropped 2.8%.
On the upside, though, is that the value of the Aussie dollar has plunged sharply from the budget estimates of 77 US cents and 64 on the Trade Weighted Index (TWI). The dollar hit US$0.7315 this morning, while the TWI was set at 61.9 yesterday in Australia. Both could end up significant stimulants if sustained.
The other issue is whether the much criticised nominal GDP forecast in the budget will remain Treasury’s view now that it’s free of the chore of having to ask its minister to pick from its range of forecasts — any change will flow directly through to revenue forecasts.
Labor, meanwhile, is trying to exploit the “Fiscal emergency? What fiscal emergency?” stance of its opponents. The budget deficit has repeatedly blown out under the Coalition, it blew out again last Tuesday and the government has been unable to bring spending down to the levels it inherited from Labor as a proportion of GDP. Scott Morrison prefers to subtly blame former treasurer Joe Hockey for this, admitting that the government has a spending problem, although he no longer talks about how he got spending down from the 26.2% of GDP he inherited when he became Treasurer.
Labor, however, has no such qualms, and is enthusiastically using the reservations expressed by ratings agencies last week about the path back to surplus, with shadow treasurer Chris Bowen to promise at today’s budget reply to bring this year’s Mid-Year Economic and Fiscal Outlook forward (yes, yes, we only just had the budget, and it was early) to October and use it as a mini-budget. That’s something Joe Hockey should have done in the wake of the 2013 election, to get some of the 2014 budget nasties out of the way sooner.
Labor, of course, gets to pose as the guardian of Australia’s credit rating because it was under Wayne Swan that we secured a third triple A rating, but it’s also (by its ready admission) the party of higher taxes, making a virtue of opposing the government’s colossal $48 billion business tax cut. And it’s hoping to exploit what seems to be a lingering sense in the electorate that the fiscal emergency we were told so much about three years ago has vanished a bit too conveniently: 48% of voters polled in today’s Essential Report agree that the budget didn’t do enough to reduce the deficit, compared to 22% who say it did (an odd position, given the budget increased the deficit, but anyway).
We’ll see how the likes of Moody’s et al react to the PEFO next week. But expect any revenue write-downs to appear prominently in Chris Bowen’s talking points.