Article by Julie-Anne Sprague And Matthew Cranston courtesy of the Australian Financial Review
Booming iron ore prices driven by Chinese demand will swell Western Australia’s budget coffers by $2.3 billion over the next four years, pointing to a likely federal government windfall that would speed up budget repair and drive down record debt faster than anticipated.
Figures released by WA’s Department of Treasury yesterday show popular state Premier Mark McGowan will head to the polls on March 13 with a budget surplus of $3.1 billion this year, nearly $1 billion more than a forecast made in December. It leaves Mr McGowan as one of few cashed-up leaders on the planet.
The windfall has been fuelled by a resources sector that has not skipped a beat during the pandemic, rolling out testing of workers to keep COVID-19 out of WA’s lucrative mining operations. The state withstood calls early in the crisis from east coast premiers to shut the sector down and has managed border wars by relocating many east coast staff to WA.
That has left it ready to reap the rewards of iron ore prices surging to a nine-year high in December. Despite easing, they remain 20 per cent higher than when WA Treasury was assessing the state’s fiscal outlook in November.
A thriving mining sector and – up until the beginning of the month – having no community transmission of COVID-19 for 10 months is underpinning the state’s economic strength.
WA’s unemployment rate of 6.2 per cent is the lowest of all the states.
Its strong financial position, which has also been driven by better than expected property stamp duties, has opened up a line of attack for a depleted Liberal opposition, which has already criticised Mr McGowan’s $43 million support package for small businesses impacted by last week’s snap five-day lockdown.
“It is unfair that the Labor government is sitting on such a significant war chest when Western Australia has so many urgent issues that need Continued p6
From page 1 WA surplus pumped up by iron ore addressing,” Liberal leader Zak Kirkup said yesterday. “Small businesses are crying out for support, our tourism industry is hurting and the state’s health system is at breaking point with record ambulance gridlock.”
The lockdown support package that has come in for criticism offers businesses a $500 electricity offset.
But the McGowan government is using the forecasts to paint itself as a safe and strong government.
“It highlights the McGowan government has delivered on its promise to fix the financial mess left by the previous Liberal National government, and to keep Western Australians safe and our economy strong through the COVID-19 pandemic,” outgoing Treasurer Ben Wyatt said.
The iron ore boom is generating significant wealth for iron ore companies and their founders. The mining industry has already sought assurances from WA’s major political parties not to raise mining royalties over the next four years. Both major parties say they have no plans to lift mining taxes.
Federal Treasurer Josh Frydenberg welcomed the boost in iron ore prices but noted they were volatile.
“As the largest iron ore exporter in the world, this is welcome news for Australia with iron ore export values rising 21.1 per cent in December to a monthly record of $12.6 billion,” he said. “However, commodity prices are volatile which is why we continue to take a prudent approach in the budget with the 2020-21 MYEFO assuming iron ore prices reach $US55 per tonne by the end of the September quarter 2021.”
WA Treasury lifted its 2021 forecast to $US134.30 a tonne, up from $US103.70 it assumed in December.
The West Australian figures include freight, whereas the federal government omits this. The price of freight is roughly $US6 a tonne.
The WA government has forecast the price to retrace closer to its long-term average of $US64 a tonne, forecasting an average price of $US65.60 in 2022, up from $US64. Analysts at Citi this week lifted their iron ore price forecast for 2022 to $US110 per tonne.
EY chief economist Jo Masters said the federal government’s “very conservative assumptions” point to a big jump in government revenue.
“The revenue boost from higher iron ore prices may pale in comparison to the amount of money spent to support the economy during 2020 but it is an important boost at a time when we need every penny we can get,” she said.
In its December budget update the federal government upgraded company tax receipts for this financial year – for which iron ore drives a significant part – by 3.4 per cent, or $2.9 billion, to $88 billion from its previous estimate in the October budget. Its previous update showed company tax receipts would be around $84.5 billion.
WA’s Pre-election Financial Projection Statement shows the state is on track for a $3.1 billion surplus, up from the $2.2 billion forecast in December.
Across the forward estimates, revenue has been lifted by $2.3 billion.
The updated financial projections, which take into account an $850 million jump in spending to account for property stimulus measures and other COVID-19-related measures, show net debt falling by $1.2 billion in June 2024 to $40.2 billion. Employment growth has been revised up to 1.5 per cent compared to 1 per cent.
The stronger 2021 revenue outlook has been driven by a $2.1 billion bounce in iron ore royalty income, $224 million in taxation revenue, and $282 million from higher commonwealth grants.
This income is offset by the government’s decision to defer interim dividends to larger corporations at a hit of $1.5 billion.
A poll conducted for The West Australian newspaper on Saturday, the day after a five-day lockdown was lifted, puts Mr McGowan’s approval rating at 88 per cent.
Having a blast Iron ore spot price ($US/tonne) Iron ore price volatility ($US/tonne)