Greg Jericho 

Scott Morrison and the budget just got lucky with the price of coal

The treasurer said it was China, rather than then treasurer Wayne Swan, who saved Australia from the global financial crisis. Who will he credit this time?
  
  

Gladstone coal terminal
There’s not a lot of downside – for Scott Morrison, as well as the economy – from the price of coking coal rising from $93 a tonne for the September quarter to $200 in the December quarter. Photograph: Dave Hunt/AAPImage

The old adage in sport is that it’s better to be lucky than good, and it applies as well to being a treasurer. Regardless of whether or not you consider Peter Costello a good treasurer, he sure as heck was a lot luckier than those who followed him. But now Scott Morrison may himself be about to get lucky.

Once the mining boom of the early 2000s kicked into gear, so too did large amounts of revenue – but, importantly, it was unexpected amounts of revenue.

Each year, the Treasury makes estimates of how much revenue it will raise, based on certain economic parameters such as employment and wage growth (good for estimating income tax) and the value of the Australian dollar and of the prices of commodities such as iron ore and coal (good for company tax).

During the six years from 2002-03 to 2007-08, the Treasury continually underestimated how much tax it would raise, because it continually underestimated just how much better those parameters would be.

For example, purely due to the parameters being better than originally expected, revenue for the 2005-06 budget was $33.7bn more than originally expected, and in the final two years of Peter Costello’s stint as treasurer, the final revenue result finished respectively $50.3bn and $62.5bn better off.

And it wasn’t just because the Treasury was being wrong three years in advance.

In between Costello delivering his budget speech for the 2006-07 budget and the final result, an extra $26.2bn of unexpected revenue came into the government’s coffers.

Think on that.

In the space of a year, an extra $26.2bn of revenue was raised, not due to increasing the tax rate or adding new taxes, but purely because things turned out better than was expected.

Now that is luck.

In the six years from 2002-02 to 2007-08 an extra $188bn in revenue was raised due to the economy and commodity prices performing better than originally anticipated.

Then came the global financial crisis.

Between Wayne Swan delivering the 2008-09 budget and its final result, purely because the economy slowed, $19.2bn less revenue was raised than expected.

And it was not just Swan who was unlucky – Joe Hockey suffered as well.

In the seven years from 2009-10 to 2015-16, a total of $196bn revenue was written down because each year the economy kept performing worse than the Treasury thought it would.

The main reason was the collapse of iron ore and coal prices. From September 2011 to the end of 2015, the price of iron ore fell 76% and coal by 58%.

Scott Morrison, however, might find himself rather luckier than Wayne Swan or Joe Hockey.

​ A restriction of coal production in China and an improvement in building construction in China ​ has caused an increase in demand for coal at the same time supply has been reduced. This has meant the price for coking coal (used in steel production) from Australia has risen from $93 a tonne for the September quarter to $200 a tonne in the December quarter.

Deloitte Access Economics estimates that for every US$1 a tonne price increase, revenue increases by $65m. Given this year’s budget estimated the price of coal to average US$91 a tonne, should prices stay above $200 a tonne we’re looking at around $7bn more in revenue than was expected.

That’s a nice amount given the current budget deficit is $37bn.

The price increase would also improve economic growth and be a nice fillip to employment in coalmining areas – especially in Queensland and NSW – as the current price would allow some mines, which were unprofitable at previous prices, to re-open for production.

Now one of the problems with cracking the champagne is that the price boost might be short-lived – China might ramp up coal production again. There also might be an increase in the exchange rate, which could also have an adverse impact on revenue – one of the key difficulties for Swan during his time as treasurer.

But in terms of the budget position, there is not a lot of downside from the price of coal going up.

Since the financial crisis, the Liberal party has often claimed that the Rudd government’s stimulus did little, and that it was actually China that saved our economy.

Only two months ago, in his speech referring to the “taxed and taxed not”, Scott Morrison sought to downplay the performance of Wayne Swan, suggesting that “during the GFC … China’s stimulus proved to be more important than our own”.

Morrison would have us believe that Swan was actually lucky, not good and thus not worthy of praise.

It will be interesting, should the price of coal hold at its current levels and the budget comes in with a much smaller deficit than anticipated, purely due to decisions made by the Chinese government, whether he will be similarly ​ reticent to take the credit.

 

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