Jim Chalmers’ tough budget can ride the export wave

Record commodity export earnings to provide billions of dollars of extra revenue as Jim Chalmers frames his budget.

Jim Chalmers’ warning that high commodity prices are not expected to last this financial year may be too pessimistic. Picture: Gary Ramage

Another year of record commodity export earnings promises to provide Jim Chalmers with billions of dollars of extra revenue this financial year as he frames an October 25 federal budget aimed at implementing Labor’s election promises and easing the cost-of-living pressures.

Commodity export earnings are forecast to reach a new record of $450bn in this financial year, an outcome that could drive a further $40bn improvement in the budget bottom line in this financial year compared with forecasts in the March budget.

The Department of Industry, Science and Resources’ latest commodity price report suggests the Treasurer’s warning last week that high commodity prices are not expected to last this financial year may be too pessimistic.

The final federal budget outcome for 2021-22 showed booming commodity prices and lower welfare payments underpinned a $48bn improvement from Treasury’s estimates in its pre-election budget update in May, reducing the deficit to $32bn.

But Dr Chalmers has warned of deeper future deficits, and said the “temporary” boost from a record terms of trade did not negate the need for tough decisions in what he has foreshadowed as an austere October 25 package.

“I’d really encourage you not to see the improvement in 2021-22 as an ongoing impro­vement,” the Treasurer warned last week.

Dr Chalmers has flagged that the October budget would predict sky-high commodity prices falling back towards long-term averages. But the latest quarterly report from DISR’s Office of the Chief Economist forecasts resources and energy export earnings to increase by $28bn on last year to reach $450bn in 2022-23.

“Earnings are then forecast to fall to $375bn in 2023–24 (still the third-highest ever), as world supply responds to high prices amidst a soft demand backdrop,” the ­report states.

Capital Economics senior economist Marcel Thieliant said the prospect of energy and mining profits staying high for another 12 months implied a roughly $40bn improvement in the 2022-23 budget bottom line versus what was expected in March. The March budget predicted a deficit of $78bn in 2022-23.

Mr Thieliant – who has said last week’s final budget outcome suggested a surplus was “within reach” provided the government resisted the temptation to spend the windfall – said another major boost to company tax receipts was “a reasonable assumption given that commodity prices remain well above the Treasury’s forecasts”.

The dollar has dropped sharply in recent months to US64.4c, or about US5c below its level in the middle of the year, adding to the competitiveness of exports which are traded in US dollars.

The Department of Industry, Science and Resources predicted the strong prices would remain for another 12 months driven by global energy shortages and the lower Australian dollar.

“Since the June 2022 Resources and Energy Quarterly, metallurgical coal prices have declined sharply, but the price of thermal coal and other energy commodities prices have remained extremely high,” the report states.

Despite easing liquefied natural gas export volumes, earnings from LNG are set to be $90bn in this financial year. Thermal and metallurgical coal should both earn more than $57bn.

“Earnings from these commodities are likely to fall back towards pre-Covid levels after 2023–24, as supply improves,” the report states.

“The iron ore price has edged lower in recent months, as slowing global growth and weakness in China’s housing sector dampens iron ore demand.”