Gyrations in the iron ore price can make a treasurer look like an economic wizard or somebody fumbling for an excuse.
That’s because a treasurer has no control over the price of arguably Australia’s most valuable mineral resource and it’s proved hard for Treasury and professional commodity forecasters to predict.
While pundits try to guess what might be in the May budget and what it will mean for a future surplus, the great unknown in recent history has been commodity prices.
Howard government treasurer Peter Costello enjoyed the fruits of the pre-global financial crisis mining boom as China began its urbanisation program.
It filled up Australian tax coffers and contributed to a string of budget surpluses.
In contrast, his Labor successor Wayne Swan suffered the consequences of the boom’s unwinding, its resulting investment drop-off and a subsequent steep decline in the iron ore price.
It meant Swan missed his much-promised return to surplus in 2013 after spending billions of dollars trying to prevent a recession during the 2008-2009 GFC.
Abbott government treasurer Joe Hockey suffered the same fate as the iron ore price continued its plunge from a peak of $US190 a tonne in 2012 to an eventual low below $US50, wiping billions and billions of dollars off potential government revenue.
Now Scott Morrison is reaping the benefit of a renewed price spike which already is putting in doubt Treasury’s conservative assumptions of just two months ago.
It seems destined to flirt with the $US100 barrier after hitting the mid-$US90s this week and its highest level since mid-2014 .
The turnaround started last year, in tandem with an even more stellar surge in the price of coking coal.
At the time of the mid-year budget review in December, Treasury said there was “very considerable uncertainty” surrounding the outlook for iron ore.
It assumed the iron ore price would drop from an average $US68 through both the March and June quarters of 2017 to $US55 in the September quarter.
Of course, that could still happen eventually.
National Australia Bank economist Tapas Strickland says the latest upswing is being driven by higher steel prices.
“It is speculated that Chinese steel mills are seeking to accelerate production ahead of likely production cuts in the lead up to the National Party Congress,” he says.
Reserve Bank governor Philip Lowe believes that while the price rise is good for the economy, he doesn’t expect it will lead to the type of pick-up in investment in the resources sector previously experienced.
“There has already been a very large expansion in supply capacity and we expect some unwinding of the recent increase in prices as supply increases,” he told a conference this week.
However, higher prices are providing a boost to national income, which is expected to have some flow-through effects to the rest of the economy.
Treasury secretary John Fraser and his economic team are likely to be quizzed on the outlook for commodity prices and its impact on the budget bottom line when he faces a Senate estimates hearing next week.
Senators are unlikely to be much the wiser given Fraser’s response when he faced the Senate economics committee last October, saying “nobody has a crystal ball” when it comes to commodity prices.
“The streets of Manhattan and Zurich and London are littered with the bodies of commodity traders who get it wrong,” he quipped.
Thankfully, while Australian politics is brutal, only reputations are at stake.