Booming Coal and Gas Prices Brings Rosy Budget Outlook: Economist

A photo shows part of the coal operations at the Port of Newcastle in New South Wales, Australia, on Nov. 18, 2015. (William West/AFP via Getty Images)

Australia’s budget deficit will see a “remarkable recovery” this year on the back of soaring coal and natural gas prices, according to economist Chris Richardson.

In September, Treasury said higher commodity prices improved the federal budget’s bottom line for the 2021-22 financial year by $50 billion (US$75 billion) from higher commodity prices, but warned that they were starting to trend downwards.

It forecasted thermal coal to crash from over US$400 to US$60 per tonne by the first quarter of 2023.

While thermal coal prices have dropped below US$400, global demand for coal from sources alternative to Russia suggests a crash is unlikely to happen soon.

With coal and gas prices underpinning federal finances, Richardson forecasts the cash underlying deficit to fall to $23 billion (US$34 billion) in the 2022 calendar year.

“After deficits of $186 billion in 2020 and $56 billion in 2021, calendar 2022 will see the cash underlying budget in balance—a truly remarkable recovery,” he wrote in the Australian Financial Review.

But he warned that the budget still requires fiscal restraint and repair for the long-term in the face of “continuing blowout” of social service and defence costs.

Government Warned Continued Fiscal Discipline Needed

Assistant Treasurer Stephen Jones said while the high coal and gas prices did help the budget bottom line, it also meant households and businesses were hit with high energy prices.

He also explained that the Treasury’s traditional puts a “technical assumption” for its commodity price forecasts, which looks at a 10-year period, which resulted in the underestimation of prices.

Jones added the underestimation ensured fiscal discipline among budget and spending ministers and welcomed Richardson’s rosy budget forecast.

“Having the numbers look better than we anticipated maybe a month or two ago, of course, that’s going to be good news to the government,” he told Sky News Australia.

“We’re not going to get ahead of ourselves. The same fiscal discipline that we put in place in October has to be seen through into the May budget as well.”

It comes after Fitch Ratings affirmed Australia’s AAA credit rating, noting that the federal budget presented in October sought to contain spending to avoid worsening inflation risks.

“The international ratings agency confirmed that the October Budget showed ‘restraint’ and did not add to cost pressures in the economy,” Treasurer Jim Chalmers said in response.

“We expect the government will seek to narrow deficits through growth-enhancing reforms, spending restraint and efficiency gains, under its fiscal strategy of putting gross debt-to-GDP on a downward trend.”

Australian Treasurer Jim Chalmers speaks to the media during a press conference inside the Budget lockup at Parliament House in Canberra, Australia, on Oct. 25, 2022. (AAP Image/Lukas Coch)

Shadow Treasurer Angus Taylor said the credit rating affirmation was encouraging but warned the government against further plans for big spending.

“It is no surprise the treasurer is celebrating Australia’s strong credit rating when his only plan over the medium-term is to increase debt and borrow more,” he said, as reported by AAP.

“As Australian homeowners tighten their belts in the lead up to Christmas, it is imperative the government reins in its plans for bigger spending to put downward pressure on inflation.”

Australia Should Take Advantage of Commodity Boom, Says Former Treasurer

However, Peter Costello, Australia’s longest serving federal treasurer under the former Liberal Howard government, criticised both the former Coalition and current Labor government for the high levels of expenditure and debt.

“The fastest growing area of government expenditure now is interest on debt. If you can believe it, the interest payments that we have to make on our debt are growing faster than the NDIS,” he told the ABC.

“You can get into this debt trap, where a very large proportion of your income has to go on servicing past debt.”

He said the debt incurred by each successive government was starting to “rachet up” and no government was addressing the question of paying back the debt.

“If you look back at the 2008 financial crisis, we had stimulus. And the idea was, when we came out of that financial crisis, the stimulus would be paid back. It never was,” Costello said.

“Then we go into COVID. We have stimulus. The idea is when we come out of COVID, it will be paid back. But it won’t be.”

Costello said the Albanese government should seize current high commodity prices and begin addressing the country’s half a trillion dollars of debt.

“These are the best times for Australia. Our terms of trade are the highest ever. In trading terms — these are the greatest days since the gold rushes,” he said.

“When you’re trading in the greatest time since the gold rushes, you shouldn’t be trading at a deficit … We should be putting some money aside. And if we don’t put it aside in the good times, where are we going to be in the bad times?”

Costello also voiced concerns about how Australia would pay for its higher defence spending, NDIS, ageing population, and renewable energy future.