It’s an $18 billion a year gift to the budget!

The iron ore price has jumped to US$53 a tonne as production levels are scaled back and markets realise that global economic growth is actually stronger than was assumed a couple of months ago.

For the budget, this is manna from heaven. Just last week, Prime Minister Abbott and Treasurer Hockey were suggesting the budget may be framed around an iron ore price of US$35 a tonne, such was their pessimism about Australia’s largest export earner.

With the budget bottom line impacted by around $250 million a tonne for each US$1 move in the iron ore price, the $US53 level is some $US18 higher than the number suggested by the government. This means, like magic, the budget bottom line will be $4.5 billion a year or $18 billion over the next 4 years better off. An $18 billion windfall just from this little change in circumstances.

All of a sudden, that budget surplus by 2017-18 is back in play. Mr Hockey knows it, especially also with the RBA set to start giving back the $8.8 billion given to it last year and low interest rates cutting back the cost of interest paid on government debt.