Sluggish economy & lower coal prices could put Qld gov’t in operating deficit

The mid-year budget update from the Queensland Government later this month will no doubt contain economic and fiscal forecasts with substantial downward revisions, owing to a weaker national economy and lower coal prices.

The state budget forecast a hard coking coal price of $US 179/tonne averaged over 2019-20 (see p. 212 of Budget Paper 2). But the current (premium) hard coking coal price appears to be around $US 135/tonne, according to Metal Bulletin. The lower coal price alone could lower expected revenues by several hundreds of millions of dollars, putting the 2019-20 operating balance at risk of going into deficit, given it was estimated to be only $189 million when the budget was handed down in June.

From the budget (p. 213 of Budget Paper 2), we know a 1% variation in the average coal price results in a revenue change of approximately $54 million. Depending on where the average coal price ends up over 2019-20, the budget could lose $0.5 billion to $1 billion. Such a loss would more than wipe out the Palaszczuk Government’s thin operating surplus.

The weak national economy could also compromise state government revenues. Pete Wargent has nicely summarised expectations for September quarter GDP growth, to be revealed this Wednesday (CapEx outlook fizzles):

“The early partials for GDP growth in the third quarter look to be weak, with declines in dwelling construction, a negative contribution from retail sales, and now another weak…partial from the CapEx figures.”

The ABS’s September quarter private new capital expenditure data (released last Thursday) showed Queensland doing better than all other states and territories (a 2.3% increase in September quarter compared with a 0.2% decline nationwide), with WA the only other state/territory to record an increase in capital expenditure (see chart below).

capex_states

The positive result for September quarter for Queensland was likely due to the mining industry, which has experienced a recovery in capital investment over the last few years (see chart below). That said, mining investment is much lower than what it was at the peak of the mining investment boom in the first half of this decade, and it won’t be enough to promote a thriving Queensland economy in 2020.

capex_ind

The Queensland Government appears well aware of the weaker economic and fiscal outlook and hence will hand down the 2020-21 Budget in late-April instead of mid-June next year. The government is aiming to stimulate both the economy and its re-election prospects (of course) with additional public spending in 2020, regardless of what that means for the budget deficit and the stock of debt, currently on its way to $90 billion.

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