Coal the dirty secret behind Qld budget improvement

The super high coal price is the main reason Queensland Treasurer Cameron Dick will report a much improved state budget balance this week. However, yesterday the Brisbane Times reported:

Mr Dick said the silver lining of the pandemic was an increase in employment and a lower deficit of $937 million – the result of Queensland’s COVID response that allowed businesses to stay open.

But the state Treasury was never assuming in its budget forecasts we’d have prolonged lockdowns in Queensland, so the budget improvement can’t be due to our COVID response, which was already factored into the numbers. Instead, the budget improvement, which I take it is a reduction of the 2021-22 net operating deficit from $3.49 billion to $937 million, a $2.5 billion improvement, must largely be due to the super high coal price, a result of global economic recovery from the 2020 COVID recession and a global gas shortage (noting coal can be a substitute for gas in energy generation). I covered this on QEW a few months ago (e.g. Super high coal prices will boost royalties and slow the increase in Qld state debt). To keep you up to date, here’s the latest coking coal price chart, showing current month and 12-months ahead futures prices, which signal that coal prices are still much better than state Treasury expected.

Super high coking coal prices will slow the growth of Queensland state debt.

For 2021-22, Queensland Treasury assumed an average price for hard coking coal of 130 USD/tonne (see p. 253 of Budget Paper 2), while it’s ended up selling for 300-400 USD/tonne for the last few months. As Treasury notes (on p. 253 of Budget Paper 2):

A one per cent variation in the average price of export coal would lead to a change in royalty revenue of approximately $33 million.

I won’t do a back-of-the-envelope calculation because I’d need to consider the thermal coal price as well, but it’s pretty obvious coal price increases of the magnitude we’ve seen mean billions of extra dollars for the Treasury, and we should learn the Treasury’s precise estimates this week when the mid-year budget update is released.

Finally, I should observe that, today, Queensland’s cruel and shameful interstate border restrictions come to an end. It’s about time. It’s good news for the state economy, especially for our tourism operators, and let’s hope the state government holds it nerve as COVID cases climb, and we don’t see costly restrictions re-imposed.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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