The federal government is remaining cautious about future earnings from Australia's key export, iron ore, with budget forecasts continuing to build in prices well below current levels.
Tuesday's budget shows Treasury forecasting iron ore prices to average $US55 a tonne over the next three years despite the commodity having averaged $US67 a tonne in the March quarter and remaining around that level since.
The conservative outlook is on account of continued volatility in commodity prices and the consensus market expectation that iron ore prices will gradually decline as major customer China cuts back steel production.
Iron ore is Australia's top export revenue earner, and every $US10-a-tonne change in the price has a big impact on tax receipts and nominal GDP.
Budget forecasts show that a $US10-a-tonne rise or fall in the iron ore price in 2018/19 will cause a corresponding $A1.2 billion increase or decrease in tax receipts, and a matching $A5.5 billion change in nominal GDP.
For 2019/20, the impact will be greater, as contract price changes flow through with a lag and further affect corporate profits, dividends and consumption.
A $US10-a-tonne change in 2019/20 will impact tax receipts by a corresponding $3.6 billion and nominal GDP by $12.3 billion.
Prices for metallurgical coal, Australia's second-largest export, are forecast to gradually decline to $US120 a tonne by the December quarter, despite averaging more than $US200 a tonne in the March quarter.
The volatile outlook for the vital steel-making ingredient remains a key uncertainty for the economy.
If metallurgical coal prices were to slide from $US200 a tonne to $US120 a tonne immediately instead of after six months, nominal GDP would be down $A0.6 billion.
This would also have an impact in 2018/19, costing $A0.5 billion in tax receipts and cutting nominal GDP by $A2.8 billion.
