From The Australian:
The budget faces a hit of at least $15 billion over the next four years from the fall in the iron ore price, which is gathering pace.
…Treasury bases its estimates for exchange rates and the oil price on the recent average level as a technical assumption, because forecasts are so unreliable.
What and Treasury’s ridiculous recent average is reliable? It’s killed the RBA:
The answer is simple. Use a simple formula derived from the futures market, that’s what it is for. It has been in near constant backwardation for four years so has done a decent job of forecasting prices. It is also eminently defensible given markets are supposed to be the prime price discoverers. The current Dalian six month price is roughly $35. The current Singapore 12 month price is $34.
Those are CFR prices, though, so subtract $7 for FOB. That will give you $28 and the Budget stripped of $5-6 billion per annum forever.
That’s what Treasury should do. Whether it has has the cojonies for it is another matter entirely.
