2012-13 Government Mid-year Financial Projections Statement

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2012-13 Government Mid-year Financial Projections StatementIron Ore PricesThe iron ore price forecasting methodology has also been revised since budget-time, asdiscussed in Chapter 3. However, despite the improvement to the forecastingmethodology, iron ore prices remain subject to considerable uncertainty. Large variationsin iron ore prices across forecasters often reflect divergent views on prospects foreconomic development, steel demand in China and global iron ore supply, which are keydeterminants of iron ore demand. While there have been significant falls in iron oreprices in the second half of 2012 as Chinese demand for iron ore (and steel) eased,the $US/$A exchange rate has not depreciated simultaneously as has reliably been thecase historically. This has heightened the risks to the State’s royalty revenue.Again, for illustrative purposes, a variation in the iron ore price, from $US91 to $US148per tonne would, if sustained for a full year, result in a $1.8 billion variation in royaltyincome for the year. If global economic conditions were to deteriorate sharply, iron oreprices could contract faster than assumed. Conversely, there is some upside risk to theiron ore price forecast if iron ore demand from China improves faster than expected and ifglobal iron ore supply grows at a slower pace than currently anticipated.Iron Ore VolumesIron ore production, particularly for the State’s main producers, remains strong and exportvolumes are growing at a solid pace. Notwithstanding the high levels of production andexport growth, the outlook for volumes over the forward estimates period is moreuncertain than usual.Projects currently under construction will support a continued expansion in productionand exports. However, there have been a number of announcements recently indicatingsome scaling back of future capital investment programs, which would only have amodest impact in the very near term. The announced changes to date relate to projectsthat were not yet factored into the forecasts over the forward estimates and, therefore,have not impacted on the investment or production estimates. Actual production trendswill very much depend on global economic conditions and their impact on China.A significant improvement in these conditions in the near term could lead to areinstatement of postponed projects, which would minimise any production effects of theannounced scale-backs. Conversely, a further weakening in conditions would have amore marked impact on iron ore production and export volumes towards the end of theforward estimates period.State Taxes ($8,195 million in 2012-13)Transfer DutyProperty transactions are highly susceptible to fluctuations in market sentiment and aretherefore highly volatile and difficult to forecast. The current transfer duty forecasts seekto balance the risk of continued weakness in the housing market with the risk that marketsentiment could quickly change and cause a faster than expected recovery in transactionvolumes.36
Financial ProjectionsPayroll TaxThe payroll tax forecasts are based on current trends in labour market conditions.If activity in the labour market is weaker than expected, actual payroll tax revenue wouldbe lower than anticipated. The forward estimates are predicated on 15.7% growth inpayroll tax collections in the current year and annual growth thereafter averaging 9.9%.This compares with average growth over the last ten years of 13.1%.Spending RisksAsset InvestmentThe estimates contained in this mid-year review are based on the latest infrastructure costprojections available to agencies. Further cost variations could arise depending on arange of factors including market conditions and the capacity of the construction sector.The infrastructure program also includes some projects that are subject to confirmation ofCommonwealth funding for further planning, and definition of scope and design,finalisation of contract negotiations, and/or other events.Corrective MeasuresThis mid-year review contains a number of general government savings measures that areestimated to deliver a net debt benefit of around $334 million over the period to30 June 2016, and an improvement to the general government operating balance of$527 million in 2012-13 (see detail earlier in this chapter). These initiatives are on top ofthe package of corrective measures included in the 2012-13 Budget (worth $4.9 billion innet debt terms over the period to 30 June 2016).The projections in this mid-year review are based on the expectation that agencies, thoughchallenging in some cases, will fully achieve these savings. While this is very clearly theGovernment’s expectation, if savings measures are not fully achieved, there will be adeterioration in the net operating balance and net debt estimates contained in thismid-year review.Decommissioning of the Office of Shared ServicesIn the 2012-13 Budget, additional funding was allocated to the Department of Finance toassist agencies re-establish their corporate services following the Government’s decisionto decommission the Office of Shared Services (OSS). The decommissioning of the OSSis scheduled to be completed by March 2014 and is currently on track. A recent report bythe Department of Finance, Corporate Services in Agencies Future Planning, highlighteda number of risks that have the potential to result in increased expenditure for thedecommissioning process, including:the tight decommissioning schedule, with any delay in the timetable addingsignificant costs to the project;agencies opting for new systems that are more expensive than anticipated in thedecommissioning model; and37
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2012-13 Government Mid-year Financial Projections Statement

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