Australia to suffer larger twin deficits

Iron ore prices continue to fall amid concern over weakening Chinese economy. Iron ore prices fell to $47/ton, it traded $110/ton, last year in April. Price is down close to 60% in a year. Analysts are now expecting prices to dip to $39/ton.

The longer the prices remain at these levels, longer are the pain for Australian treasury and the Aussie.

• According to Australian treasurer Joe Hockey, Plunging price in Iron ore would reduce Australia's revenue by $19 billion for the next four years. Iron ore contributes about 20% of Australian exports.

• Treasury prepared December budget plans, based on a $60/ton price, however this time in May, at the next budget they will be conservative, budgeting with iron ore prices at $35/ton. Mr. Hockey is due to present budget on 12^th May.

Treasury secretary failed to provide detailed plan on how he will be narrowing deficit and bring the budget back to surplus. Slowdown in China and mining Sector is clearly posing challenge for austerity. Mr. Hockey, also failed to guarantee that deficit would not widen in coming time.

Iron ore price plunge acting as double edged sword, giving rise to twin deficit.

Australia as of now, has no plans to raise taxes to compensate for the revenue lost from commodity price plunge. For every $10 drop in iron ore prices, Australia loses about $2.5 billion in revenue.

Aussie, currently trading at 0.758 against dollar, will remain out of favor due to current economic conditions. However ASX 200 stock index might do well, as Reserve Bank of Australia, will keep monetary policy easy over longer horizon.