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Iron ore prices causing chaos. Company deception suspected.

The Australian Government budget is having serious problems related with the collapse of the iron ore prices. According to Mr. Tony Abbott, Australia Prime Minister, the recent adjust to the budget for the next four years represents $30 billion and with it, several cut in many areas.

Now is the economic sector who will suffer the consequences of this miscalculation. In the past days, price rebounded in China back just above US$ 50 per ton, but that’s is less than half the US$ 177 per ton from last year in this very time. This is bringing problems to Mr. Abbott administration.

This quickly translated to the cancellation of the planned tax cut for big companies as a measure to soften the sudden budget hole. Everyone remembered this promise and also the “help” for the Paid Parental Leave funding. Now both schemes are out of the picture for good.

Kate Carnell, chief executive of the Chamber of Commerce and Industry said that expecting this fiscal measure. “We are disappointed about the company taxi not coming down, although we are very pleased the paid parental leave scheme, as outlined by the Prime Minister, is not going ahead” she told, making clear that the companies participation on the Paid Parental Leave funding wasn’t a good news for any businessman.

By the time, both schemes were cancelled and many other relevant aspects in the financial health of Australia will change is the next months. Nevertheless, Mr. Abbott maintain the tax cut for the small business as a way of support. Innex Willox, member of the Australian Industry Group said: “We are please though that something will go ahead for small business who desperately need an injection of confidence, but also an injection of capacity to invest”.

In that way, federal government is looking to boost the small businesses by easing the financial matter for them. Also, Mr. Abbott may be planning to leave more room to small business to become bigger, entering that way in the higher tier of the tax system. Trying to stimulate the investment, it’s being proposed that all small businesses will cross the tier two line for taxes when they report their first $5 million in profits.

But maybe the political aspect of the situation could aggravate things for Australia. It is being reported that the Senate is placing too many obstacles in Mr. Abbott’s path for financial recovery. The actual split Senate represents a significant problem for the Prime Minister administration and all its designed measures for the situation.

Roger Corbett, member of the Reserve Bank Board, firmly think that a double dissolution election can fix this political problem and put on the table more tools for helping the economy. The double dissolution is a possibility inside the Australian Constitution where the Governor General of the country can dissolve both Senate and House of Representatives and call for a sudden full election.

He also thinks that in the actual situation, it is almost impossible for Tony Abbott to govern the country. Even already proposed measures are being blocked. Forcing young unemployed population to wait for a semester to access government benefits and reducing the rate of increases to pensions enter in that category of frozen measures by the divided legislative power.

Most of the problem is attributed to the iron ore price collapse, which represents a bad piece of news for every Australian. Only in the first three months of the present year, the iron ore price fell 28 per cent. Many are speculating about the real cause of this and all the suspicions aims to the sudden weak demand in China. Others consider the Australian supply growth as an important and relevant aspect.

The government did act against this last one thing. Political pressures were applied to organisations as Rio Tinto to avoid a dangerous supply growth and prevent a fall in prices. Others mining companies reported that iron ore exports remained flat since the third quarter of the past year, so the supply growth can’t be considered more or equally relevant as the demand downfall.

But there’s still hope for Australia and its iron. Glyn Lawcock, UBS analyst said that “The first two months of the year are always very slow in China; it is winter there and Chinese New Year so therefore construction activity is quite poor always”. This may be represent the possibility of a re-activation in the construction area in Chine in the second semester of the year.

In that way, Mr. Abbott must do the necessary to slow down the export growth. Talks with the miners are needed to make a serious agreement about it and help the iron ore price to go up again at a significant height. But the relation between government and private industry is hurt. Fallen promises could interfere with possible agreements in the productive issue.