The Australian newspaper has today run an article arguing that Budget revenues are facing a potentially big revenue upgrade due to the sharp fall in the Australian Dollar, which has depreciated by around 10 cents since the 2013-14 Federal Budget was announced in May:
THE tumbling Australian dollar is set to help Labor claim a surprise boost to the budget during the election campaign as tax revenue improves on the back of the global shift in currency markets.
The budget gains are tipped to wipe out some of the $10.9 billion deficit that is forecast for next financial year but the outcome depends on a sustained fall in the dollar from the level above $US1 assumed in last month’s budget…
“A lower Australian dollar should provide support for government revenues, as it will boost the local currency prices of commodities and mean higher revenues from the mining sector,” said HSBC chief economist Paul Bloxham. “More generally, the lower Australian dollar will support economic growth, which will also lift government revenues. Overall, the lower dollar is good news for the government.”
While the budget papers were based on an exchange rate of $US1.03 to the Australian dollar, the currency was trading at around 93c yesterday.
Other things equal, the fall in the Australian Dollar should help to boost Budget revenues for reasons outlined by Paul Bloxham above, namely higher company profits for Australian exporters and import competing firms, which boosts company taxes.
But as is often the case, things are rarely equal, and the boost to the Budget from the falling dollar will be offset by the sharper than expected decline in commodity prices and the terms-of-trade.
As noted in my post-Budget report, the terms of trade forecasts in the Budget were very aggressive, since they assumed a significant uplift for the March and June quarters this year and an almost non-existent fall next year and only a 2% fall in 2014-15. With iron ore prices already down around 25% this year, and coal prices lower as well, along with the ongoing ructions in China, Treasury’s forecasts are overly optimistic and likely to severely disappoint.
To add insult to injury, the recent falls in the sharemarket could lower capital gains tax receipts as well, further weighing on Budget revenues.
In effect, the Budget contained two errors that cancel each other out. A large Budget deficit appears locked-in.
