Higher Aussie Dollar Impacts On Tax Receipts

by Mary Swire, Tax-News.com, Hong Kong

10 November 2010

The 2010-11 Mid Year Economic and Fiscal Outlook (MYEFO), issued by Australia’s Deputy Prime Minister and Treasurer, Wayne Swan, has disclosed the negative impact that the appreciating Australian dollar is having on current tax revenues.

It was pointed out in the MYEFO that, overall, the historically high terms of trade and growth in the mining sector as a share of the Australian economy have meant that the country’s budget is more sensitive to developments in commodity and currency markets than in the past.

In fact, Swan has given his opinion on the global factors that are making it possible for the Australian government to receive less tax revenue, at the same time as the economy is growing by an expected rate of 3.25% in 2010-11 and 3.75% in 2011-12.

The Australian dollar reaching parity with the US dollar, he said, “means our exporters bring home less income and that flows through to reduced company and resource taxes. Commodity export earnings are particularly affected, because they are contracted in US dollars.”

He added that “the stark impact of the dollar’s appreciation on commodity prices was demonstrated with new figures released by the Reserve Bank which showed that, while non-rural commodity prices have increased by over 6% in US dollars since the middle of this year, prices in Australian dollar terms have fallen by more than 7% over the same period because of the dollar’s appreciation.

It has been reported that the estimated effect of the currency appreciation, if maintained, will reduce corporate tax collections by some AUD2bn per year, across the period covered by the budget forecasts, with larger reductions possible in later years after the new mining tax is due to be collected.

Despite that potential source of volatility in the budget estimates, the government is maintaining its commitment to return the budget to surplus. The forecast underlying public sector cash deficit for 2010-11 is AUD41.5bn (USD42.1bn), or 3% of gross domestic product (GDP), returning to a surplus of AUD3.1bn in 2012-13. This represents a fiscal consolidation of 4.5% of GDP over the three years to 2012-13.

Furthermore, net debt is expected to peak at 6.4% of GDP in 2011-12. This, it was said, will leave Australia in a substantially stronger fiscal position than any of the major advanced economies.

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