According to media reports yesterday and this morning, today’s mid year review of the 2011 federal budget will see the federal government reveal cuts of up to $3- $4 billion over the next four years, mostly down to the impact of the stronger dollar.
The cuts could match the $10 billion impact on the budget from the higher value of the Australian dollar.
Hints on Sunday and yesterday from Prime Minister Julia Gillard and Treasurer Wayne Swan have pointed the way to spending cuts to keep the budget on track for a surplus in 2013.
The May budget forecast of a paper-thin 2012-13 surplus was based on a dollar worth US90¢. It has since climbed above $US1.01.
The Reserve Bank’s latest economic forecasts last Friday were based on the assumption that the dollar would remain at about $US1 for three years.
The RBA said it sees growth rising to 3.7% by the end of 2011, 4% by the end of 2012, while it sees inflation rising from 2.75% through June 2012.
Complicating the federal government’s position is that almost every measure in the budget has seen better performance than forecast in May, but the damage to revenue from the higher toll will be the major variable.
The budget forecast jobs growth of 2.25% has been surpassed by annualised growth of 3.8%.
Continuing high export prices are lifting Australia’s terms of trade by 20% rather than the forecast 14.25%.
The surge in commodity prices after the Fed’s easing last week sent the US dollar lower is likely to continue into 21011.
Mr Swan has already said the stronger currency will cut tax revenue, especially levies on resources companies (and company tax receipts).
The dollar closed above parity with the greenback for a 4th day yesterday.
The dollar traded at near float highs of over $US1.061 in local dealings. Its peak was on Friday in New York at $US1.083.
Mr Swan says, “The biggest factor in the mid-year update will be the negative impact the high Australian dollar is having on revenues."
That’s especially so with iron ore and coal export prices being set in greenbacks.
“The higher dollar means our exporters bring home less income and that flows through to reduced company and resource taxes,” he said.
