Queensland’s budget based on optimistic $A forecasts

The Queensland government anticipates financial gains that rely on a much more optimistic forecast about a decline in the dollar than the other big resources state, Western Australia.

If Queensland used the same currency forecasts as Western Australia, it would have to budget for $290 million less over the coming three financial years. The difference is due to the impact of currency movements and forecasts on mineral royalty revenue.

A falling ­dollar increases the value of coal (in Queensland) and iron ore (in WA) exports and how much the state governments receive in royalties.

The two resource-rich states have very different currency forecasts, according to analysis of budget papers.

WA recently adopted a more conservative forecasting model that coincided with warnings from rating houses that its currency assumptions were too optimistic.

Standard & Poor ’s associate director of international public finance ratings, Claire Curtin , previously said WA had “unreal expectations" in regards to foreign exchange movements.

West Australia’s Treasury department projects that the dollar will average $US1.024 in 2013-14. The dollar is forecast to fall to US99.6¢ in 2014-15 and US96.8¢ in 2015-16.

For every US cent decrease in the exchange averaged out over a financial year, the WA government receives an extra $52 million, which largely consists of more valuable iron ore royalty payments.

Queensland is forecasting exchange rate parity with the US dollar next financial year. It then forecasts a significant drop to US96¢ in 2014-15, which is US3.6¢ lower than WA’s forecasts. In 2015-16, the state expects the rate to be US94¢. In Queensland, for every US cent shift in the rate, the impact is approximately $33 million in 2013-14.

Credit rating firms such as S&P and Moody’s Investors Services encourage state economies that rely heavily on resources-related income to use conservative mineral price and currency forecasts, due to the often extreme volatility of price movements. Recent falls in the dollar to around US96¢ have helped the states, although mineral price volatility has hindered them.

Queensland is trying to regain the Triple-A credit rating it lost in 2009, which affects the price of its debt. WA’s Triple-A rating is “on watch" due to concerns that costs will significantly outstrip revenue streams.

A Queensland budget note from Moody’s said that it would evaluate Queensland’s assumptions and “budget cushions to offset potential revenue volatility, and the impact of projected financial trends on the state’s debt burden".

The Australian Financial Review