Here’s why Australia’s budget is still so dependent on iron ore – by Jonathan Barrett (Australian Financial Review – December 16, 2015)

This week, the federal government disclosed it would receive $7 billion less than anticipated over the budget years as a result of updated – and lower – iron ore price forecasts.

But how exactly does the iron ore price affect federal coffers? And how will it impact the states?

Most of the country’s iron ore deposits are in Western Australia’s Pilbara region, and, unlike gas reserves located in federal waters, the key steel-making commodity is owned by the state.

As the federal government doesn’t actually own the commodity, the obvious connection between the federal budget and iron ore price is the profitability of mining companies. The more money they make, the more corporate tax they pay – or should pay – and the more money flows to the federal government.

Of course, the profitability of miners impacts the mining services sector, and the amount of corporate tax they pay, and so on.

In recent years, volatile commodity prices have been the single biggest reason why corporate tax receipts have come in lower than expected.

But it isn’t always commodity prices that cause havoc with budgets. After the global financial crisis, the anticipated capital gains tax take was affected by the ability to use capital losses to reduce or eliminate anticipated CGT debts.

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