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Budget cash splash will do more harm than good

It was always going to be an election budget. There are some good things, but the cash handouts are fiscal irresponsibility at its worst. Think about it: the Treasurer revealed a deficit of $78 billion over the forthcoming 12 months. This is money we, as a nation, must borrow.

One of the first rules of good money management is to avoid bad debt and use good debt. Bad debt is when we borrow for consumption. Think travel, clothing or a wedding. Good debt is when we borrow for assets such as property and shares – things that will provide lasting benefits. I have no problem whatsoever with governments borrowing for roads, infrastructure and items that have a long-term payback, but I see no point in cash handouts for the sole purpose of getting the government back into power.

Take the decision to cut petrol excise by 22c a litre for six months. Petrol accounts for no more than 4% of most household budgets but it’s always in the news, and thanks to huge display signage, is one of the few commodities for which everyone knows the exact price. The price of petrol can generate strong emotions but there are other ways to reduce the cost. The major motoring organisations have associations with petrol stations to provide a discount of between four and five cents a litre. And there are apps such as the 7 Eleven fuel app, which lets you lock in today’s fuel price for the next seven days with no penalty. We’ve been using it for years and saved a bundle.

Where I live, it’s normal for petrol to fluctuate by 30c a litre or more over the cycle. So, you can expect your 22c a litre discount to vanish in the next few cycles. Even though this measure has been announced as being for six months only, the cost will be a staggering $3 billion – all borrowed. Think what you could do with $3 billion towards flood mitigation programs.

Then there is $1.5 billion used to give 6 million welfare recipients a once-only payment of $250. Let’s face it, that kind of money won’t change their lives one bit. Wouldn’t it be better to use that kind of money to provide better dental facilities or improve aged care?

These are just expensive band-aids. They won’t do anything to slow down inflation, which is the actual problem. Despite the official figure of 3.5%, I am told the average rise in groceries like red meat and vegetables is nearer 10% – ignoring the current post-flood highs. A cash payment of $250 now, combined with six months of slightly less expensive petrol won’t do a thing to change it.

The big issue about to be felt by most Australians is interest rates. We are in a unique position where inflation is running hot and interest rates are at historic lows. It’s a virtual certainty that we’ll see at least an interest rate rise of a full 1% in the coming year. Thanks to low-interest rates, and rapid housing price rises, the average mortgage in Australia is now a breathtaking $600,000. A rate rise of just 1% would add $6000 a year or $115 a week to the average family’s mortgage repayments. How will people cope with that?

There are also budget moves to help first homeowners, but the problem with all these schemes is that they drive up house prices by increasing the number of potential purchasers. And it gets worse. The government is encouraging single parent homebuyers to borrow on just a 2% deposit, with no mortgage insurance. In that scenario, a person can buy a home costing $400,000, with starting equity of just $8,000. Offering home loans to couples with a 5% deposit is bad enough, to entice single people to borrow with just a 2% deposit is as bad as it gets. At least a couple may have the income of one of them to fall back on if for some reason one of the breadwinners is unable to work. Single people don’t have that luxury. Think what would happen if that house falls in value by just 10% – and this is not unknown, especially in some regional areas – they are $32,000 underwater. If they’re forced to sell the property because of rising interest rates they could be suffering a big capital loss. It won’t affect the lender, who is covered by the government’s own mortgage insurance scheme. So how does that help struggling homebuyers?

Let’s have some straight talk. The global financial crisis was born when President Bill Clinton instructed mortgage lenders in America to reduce lending standards so that poorer people had a chance at homeownership. Consequently, hundreds of thousands of Americans were lured into buying homes they couldn’t afford, and most of them lost what little they had. That’s the last thing we want to happen in Australia.

 

Noel Whittaker is the author of 'Retirement Made Simple' and numerous other books on personal finance. Email: noel@noelwhittaker.com.au. This article is general information and does not consider the circumstances of any individual.

 

23 Comments
Ben
April 10, 2022

"Then there is $1.5 billion used to give 6 million welfare recipients a once-only payment of $250. Let’s face it, that kind of money won’t change their lives one bit." $250 is very meaningful for people struggling from pay to pay. Between that and blaming Clinton for making homes easier to access to poor people, I'm getting a sense of Mr Whittaker's ethos and ideology here. 

Roz in OZ
April 10, 2022

Yes, $250 better than nothing but clearly substantial ongoing help is required here. Unemployment benefit must be increased by $100 PF as a minimum; and similar other benefits.

Tony
April 11, 2022

I’m afraid Noel is being very selective here. He strongly supported, and still does, franking credit refunds. These are also paid from money borrowed by the Government. They are not moral payments and contradict the whole purpose of franking credits, which is to avoid double taxation. The refunds do not avoid double taxation, they abolish it!
When Noel owns up to this, I will listen to his views again.

James
April 12, 2022

Wrong about franking credits! The shareholder is rightly attributed the grossed up value of dividends/distributions paid, and if at the EOFY a tax refund is due, it is refunded. It's as simple as other income and legitimate deductions and the effect on net tax. Don't overcomplicate it!

Jenni
April 13, 2022

Exactly, problem is these handouts to most taxpayers are poorly targeted, why do those earning more than average wage need any Govt handouts? Money should have gone to those most in need, for example, welfare recipients who pay rent eg increase rent assistance. This is much more useful than general increase in eg Jobseeker as those who do not pay rent are in a much better financial position than those who do have to pay rent. Same goes for age pension recipients, those who own their own home can manage on age pension, whereas those who rent as much more vulnerable.

Steve
April 08, 2022

FAO Graham Hand. Graham, I made a comment above about 30 year fixed loans as per the US. It would be most helpful if one of your experts could explain how easy/hard it would be to replicate this in Australia. Lets face it if we could remove the risk of your mortgage interest rate rising for the foreseeable it would have to be very enticing. This would be a gamechanger in the Aust. finance industry. Or do we just wait for a tech start-up to do it first?

SMSF Trustee
April 12, 2022

Steve, there are a few reasons it doesn't take off in Australia. The main one is from the borrowers side. The median life of a mortgage is 5-7 years and 50% of home loans are fully paid off after 10 years. The need to lock in for 30 doesn't exist.

Also, the yield curve is usually positive, meaning 30 year rates are almost always going to be higher than variable. (Same as for 3 and 5 year fixed.) Most borrowers would rather take the lower rate and keep the extra cash flow, or use it to increase equity in their home rather than pay higher interest.
No tech start up can force borrowers to do something they don't want to do!

SMSF Trustee
April 12, 2022

PS the reason for short loan life is that people move house frequently. So the loan gets paid off when the house is sold. A new loan gets taken out.
Not suggesting that people are flush with cash to pay off loans in a hurry.

Steve
April 14, 2022

Sorry but the length of the loan is a moot point. I lived in the US for 10 years and had a 30 year fixed mortgage which was refinanced twice to lower rates (payback on refinancing fees is about one year). After 10 years we came back to Aus and sold the house/paid off the mortgage. Fixing rates for 30 years does not fix the duration of the loan; you can pay it out at any time. A huge number of loans would have been refinanced in the last few years at record low rates. Which leaves the higher rate for fixing, but I expect some would still like the security of having the maximum repayment fixed for the duration of their loan, rather than just say 3 or 5 years. I suspect the bigger difference is the role of Fannie Mae and Freddie Mac in keeping finance costs low in the US. This might be where government has a role to play..........

Steve
April 08, 2022

Oh where to start... Lets go with the line "A rate rise of just 1% would add $6000 a year or $115 a week to the average family’s mortgage repayments. How will people cope with that?" Well any loan should have tested the ability to repay without undue stress with some level of higher interest rates factored in, probably at least 2% higher, so 1% should not be an issue. The fact this buffer may be used for increased lifestyle misses the point somewhat? Gotta blame someone, it's never the borrowers fault: "I was tricked!"
Again we see the focus on the headline cost of a house (principal), not the true cost (principal + total interest paid). All the media focus on is the high principal and forget the total cost is going to be much the same as the total repayment is based on income and ability to repay. Of course houses were "cheaper" when interest rates were higher, it's basic maths. You may have a bigger loan but the principal falls much faster with low interest loans. And I do agree with the lameness of simply allowing people to access more money (eg super balances) or allow higher leverage (ie lower deposit) can only lead to higher prices as this all feeds into higher demand. Again, basic economics. THAT is the long term problem, not the odd sugar hit from an election budget. Whys do they call economics the dismal science - the fact we address high housing prices with increasing demand, and high debt by lowering interest rates (which simply increases debt) might be a possible reason?
OK the yanks stuffed up big time in the GFC with ludicrous lending standards but we could borrow just one of their ideas - 30 year fixed interest loans. Takes most of the pain out of rising interest rates for existing borrowers which is what seems to be the main fear. The Yanks can do it (have done for decades), why can't we? Now that would be a VERY appealing election offering!
Finally lets not forget the benefit of higher interest rates for long suffering lenders (ie people, not banks). Many people still have high cash balances earning stuff all, a bit more cash in their pockets will certainly provide some support for the economy.

Brad
April 08, 2022

Agree with Noel Whittaker's comments on the budget; however, if it keeps Labor with their even more spendthrift ways out office, then it is money well spent !

Tony
April 11, 2022

Labor? The party that tried to be responsible by removing layers of middle class welfare like franking credit refunds, negative gearing and CGT discounts on property? The party that innovated franking credits to remove double taxation, which was corrupted by the Libs as part of its profligate spending during the greatest boom ever in Australia. Labor? The party that gave us Medicare, Superannuation and the NDIS? Without Labor initiatives, we would be a very poor country indeed!

Tom Newton
April 08, 2022

The problem with democracy is that governments give voters what they want. Unfortunately, most voters are stupid, and demand unsustainable government expenditure. It happened in Greece. It's happening here.

Roz in OZ
April 10, 2022

Yes, and I believe Plato said similar 2,500 years ago!

JF
April 07, 2022

Noel, I really appreciated the clarity of your position. It is sad that the obvious "long debt to invest is good, short debt to consume is bad" national approach is so hard to find! Totally agree we should always be long term planning.

DanM
April 07, 2022

JF, couldn’t agree more. That’s the sensible approach for those of those, including me, who have ‘kept up’. For a large and growing portion of our community, who have fallen behind, it doesn’t help much. During this government’s watch, and I’ve no time for partisan politics, things have deteriorated badly for young people who don’t own real estate, low-paid workers (e.g. aged care; childcare; hospitality; and others), many of our elderly, and people with chronic illness or disability. They are getting a trifling handout and we are getting solid tax cuts. This current resources boom is providing rivers of cash and is likely to have long-legs. Why not do something more meaningful so fewer are left behind. We won’t enjoy our future if our prosperity is not shared.

Roz in OZ
April 10, 2022

Yes well said DanM!

Al
April 07, 2022

The federal government does not borrow its own currency that it issues

John Chambers
April 07, 2022

Astute observations and succinct.

DanM
April 07, 2022

Isn’t it banks, not governments, that loan money? I also thought the consensus view was that the actual financial crisis was triggered by amoral bankers packaging up a toxic debt-porridge and selling it, cheap and quick, to profit-hungry gluttons. Noel knows his stuff so I accept that is a wrong understanding. I have no doubt that inexperienced borrowers are being setup again however.

David Wilson
April 07, 2022

Well said Noel in calling out the Government's 'assistance' to first homeowners:
"There are also budget moves to help first homeowners, but the problem with all these schemes is that they drive up house prices by increasing the number of potential purchasers".
This is yet another cynical measure from the Coalition that has superficial popular appeal but actually exacerbates the housing affordability problem. I am sure that many Firstlinks readers have children who are attempting to get a foothold in the housing market. The lucky ones will get assistance from the bank of mum and dad (which is going to be very expensive). The rest can look forward to a lifetime of renting or the risks associated with taking on an enormous mortgage (as Noel also points out).
Time for a change of Government!

Pat Connelan
April 07, 2022

I was nodding my head in agreement until the last paragraph containing the right-wing myth about the GFC being caused by Clinton promoting home ownership. The GFC was caused by banks not paying close enough attention to leverage and risk. Surprised that a supposed financial expert doesn't understand that concept.

Lance Wittington
April 07, 2022

Right on Pat. The GFC was caused by banks doing the wrong thing by lending to people who could not afford the repayments. I must add while thousands of people lost everything all the major banks and their directors were not liable for any of the problems they caused. None were taken to task over their actions and to date they are ALL flourishing. Typical Banks??
Regards Lance

 

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