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.