By Professor Mark Brimble, Griffith Business School
The significant global headwinds outlined in the two-page RBA media release make more compelling reading than the hundreds of budget pages, and the impact of a rate cut to mortgage holders of 25 basis points will have a bigger direct impact than the budget for many Australians.
The budget measures hit some easy targets with superannuation benefits for the wealthy, smokers and multinationals on the hit list. Revenue generated from these measures is also precisely applied to small business tax relief, support programs for youth employment, improving superannuation for low income earners and modest middle income tax relief. One would be forgiven for thinking there are clear winners and losers.
From a personal finance perspective the outcomes depend on whether you are in one of these groups. One key measure is the proposal to legislate the purpose of superannuation which should provide a useful framework for future policy development. One looming question that emanates from the list of super adjustments is defining ‘how much is enough’ to ensure the reduced caps on contributions and incentives will allow the majority of Australian’s to be financially independent and alleviate the risks of the ageing population and longevity risk for the nation.
The ‘jobs and growth’ three word slogan is clearly the central message of the budget, however overall it is noted that the budget numbers suggest there will be decreased growth and employment compared to the 2015 MYEFO numbers. In addition, the painful trade-off between childcare costs and wages is not addressed with the delay to changes in this.
Furthermore, the economy is yet to face the reality of tens of thousands of expected job cuts in the car industry, manufacturing and mining. For investors, employment should be of key concern, and not just due to the potential impact on the largest income producing asset there is (oneself) but also for flow-on impacts to economic activity and consumer and investor confidence. This will also impact financial institutions due to their substantial exposure to property (re unemployment leading to mortgage defaults) and given that the four big banks make up approximately a third of the Australian equity market investors should take note.
In the longer term, the narrative on the ‘transition’ economy and moving to the ‘jobs of the future’ is also thought provoking. Support for start-ups, continued infrastructure spending and PPP’s is notable, however curiously the budget is largely silent on longer term issues such as energy reform, climate change, the aging population and our comparative under performance in education. Furthermore, education – particularly higher education – is a targeted ‘loser’ with more than $2 billion in funding cuts in the forward estimates. Notwithstanding higher education being one of Australia’s top five export sectors and a significant contributor to GDP, the benefits of a highly skilled workforce that result from it is key to the future skills-based economy. It is thus concerning that that the “Promotion of Excellence in Learning and Teaching in Higher Education” and the “Higher Education Participation Program” are subject to substantial funding cuts. This seems inconsistent with the narrative for the future skills based economy.
It is also notable that the budget includes decisions taken yet not disclosed amounting to $1.5 billion and accompanying undisclosed savings of $1.9 billion. In addition the somewhat unpopular cuts from previous budgets are locked into the forward estimates and hardly mentioned in the budget papers. Many of these will have a significant impact on personal finances (family payments system changes, paid parental leave and education cost, for example) and will perpetuate regulatory uncertainty. In addition, it is also unclear how a number of items in the forward estimates will be implemented – the devil is in the detail as they say including higher education reform, public sector employment and the ability of small business tax reform and infrastructure spending to generate growth.
The RBA Board’s decision to cut the target cash rate with an accompanying less than upbeat media release painted a picture that was in contrast to that of the budget speech (and underlying forecasts) suggesting the plan to return to surplus within the decade is optimistic at best. Arguably, the significant global headwinds outlined in the two-page RBA media release make more compelling reading than the hundreds of budget pages.
More pragmatically, the impact of a rate cut to mortgage holders of 25 basis points, assuming the financial intermediaries pass it on in full (and the analogous cut in income for those invested in fixed interest/rate exposed securities) will have a bigger direct impact than the budget for many Australians. For example the average Australian mortgage holder will save about $1100 in interest per year compared to the middle income tax relief in the budget of about $312 – with nothing for folks earning less than $80,000 per year. In more ways than one, the RBA Board trumped the 2016 budget.
“Together with raising your children and owning your own home, becoming financially independent in retirement, free of welfare support, is one of life’s great challenges and achievements”
Given that Australia is facing the real prospect of two decades of budget deficit and storm clouds gathering on the global economic horizon (not to mention financial literacy issues and low access to financial advice), one must ask if the pre-election budget went far enough to map out a medium term economic plan. With this in mind, one must question the achievability of financial independence – it is certainly an uncertain time to be an Australian.