Aussie household debt undermines budget

Aussie household debt undermines budget

Tonight’s the night.

Sometime around 8pm, a politician in a fancy suit, bought with taxpayer money, will tell us how rich Australia is.

How much money our country makes.

In the hours after, we will be swamped with promises.

Promises of tax cuts…

Promises of increased services…

Promises of jobs and roads and hospitals and better local schools…

Oh yes, folks — it’s budget night.

And with a federal election only six weeks away, tonight is a night full of kissing babies, fake smiles and telling the public everything they want to hear…

It’s not really a surplus

This might be the biggest ‘What’s in it for me?’ budget Australia has seen for a few years.

Why?

Well, it’s tipped that Australia’s national accounts will show we are in a surplus.

Prime Minister Scott Morrison was quick to jump on this, saying Australia’s bottom line has improved because his government has spending under control.

That’s utter nonsense.

For starters, tonight’s budget isn’t actually delivering us a surplus. It’s more of a forecast that Australia will earn more than it will spend this year.

And this supposed surplus is entirely reliant on economic conditions…most of which are outside our control.

The windfall behind the forecast surplus has come from commodity price rises, a falling Aussie dollar (which has boosted company profits), and more people working (meaning more income tax has been collected). And let’s not forget that China is still buying large quantities of exports.

These are factors all beyond the government’s control.

Yet the government is trying to take the credit for it as a reduction in spending.

If the government does want to make this surplus happen, things must stay exactly the same for the next 12 to 18 months.

That means commodity prices must stay where they are or increase…and the Aussie dollar must remain relatively weak. Businesses must keep employing new people.

Furthermore, this forecast ignores the possibility of the Chinese economy slowing down.

In addition to a Chinese slowdown, we’re looking at a prolonged housing slump, commodity prices falling, and Aussie property prices dropping even lower — and taking consumption with it.

Yet things must stay the same in order for the federal budget to be in the black.

That’s the thing with economies though…

They tend to deviate from the script.

Glossy papers can’t change facts

Even though this is a ‘me’ budget, not a single idea or vote-buying promise will change the structural issues within the Aussie economy.

When the Reserve Bank of Australia board meets later today, it’s highly likely that interest rates will remain at 1.50%.

In fact, I’m not expecting a rate cut until after May…

In saying that, one thing the federal budget will completely ignore is the high level of personal household debt in Australia.

Which — believe it or not — the RBA admitted last year was a threat to our economic stability.

The following statement is from the RBA’s September 2018 meeting minutes:

This high level of household debt relative to income raises two potential vulnerabilities. First, because mortgage lending is such an important part of bank balance sheets in Australia, any difficulties in the residential mortgage market could translate to credit quality issues for banks.  

‘… The Australian banking system is potentially very exposed to a decline in credit quality of outstanding mortgages.

But the second potential vulnerability – from high household indebtedness – is that if there were an adverse shock to the economy, households could find themselves struggling to meet the repayments on these high levels of debt.

If they have little savings, they might need to reduce consumption in order to meet loan repayments or, more extreme, sell their houses or default on their loans. This could have adverse effects on the real economy – for example, in the form of lower economic growth, higher unemployment and falling house prices – which could, in turn, amplify the negative shock.

Simply put, tonight’s talking from politicians will be just that. Talking.

No amount of promises — from income tax cuts to government handouts — will change the fact that there are serious underlying problems in the Aussie economy.

Tomorrow, I’ll show you another piece of the puzzle that proves it.

Until then,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia