Is the budget good for the Australian economy?
Australia is a two trick pony. Mining and housing.
The government obviously has no control over the revenue raiser, but they do have a bit of control over the second lever – housing.
The problem is that this budget has tightened the belts of those who already have their backs to the wall.
The increase in the Medicare Levy and the cuts in the Family Tax Benefit are effectively a pay cut for those who have very large mortgages – the middle income Australian families. These mortgages are extreme and if you include credit card debt are actually larger than the entire Australian economy. Small cuts in the take home pay for this group is a leveraged step down for the economy.
My first impression of this budget is that it is going to increase the slowdown in the Australian economy as it puts pressure on the elephant in the room – the third of Australians who have borrowed too much.
With the mining boom in its twilight days, there was only one sector of the economy that was being propped up – housing. The ridiculous rally in the bank shares is testament to this. This budget puts further pressure on this sector and is not overly good news.
On top of this the pensioners and babyboomers downsizing of housing is likely to add to pressure on the middle end of the housing market. The ability to downsize your house and add $200,000 to your financial assets without affecting your pension is likely to see further pressure on what was already looking to be a rush for the exits in houses in the middle end of the spectrum. Four out of five of clients who I speak to about retirement have stated they would like to downsize at some stage in the next five years. Many of these people cannot retire unless they downsize. They are forced sellers! This has the ability to create an oversupply of houses in the middle end of the market at some stage. With the banks hanging on to every percentage point of growth in the mortgage market, this may again reduce borrowing going forward.
The next few years are going to be very interesting. I feel very comfortable to sit on the sidelines with the miners and banks and only invest my client’s money in areas which are not at the top of their cycle and could have a long way down.