Tony Abbott and debt

Fri, 16 Jun 2017  |  

With Tony Abbott and governemnt debt hot news topics at the moment, I thought I would repost this artricle which I wrote in April 2013:

Enjoy, SK

------------------------

Here’s a true story. It’s about a man called Tony.

Tony is a hard working Aussie, doing his best to provide for his family. He has a good job, but such is the nature of his work that his income is subject to unpredictable, sharp and sudden changes.

Tony’s much loved and wonderful children go to a private school and wow, those fees that he choses to pay are high. He used to have a moderate mortgage, especially given he was doing well with an income well over $200,000 per annum.

Then things on the income side turned sour.

Tony had a change in work status that resulted in his annual income dropping by around $90,000 – a big loss in anyone’s language.

How did Tony respond to this 40 per cent drop in income?

Well, rather than selling the house and moving into smaller, more affordable premises, or taking his children out of the private school system and saving tens of thousands of after tax dollars, Tony called up his friendly mortgage provider and refinanced his mortgage.

In other words, Tony took on a huge chunk of extra debt so that he could maintain his family’s lifestyle. No belt tightening, no attempt to live within his means, just more debt.

Tony was reported as saying when asked about the cut in his income and his craving for more debt, we are “soldiering on the best we can... what’s it called? Mortgage stress!” he quipped when referring to the fact that his level of debt was now many multiples of his income.

Tony also said that, “it’s true you do experience a substantial pay cut and, yes, if you are a normal family without accumulated assets, without additional sources of income, it does make a big difference”.

It sure does, Tone.

Tony is an interesting chap because he has some strong views on how the government should run its finances. He reckons the current government is addicted to debt and that he’ll cut the level of debt if ever his dream of becoming Prime Minister comes true.

When speaking of government debt, which would be the equivalent of a mortgage of $20,000 for someone earning $200,000 a year (10 per cent), Tony reckons that “we all know what it’s like when you’ve got a household budget to manage. Sometimes you’ve got to tighten your belt. Just as households have to tighten their belts when times are tough, I think that when the Commonwealth faces unforeseen expenses that’s when it should tighten its own belt.”

Hang on Tony.... Didn’t you keep on spending and consuming when you had a change in household financial circumstances? And didn’t you cover this spending of yours by boosting your debt?

Tony also said, “we are determined to make sure government exercises the same kind of restraint over its spending which businesses and households have long understood.”

Huh? Restraint? Tony, you personally borrowed like a drunken sailor!

I’m confused.

Or is there some inconsistency with Tony – what I say and what I do are entirely different things. Tony did after all say a few years back “I know politicians are gonna be judged on everything they say, but sometimes, in the heat of discussion, you go a little bit further than you would if it was an absolutely calm”.

Ah...now I see. Tony the politician says and does different things to Tony the regular bloke.

But back to now.

Always an optimist, Tony hoped that one day his income would again rise and while he waited for that day, he did in fact soldier on with his massive mortgage, massive spending and without there being a hint of belt tightening.

As luck would have it, he unexpectedly saved $10,000 a year on his interest costs by the fact that mortgage interest rates dropped a thumping 3 per cent.

I’m sure he’ll send a thank you note to whom ever helped get interest rates down so much.

And as luck would have it, Tony’s had a pay rise and he’s now on around $350,000 year. Phew.

It’s a good job Tony didn’t panic and sell his house and drag his kids out of school. Rather, he took on a bit of debt that he could easily afford as it turns out and it got him through the tough times.

comments powered by Disqus

THE LATEST FROM THE KOUK

Could tax cuts threaten our AAA credit rating?

Thu, 22 Feb 2018

This article was written for The Wire, a publication produced by FIIG. This link is here: https://thewire.fiig.com.au/article/commentary/opinion/2018/02/16/could-tax-cuts-threaten-our-aaa-credit-rating

-----------------------------------------------------------

Could tax cuts threaten our AAA credit rating?

In just over 10 weeks, on 8 May to be exact, Treasurer Scott Morrison will deliver the 2018-19 budget - almost certainly the last before the next election.

The budget is likely to offer mixed news, but encouragingly remain on target to a small budget surplus in 2020-21.

Importantly, from both an economic and political perspective, there has been some upside to government tax receipts since the mid year economic and fiscal update was published in December. This is largely the result of company tax receipts running strongly as profits and therefore tax payments have been buoyed by higher commodity prices, boosting the financial position of mining companies. Strong employment growth has kept income tax payments flowing freely to Treasury, despite soft wages growth.

If the current speculation from Canberra is correct, and it appears to be well founded, the government will use the windfall revenue gains to promise income tax cuts on top of the company tax cuts it is currently trying to get through parliament.

Tax cuts stimulate growth

While the timing and magnitude of the income tax cuts is yet to be revealed, there is little doubt that there will be something of a sugar hit to the economy if the Coalition win the election and the tax cut legislation is passed. There will plainly be more cash in the economy rather than in the government coffers at the time the tax cuts are delivered. This would support bottom line economic growth and at the margin, add to inflation. Financial markets would also be impacted, if the US is any indication.

When next for the Aussie dollar?

Wed, 21 Feb 2018

This article first appeared on the Yaho7 Finance web site at this link https://au.finance.yahoo.com/news/next-aussie-dollar-041651007.html 

------------------------------------------------------------ 

What next for the Aussie dollar?

It has been a turbulent few weeks for financial markets, including for the Aussie dollar. The AUD has been on a roller coaster, having reached a high of 81.2 US cents in late January and a low of 77.7 US cents about 10 days ago having traded at a low around 75 cents in December.

It is currently trading around 79.5 US cents, with the market divided about which direction will break over the next 12 months.

Foreign exchange markets are driven by many factors. For the Australian dollar, there are some powerful influences that have shown to determine its fortunes. One of those is the gap in interest rates between Australian and the rest of the world. When Australian interest rates are substantially above those of the rest of the world, there is often a bias from investors towards the AUD which drives it higher. When the interest rate gap compresses, the appeal of the AUD is reduced.

Which brings us to a fascinating situation at the moment, when we compare Australia and the US. With the US Federal Reserve embarking on a series of interest rate increases and the Reserve Bank of Australia squarely on hold, the interest rate gap between Australia and the US is effectively zero. This is not only for the official cash rate, but also for 10 year government bonds. This is a rare occurrence and prospective changes in the interest rate gap is one reason why the risks favour the AUD falling back towards 70 US cents over the next year or so.