Yes, it is a little about all of us spending more than the RBA would like, but it is a lot more about state and federal governments continuing to grow their expense budgets with no real concern for the possible consequences.

Surprisingly, for many including myself, the RBA announced a 25 basis points rise in the cash rate on the 2nd of May 2023, prior to the budget on the 9th of May.  This took the underlying cash rate from 3.60% to 3.85%.

Late April we had seen a slight improvement in inflation with the rolling annual rate plummeting to 7.0%, from 7.8% in the December quarter.  The rolling rate is the aggregate rate over the previous twelve months.  While this result wasn’t exactly exciting, it was heading in the right direction and the general analysis was that the Reserve Bank would wait to see what the government laid out in the budget before any additional rises.

Unexpectedly the RBA went early but it may have been due to what the federal treasurer was already leaking around the budget.

We will spend a little bit of time on the budget post this section but first let’s discuss interest rates and why the RBA moves have not really had that much impact on consumer spending YET.

We are not big believers that rates will be softening any time soon but the rises we have seen will have very material impacts in the second half of this year when mortgagees on fixed rate loans move to variable rates.

To give you some idea of the problem, 880,000 loan facilities will come off fixed rates in 2023 and a further 450,000 loan facilities in 2024.

  • Many mortgagees fixed their rates at or around 2.0% which was a very sound strategy, but they will be coming back into the variable rate world at closer to 6.0%.
  • The average home loan at March 2023 in Queensland was $518k, Victoria was $590k and NSW $710k.  The average across Australia was $577K (2nd highest was the ACT at $606K).
  • On $577k at 2.0% interest your repayments each year would include approximately $11,540 of interest.  At 6.0% the interest component has grown to $34,620.  That is households having to find an EXTRA $666 a week to meet their mortgages.  $23k each year the household will not have to spend on anything else.

Average Home Loans in Australia by state

On top of this, nearly everything household is going up:

  • Rates and body corporate fees;
  • Energy prices;
  • Medical costs;
  • Travel and entertainment;
  • Education, food and transport.

And now, we are seeing more taxes, both by the federal government and the state governments.

This is something that has been building around us for the last twelve months so we have all been part of it, but the impact of the interest rate rises on households has not really had its full impact yet.

With that background, our view was the RBA would hold rate rises for the interim while these cost-of-living pressures took effect.

If you slam the brakes on the economy too hard, you get rapid increases in unemployment and that adds a whole new level of household pressure.

But… then we had the federal government budget.

As I mentioned in April, our federal government expenses are running at Covid level highs and this can and is contributing to inflation.

The RBA would have been hoping that the federal government would restrict spending increases and remove some of the stimulus that has been driving up prices.

Prior to the pandemic, government expense increases were running at just over 3% on average (2014 to 2019).  We had the big jump in Covid19 stimulus then we needed to get back to some fiscal responsibility.

We can now update the table from last month with the new forecasts from for the 23_24 Financial Year (FY) budget and closing off FY 2023:

I know the pitch was ‘a fiscally responsible budget’ but that is an 8.9% increase on 2023 expenditure after the biggest spending spree we have ever seen in Australia’s history in FY 20, 21 and 22?

We did have a surplus thanks to a treasure trove of revenues from our iron ore, coal and natural gas taxes AND this government including earnings from the Future Fund as part of its ‘revenue’. 

  • Budgets have never included earnings from the Future Fund before and without it, it would still have been a slight deficit.  A bit of creative accounting here but at least we didn’t see federal government debt expand.

Taxation and the budget.

Lots of handouts to combat cost of living and yes, most welfare payments are increases to people already on welfare.  That is not really surprising but middle-class households and small businesses are also being savaged by increased costs and now increasing taxes.

I will discuss some of the major items further into this article but looking at the bigger picture shows just how much taxation is increasing.

Firstly, taxation revenue – this is all revenue, both federal, state and local taxes.

That is the numbers; but the concern is the amount the government is taxing us as a percentage of Gross Domestic Product (GDP).  The Coalition had a maximum ceiling of 23.9% of GDP for federal taxes.  This has not stopped states increasing taxes, but now Labor has removed that ceiling as it would have put a clamp on their taxation plans.

State taxes are included in the above, but the table below shows the growth in taxation by local and state governments from 2018 to 2022:

Which means that as a percentage of GDP federal and state government taxes are at almost 30% of GDP.

If we were seeing a big improvement in services, you might forgive the increases but no-one seems to be very excited about the management of our state health, education and transport programs? 

The last thing on states which are very topical given the horror budget just released by the State of Danistan (Victoria) – Victoria now has more government debt than NSW, QLD and Tasmania combined.

  • The public service component of their workforces is continuing to grow but wages in that sector are growing a lot more quickly. 
The number of employees grew by 2.7% but the wages bill grew by over 6%. 

This doesn’t include the 15% wage rise for all aged care staff which comes into force 30 June 2023.

A quick budget summary

The budget winners:

  • Childcare subsidy rates are rising (July 1, 2023);
  • The single parenting payment will continue for children until the youngest child is aged 14. (July 1, 2023);
  • Parental Leave pay and Dad and Partner pay will combine into a single 20 week payment – the family income test has lifted to $350,000 (July 1, 2023);
  • Paid parental leave to be increased to 26 weeks in 2026;
  • $40 per fortnight increase for Australians on Jobseeker, Austudy and Youth Allowance;
  • Over 55 now have the same increase in the Jobseeker payment as those over 60 who have been on Jobseeker for over nine straight months.  A $92.10 fortnightly increase;
  • Low-income earners on rent assistance can get $31 extra a fortnight for private and community housing;
  • 5,000 scholarships worth up to $40,000 to entice high quality candidates into teaching.
  • $240m to go to the stadium in Hobart (total cost $740m).

The budget losers:

  • Offshore oil and gas will be with increased taxes of $2.4b under changes to the Petroleum Resource Rent Tax;
  • Australian multinationals will need to pay a minimum domestic tax rate of 15%;
  • Beer and smokes taxes are increasing;
  • A crackdown on NDIS fraud;
  • The new superannuation tax for high balances from 1 July, 2025.

Next month we will get back to those pesky investments.

As always if you have any queries, please do not hesitate to contact us.

Paul Forbes, RFS Advice CEO