Overview

This budget is all about spending, and spending big. The Governments position on this is that it needs to spend in order to reduce the levels of unemployment across our country and sustain economic growth in the short-term. The Government has proposed around $22 Billion to be spent per:

• $3.4 Billion on roads
• $4.6 Billion on rail
• $3.5 Billion on clean energy
• $3.2 Billion on hospitals
• $2.6 Billion on Universities
• $4.7 Billion on Broadband

The so called – big ticket items – were the significant increase in the aged pension , the tax cuts which were delivered and a new carers payment scheme which was introduced in addition to a paid parental leave scheme. Of course, this was negated by increased taxation on superannuation and a tightening of rules associated with superannuation for higher income earners, increased means testing for middle income earners and the dreaded increase in the pension qualifying age to 67 – ouch. These measures are meant to increase our GDP (Gross Domestic Product) by around 0.75% – or approximately $6 Billion – and lower our unemployment by 1.5% for the 2010 year. The Government has contended that without these measures we would be pushing 10% unemployment.

The Debt

Of course, with all this spending comes the bad news. The Governments deficit will expand to a whopping $57 Billion and will not be eliminated – apparently – until 2015/16. This is based on some highly, highly dubious figures released by the Government of a 4.5% rebound in the economy per annum after the global downturn recovers and remain that way for a number of years. In the last 30 years, we have only had 5 years where the GDP of our country has grown at rates similar to those flagged by the Government and so to suggest that the Governments deficit will rebound by 2015/16 seems highly unlikely – particularly on the basis that we would need around 5 years of consecutive years at this level.

The short-term forecasts seem to be in line with most accepted trending regarding near-term forecasts and are more realistic. Why the Government didn’t just come out with more realistic figures than those proposed – I have no idea – but one assumes to ‘fluff up’ the numbers a bit for their political interests as opposed to tangible reality. While I do by no means suggest that the spending the Government is proposing is not needed, I am just slightly confused as to why the Government doesn’t just provide more quantitative growth figures and sustainable repayments of debt calculations – but read this now – there is no way the proposed debt will be repaid by 2015/16 unless we have record levels of GDP growth for the next 5-6 years after 2010. I will gladly eat my hat if this does happen … and my pants too.

To balance the view, I also think that everyone needs to put Australia in stead with the rest of the world. Our net position will increase significantly but in comparison to other nations around the world – we are very well off. Our debt will peak at 13.8% of GDP in 2013/14 which is significantly lower than many other first world countries in the current recessionary period. My concern is the simply unrealistic medium term policies outlined by the Government to repay the sums of debt they are talking about at a sustainable level. Evidently, whether it is this Government or another – more aggressive fiscal and monetary policies will be need in order to realistically reduce debt levels to those proposed.

The Global Recovery

The Governments forecast for unemployment rises to a maximum of 8.25% by mid 2010 before falling from this point onwards in line with the proposed recovery of the world’s economies and GDP growth onwards after this point. This does seem to be slightly conservative from other industry related reports I have read which seem to flag unemployment reaching slightly higher levels and being sustained into 2011. A very fat dark cloud remains over what will happen post-2011 and from all indications revealed by the Government – Australia will have the best 5-6 years of modern times once the economy has recovered. The current value of the Future Fund is %58.1 Billion as at 31 March 2009 and has fallen by 9.6% over the last 9 months in 2008-09 – another point of concern to watch.

In my mind, it really was reckless of the Government to suggest such figures since it just inflames the political rhetoric between the both parties – instead of focusing on the real issues which affect everyday Australia’s. More importantly, it seems that no one is really fooled by the publishing of unrealistic growth figures and they are discarded by the public anyway – so one has to wonder – why include them?

Financial Markets

The Australian Financial markets seem to react relatively positive to the budget – with the 3-yr and 10-yr bond futures moving higher by around 7 points in the first 30 minutes of trading. This infers that most people were probably surprised that the debt levels were not higher considering the leak that occurred earlier last week. The AUD is currently trading around the 0.76 USD market – which is still quite strong.

Conclusion

While the budget seems to be fairly balanced given the times, the Governments unrealistic assumptions regarding growth seem to cast a shadow over its credibility. Most forecasts predict a very weak and sub par recovery in 2010, and no real rebound until 2011 when the economy will move towards more positive trending. This is based on a number of current factors such as weaker exports, general business sentiment and the overall global economic downturn recovery process simply not being able to respond faster than this. The US and European markets have to recovery and rebound before Australia begins to have more positive trending, and despite our shield from China – it can simply not sustain our entire economy and boost it significantly to the levels the Government is predicting.

As a consequence, this will continue to depress the labour markets in Australia all the way up to the end of 2010 and maybe even into 2011 – I can simply not see any real recovery before this, which seems to be in line with other industry reports and general market sentiment. The RBA’s position, from everything I have read from the reports it has released, seem to reflect genuine concern for the market and I envisage it will continue to stimulate the economy. However, of future concern is that if the Government does continue a stimulatory fiscal policy position into the future once a global recovery rebound occurs – then this is the point to watch for tightening from the RBA to curb any inflationary pressures which will start to appear again in the market.

Perhaps this is a necessary budget – spend now, but pay much more later to save jobs – and really regardless of whether a Labour or Liberal Government was in power – both would be spending in order to ensure job security remains high. The question of course relates to the policies being introduced and the level of spending in the short-to-medium term combined with the debt stragities adopted by the current Government – are they sound? One surely casts doubts on a positive answer to this question. This really is a budget that has some flavour but a lot of unrealistic postulations about the future economic rebound of both our country and the world – of course, this couldn’t be because we have an election year next year could it ? Ah, politics never ceases to amaze me.

Agree with me ? Disagree ? Drop a comment below.

Interestingly – ‘long term credit ratings’ – probably would have rated Lehman Brothers up there … and we all know what happened to them …

Check out this list after the jump!

1. KfW (Germany)
2. Caisse des Depots et Consignations (CDC) (France)
3. Bank Nederlands Gemeenten (BNG) (Netherlands)
4. Landwirtschaftliche Rentenbank (Germany)
5. Rabobank (Netherlands)
6. LandeskreditbankBaden-Wuerttemberg-Foe rderbank (Germany)
7. NR W. Bank (Germany)
8. BNP Paribas (France)
9. Banco Santander (Spain)
10. Royal Bank of Canada (Canada)
11. National Australia Bank (Australia)
12. Commonwealth Bank of Australia (Australia)
13. Banco Bilbao Vizcaya Argentaria (BBVA) (Spain)
14. Toronto-Dominion Bank (Canada)
15. Australia & New Zealand Banking Group (Australia)
16. Westpac Banking Corporation (Australia)
17. Banco Espanolde Credito S.A. (Banesto) (Spain)
18. ASB Bank Limited (New Zealand)
19. HSBC (United Kingdom)
20. Credit Agricole (France)
21. Wells Fargo (United States)
22. Nordea Bank (Sweden)
23. Scotiabank (Canada)
24. La Caixa (Spain)
26. US Bancorp (United States)
27. Banco Popular Espanol (Spain)
28. DBS Bank (Singapore)
29. Pohjola Bank (Finland)
30. Deutsche Bank (Germany)
31. Société Générale (France)
32. Intesa Sanpaolo (Italy)
33. Bank of Montreal (Canada)
34. DnB NOR Bank (Norway)
35. The Bank of New York Mellon (United States)
36. Caixa Geral de Depositos (Portugal)
37. United Overseas Bank (Singapore)
38. OCBC (Singapore)
39. Axa Bank Europe (Belgium)
40. Credit Suisse Group (Switzerland)
41. LandesbankBaden-Wuerttemberg (Germany)
42. Nationwide Building Society (United Kingdom)
43. CIBC (Canada)
44. National Bank Of Kuwait (Kuwait)
45. Barclays (United Kingdom)
46. UBS (Switzerland)
47. JPMorgan Chase (United States)
48. Bank of Tokyo-Mitsubishi UFJ (Japan)
49. Banque Federative du Credit Mutuel (BFCM) (France)
50. Credit Industriel et Commercial (CIC) (France)

• World economy has remained very weak following decreases in demand late last year
• Conditions in global credit markets have improved since November last year, but remain fraigle
• Demand has not weakend as much as in other countries and Australia has not experienced the sort large contractions seen elsewhere.
• Inflation is likely to decline over time.
• Overally, economy is not slowing significantly and therefore no need for a cut unless some event indicates it.

Thanks Glenn – ummm just to point out that overnight the Dow Jones Industrial Average (DJI) fell around 299.64 points overnight or around 4.2%. The S&P500 (GSPC) was equally slammed falling by 34.27 points or 4.7% to around 700.82 points and the Nasdaq (NASDAQ) also shed 54.99 points or 4% to finish at 1,322.85. Most of this bad news was on the back of the announcement by American International Group (AIG) that it posted a fourth quarter loss of around a $61.66 billion USD loss or around $22.95 USD per shore – much worse than the $5.29 billion loss in the fourth quarter last year when market proponents assumed the market was at its lowest point. This meant that the full year 2008 results for AIG were a reported loss of $99.3 billion USD or a whopping $37.84 USD per share.

Iconically, this is really an unprecedented fall and has never been seen in the history of the world and to put it in perspective – Australia’s total GDP is around $1 Trillion – so this is approximately about 1/10th of our entire countries GDP loss in one organisation. Surprisingly, the RBA should have really dropped interest rates on the back of this news and other continued severe credit-market deterioration, particularly in commercial backed mortgages in the United States, but they have decided against it – perhaps to keep interest rates cuts up their sleeve for the future and to wait for more economic data.

So what is all this going to mean ?

Well, I would think that things have still some time to go yet before we hit the bottom.

There tends to be a lagging effect on numbers vs. the “real” society impact when huge losses are posted, companies take these losses in real terms and then restructure their business and retire existing staff. The global recession is having a tremendous impact on credit and this is causing serious volatility in the market as investors attempt to determine which industries are being hardest hit and which companies are the next to post huge losses. The sheer volume of money that has been lost is going to continue to hammer employment markets in addition to wage growth as companies bottom lines erode and profitability just deteriorates in line with this. 

While the RBA and the Government are attempting to keep the economy rolling along with billions of dollars of capital injections, reducing interest rates and guaranteeing deposits - I am not convinced that its going to make consumers spend. Debt is at an all time and its a fantastic time to get rid of that debt cheaply and easily. In my mind, racking up huge purchases on credit cards in ‘uncertain’ and ‘unstable’ times is really just foolish and not a prudent use of a persons income generation. Debt reduction should be the key focus for households and once the market has finally bottomed out – many individuals can turn back to the market to ride the boom upwards and capitalise on the bull run that the market will take.

For now, I would say ‘Batten down the hatches’ as more jobs and more economic announcements are going to continue. 2008 was perhaps the worst ‘unknown’ financial year in the worlds history and the effects are going to continue for some time yet. If you think about it rationally, it is just not possible to loss that much money around the world and not feel the effects for some time afterwards. Don’t fool yourself into thinking that everything is going to be fine – consolidate your finances, reduce your debt while you can or use cheap debt to capitalise on expansions to your home to improve its value in the future (when you can use the equity in your home to finance investments) and wait for the market to bottom out.

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Of course my advice has always been not to reduce your fortnightly interest repayments. Keep them at your current level and you will slash off around 5 years over the course of your home loan. Less on interest, more in your pocket.

Yep, this is the simplest recommendation that anyone can provide when interest rates decrease – don’t go out and spend this interest rate differential – “force save it” by keeping your homeloan and/or other loan repayments high. The higher the better really.

The other massive news today was that the Rudd Government is putting an extra $42 Billion into the economy – dubbed the “2nd Stimulus Package”. This means that most people will get another $950 “bonus payment” in March 2009 if you earn less than $100K. Personally, I completely disagree with lump sum payments by the Government – they do not work. In this economy, people are not going out to spend this additional cash like the Government wants them too – times are tough, the job market is shrinking which means that Australian deposits are increasing as people become resistant to overspending. I think that most people are going to save this money, put it directly on the home loan repayments or reduce their debt (i.e. such as credit cards or other miscellaneous debt).

A more effective distribution of money to Australians in this earnings bracket is via a staged approach that limits the payments that are provided to Australians. “Bulk Payments” didn’t work in December 2008 – with Australian Bureau of Statistics providing data which suggests most people used the December payment on savings or reducing existing debt. Of course, everyone loves a bulk payment – I just don’t think its going to provide the “kick start injection” that the Government thinks it is going to.

My thoughts on this payment is to save this money and use it as a liquidity buffer so you can draw on cash if you need – don’t spend it. Pay off existing debt and pretend that the payment was just a “bonus” that you needed to reduce debt. The more you can reduce your debt in these times the better.

Other highlights of the day include:

• Total government stimulus now at $88.7 Billion.
• Injection of the “2nd Package” is $42 Billion.
• New Package should support 90K of jobs.
• Government will ease discretionary spending to 2% to reduce the overall interest payments.
• Budget deficit will hit $22.5 Billion for the year to June 30.
• Low and Middle Income earners to receive another $950 from the ATO.

Drop a comment on your thoughts below.

• Ellen J. Kullman, Chief Executive Officer, DuPont, USA
• Rupert Murdoch, Chairman and Chief Executive Officer, News Corporation, USA; Co-Chair of the World Economic Forum Annual Meeting 2009
• Duncan Niederauer, Chief Executive Officer, NYSE Euronext, USA
• David M. Rubenstein, Co-Founder and Managing Director, Carlyle Group, USA
• Ronald A. Williams, Chairman and Chief Executive Officer, Aetna, USA
• Moderated by Michael E. Porter, Bishop William Lawrence University Professor, Harvard Business School, USA

Some great points come out of their discussion regarding the state of the United States economy including – in brief summary – the following points:

• The panelists comment on the need to create new innovation in energy. Interestingly, they point out the correlation between high fuel costs and the spur for new innovation during the periods of increasing world oil prices but then as oil prices fall – this “urgency” for new innovation in energy subsides as oil falls. This time around, everyone on the panel indicated that lower fuel prices must not mean that innovation stops – all agreed that this time around it must continue.
• Increase the level of education at a junior level – a smarter population means that innovative solutions can be presented to problems that seem unsolvable. 
• Increase the level of consumer confidence by ensuring that the level of communication between the Presidential Office and the people in America and around the rest of the world is consistently transparent.
• Don’t rush solutions in the first 100 days but rather use the 1440 days remaining in office to fix so many of the issues – time is of the essence but it’s important to note that time is available.
• Tax gasoline usage in order to reduce the amount of corporate taxation in the United States so businesses remain in the US and don’t move offshore.

There are a lot of other point worth watching in the video so check it out below and get the rest of your people in the office and/or work place to listen.

The ASX saw increases primarily in the Energy, Materials and Metals and Mining sectors which were all up marginally. Rio Tinto (RIO) rose $3.00 while a big loser for the day was Newcrest (NCM) which was pounded by investors and lost around $2.30. 

Further update after market close.

In the news:

Israel-Gaza Ground War Heats up – Unfortunately, there is no letting up by Israel and so ground attacks continue on the Hamas-controlled Gaza Strip as its sees fierce fighting between the two sides as they battle for control of Gaza. More than 500 Palestinians and give Israelis have been killed in the fighting as of Sunday and more are expected to die in the coming week. This may shake financial markets around the world if the war escalates.

Dow Jones Up for the New Year – After what was the worse performance on the market in decades, US Stocks were up around 258.30 points on Friday and finished around 6% higher for the week – breaking through the 9,000 barrier for the first time in since November. There was very light trading volume on the basis that most traders were still on holidays – so the real question is whether the New Year Cheer will remain on the return of the bulk of the investment bankers in the States this week or whether the plethora of new corporate and economic data that will flow across January will provide traders with more fear of the true extent of the U.S. recession and the credit crunch.

Another Aussie Killed in Afghanistan – Another Australian has been attached in the Afghanistan making this Aussie the 9th to have died since Australia committed troops to the war. It is believed that a rocket attack by Afghanistan Militants was the primary cause of the attack. Read more on the story here.

Of course, with interest rate cuts come the less incentive to invest in the AUD dollar – so we will see bigger falls in the value of the AUD over the coming weeks. The incentive is no longer there for Asian nations to invest heavily in the Australia dollar and get a good return from our “once high, now low” interest rates. The dollar will fall and this will mean that imports will become more expensive, the price of overseas holidays will go up and of course (and hopefully) we will start exporting more of our locally made goods. 

Look back more than 6 months ago and such a cut would have been unheard of, in fact most people would still be staggering under the cost of petrol and holiday makers would be loving the-then almost parity in the AUD-USD exchange rate hovering around the 0.98 USD mark. Now shoot forward and we look at 100 basis point cuts as – “oh well, another massive cut” – it really is amazing what has happened in the last 6 months.

How far is it going to fall ?

I have some friends telling me they are predicting it will go as low as 2.5%, possibly even 2.25%, depending on the fall out in world markets over the next 6 months. Unless China starts churning through resources at a rapid rate, expect our exports to stagnate which means that our overall economic movement will slow down (in fact it has already!). 

Really I don’t think these rates are ‘unrealistic’ – but the big deciding factor is how the world ‘weathers the storm’. For those of you looking to secure a variable home loan, or purchase a house, seems like now would be a nice time to get your act into gear. At the rate we are going, demand for housing is going to be back on the rise because the cost of borrowing money is simply ridiculously low. 

As I stated before, don’t spend all of your interest savings on Christmas presents – instead

Give your homeloan a present, a reduction in its overall principal amount which will cut its interest burden. 

After all, you know that he or she is going to love it …. the home loan that it is!

You see interest on home loans is compounding interest – as no doubt many of you home owners know – typically over a 30 year loan. This means that the interest adds up each year and ‘interest is applied on interest’ – in addition to being added to your principal basically. The amount you are going to pay back in interest, is more than what you will actually borrowed in principal, and so if you borrow $500K at 10% interest then in your second year you will be charged on $550K (assuming you paid no principal off in the first year). This is known as – what I have termed – “The 2.1 Principal”. That is, you are going to pay back double and a bit on the amount you borrowed as a rough approximation across the life of a typical home loan.

So on a $520K home loan at 7.5%p.a for the next 30 years – you are paying back a whopping approx $788K in interest alone! Or $1.308 mil over 30 years for interest and principal – “The 2.1 Principal”. Yes, it sucks and this is why the bank earns so much money. So how can we tackle this problem and reduce our overall cost ? Well there are a number of tricks:

1. Change your payments to fortnightly

Yep, this is the oldest trick in the book. There are 26 fortnights in a year, and only 12 months – so you are actually gaining extra payment cycles per year which can assist you in paying off the loan without you really even knowing. The amount you are paying back is faster so the overall number of payments shoots up and reduces the amount of interest building up. If you aren’t on fortnightly payments (unless there is some sort of taxation strategy at play) then you should be!

2. Don’t decrease payment amounts

This is without a doubt the biggest saver across 30 years. You know that extra $50 you get weekly from the Government interest rate cut ? Don’t spend it on that new LCD. Simply put – the more you can shove back into your home loan – the less interest you are giving the bank – and the more you are “forcing” yourself into saving. You have to get used to setting up your fortnightly budget and sticking to it – don’t decrease repayments as it’s going to hurt you substantially in the long run. So this means if an interest rate cut comes along – don’t spend this cash - rather keep your pre-interest rate cut payment cycle going at it’s current rate. This will drastically cut the life of your loan and not really impact your lifestyle as you were managing this repayment when interest rates were higher anyway?

3. Fixed or Variable or Both?

Yep, it’s always good to check out your options when interest rates go low. A split “fixed-variable” home loan is always a good bet to ensure that you can lock-in some “upside potential” when interest rates increase or decrease. That is, when the economy starts moving again and interest rates increase – your fixed “leg” of the home loan protects you from this adverse movement and your variable “leg” is less impacted by the increase. Equally, if you were a little overzealous with your fixed rate lock-in – then when interest rates come down, your variable side helps you out and your fixed leg doesn’t.

Of course, if interest rates are plummeting then it’s always good to check out the cost of fixed rate loan in it’s entirety. Although, as many famous investors have said “Don’t put all your eggs in one basket”. Fixing an entire loan is usually only beneficial when the cash “base” interest rate is really low. For example, people who locked in rates at 8% a few months ago would be kicking themselves, because now they have a minimum 3 or 5 year fixed rate that they cant get out of. Had they taken the “split” strategy – then things wouldn’t be “as bad.

As always, this strategy also depends on the nature of the loan and whether it’s for investment or ‘home living’ purposes. Many tax advantages exist for running higher interest costs and so forth – hence, the reason for interest only loans – so it’s not always the “best strategy” but rather one to get you thinking about. Also remember that “fixed loans” are priced by some very smart people at Banks who forecast future interest rate rises – so this is why the “fixed rate” is always so much higher than the variable. The Bank is adding in some “cushioning” to ensure that if interest rate change upwards, they are not adversely impacted in the short-term. This is also why interest rates are only ever priced for 3 or 5 year lots – as it’s far to difficult to forecast any further ahead for interest rate movements.

4. Super or Homeloan?

This is tough one and really dependent on a persons individual circumstances and current life cycle. Many people are going to scream at you “interest, interest, interest” and I am going to more than likely agree. However, you need to do the maths. If you superannuation is netting you a return which offers a more substantial incentive to decrease your monthly repayments to the absolute minimum level required by your bank, so that you can pump residual cash into your super – it’s a valid strategy. You have to look at the combined benefit of the taxation savings and the performance of the *real* (minus inflation) superannuation return to find out whether this is worthwhile.

It is worth it ? That’s a life, maths question that you should check with your financial planner about.

5. Aggregate Loans and Be Aggressive

Yep, folding multiple home loans into one is another good way to reduce payments and get an ‘accumulative’ interest rate which is lower. This is all “debt reduction” companies do that you hear on the radio – they basically tell you

“stop spending, lets fold all your debt into one facility and get a lower interest rate so you can pay it off faster”.

Of course, most of the time people in this situation are in high interest debt facilities so they will hook you up with an interest plan that earns them trailing commissions and is lower than what you were paying – but not as low as what you could get – so you think you win. This is how they make money.

My question? Why pay these people when you can do this yourself. Approach a bank or credit house (assuming your credit rating isn’t too bad) and ask about transferring to them. Find out all related fees and charges such as “transfer balance fees” and so forth. Do the maths and you may find it is more beneficial for you to shove everything into one loan and pay an aggregate rate on this loan, than pay a whole lot of separate loans.

Remember, you don’t owe your current bank anything and if they want to keep you – even if you have been with them for 30 years – tell them to get their pen out and start slashing off 0.50% from the rate they give you. Always go with the best rate unless there is some other incentive for you to stay at the bank.

Conclusion

Different strategies for different people. Most importantly is that you really spend a night doing some calculations to find out ways to reduce, and lock-in, reductions during periods of interest rate cuts and economic recession. If you have a financial planner, ask them to do some maths for you (what are you paying them for!?) and get some benefit from all the doom and gloom.

Of course, it always comes back to your personal willpower to pay off debt fast – the quicker it happens, the less interest you pay and the more you can enjoy a debt free life.

That’s about it for this post – email me as always via the contact page with your questions!