Aussie debt is about to top half a trillion

Thu, 15 Jun 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/article-231056138.html 

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Aussie debt is about to top half a trillion dollars

Australia’s government debt is poised to break through half a trillion dollars. As of last week, it stood at $0.4992 trillion.

Half a trillion dollars, is $500,000,000,000.00 of gross debt on which the government will be paying interest of around $15 billion each year – and that assumes that interest rates remain at the current record lows.

Government debt has been on an upward path since the global financial crisis hit the economy in 2008. The GFC saw a significant fiscal stimulus where government spending increased substantially as it delivered enough support so that Australia avoided a recession. It was text book economics but the price of avoiding recession was a rise in government debt.

More recently, structural changes in the economy have seen chronically weak wages growth and below target inflation locked into the landscape. These trends have undermined government revenue at a time when government spending is still running well above the levels prevailing before the GFC. Efforts of the government to cut its spending is recent budgets have not only failed, but spending is actually rising at a strong rate.

As a result of all of this and some reckless pre-GFC policies that wastefully sprayed money around the economy, the budget has been in deficit since 2008-09 and is set to remain in deficit until at least 2019-20. And while ever the budget is in deficit, gross government debt keeps rising.

Half a trillion dollars of government debt is a new record and according to last month’s budget papers, government debt is set to hit $725 billion in the mid-2020s. Government debt was ‘just’ $273 billion at the time of the September 2013 election when the Coalition promised to return the budget to surplus and ‘pay off’ debt. It has failed in this policy.

What is concerning is that the $725 billion debt forecast assumes the budget moves to surplus by 2020-21 and stays there after that, which is a scenario that just about everyone other than Treasury judges to be unlikely For now, the government is having no financial management problems raising debt. Australia’s triple-A credit rating is safe for now, which ensures fund managers and others are willing to finance the ever growing levels of debt at the current level of interest rates.

And while a credit crunch where investors shun Australian government debt is unlikely to show up any time soon, if the level of debt rises at a significantly faster pace than currently forecast and there is a credit rating downgrade or two, investors will be less willing to lend to the government at current interest rates.

In other words, an unexpected debt blow out from already elevated levels because of a slump in housing or protracted weakness in commodity prices or some other issue would not only see debt rising more quickly, but interest costs escalate. At the same time, the Australian dollar would almost certainly fall, and by a large amount, which would push import prices and inflation higher, which in turn would erode living standards.

While the half trillion dollars of government debt is not yet a problem, a point could soon emerge where the government will need to take action to address the debt escalation. It appears that economic growth is not enough to fix the budget and control the debt level.
This means that tax hikes and / or spending cuts will be needed in the not too distant future. This might be best achieved when, one day, the economy is stronger.

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The Australian stock market is a global dog.

Sat, 24 Jun 2017

This article first appeared on the Yahoo7 web page at this link: https://au.finance.yahoo.com/news/1381246-234254873.html 

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The Australian stock market is a global dog.

At a time when stock markets in the big, industrialised countries are zooming to record high after record high, the ASX200 index is going no where. So poor has the performance been that the ASX is around 20 per cent below the level prevailing in 2008.

It is a picture most evident in the last few years. Since the middle of 2013, the ASX 200 has risen by just 10 per cent. The US stock market, by contrast, has risen by 50 per cent, in Germany the rise has been 55 per cent, in Canada the rise has been 20 per cent, in Japan the rise has been 45 per cent while in the UK, with all its troubles, the rise has been 15 per cent.

So what has gone wrong?

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

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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.