This article was originally published on 30 April 2013 on my old blog, marketeconomics.com.au
The background to this article was Mr Abbott taking a significant pay cut after the 2007 election when he went from a Ministerial salary of around $200,000 a year to a Shadow Minister’s salary of around $110,000 a year. He and his family clearly maintained their spending levels, did not ‘tighten their belts’ in any observable way and reverted to debt – a $710,000 mortgage – to cover his expensive lifestyle choices. The article has not been altered to take account of events since April 2013.
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!
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.