May 2018 Newsletter

It’s May, and many parts of the country will be grateful that cooler Autumn temperatures have finally arrived. On the national economic stage, this year’s Federal Budget was handed down by Treasurer Scott Morrison on the evening of Tuesday May 8.

April was a month of market volatility against a backdrop of ongoing global economic growth. In the US, 10-year bond yields broke through 3 per cent for the first time since late 2013. This, along with rising commodity prices, reignited inflationary fears and pushed the US dollar sharply higher. Oil prices (using the benchmark Brent Crude) rose more than 5 per cent in April, and 44 per cent for the year, to around US$74.5 a barrel. Spot iron ore prices rebounded 3 per cent in April to US$67.5 a tonne. The strong US dollar was behind the Aussie dollar’s sharp fall to around 75.5 US cents.

In contrast to the US, local inflation is stubbornly low. The March quarter consumer price index (CPI) lifted 0.5 per cent for an unchanged annual rate of 1.9 per cent. While secondary education, household power, pharmaceuticals and vegetables are rising faster than the headline rate, prices for women’s clothing, household appliances, audio and computer equipment are falling. National house prices recorded their smallest annual growth in over 5 years in March, with the CoreLogic Home Value Index up just 1.2 per cent. Consumer confidence improved over the month with the ANZ/Roy Morgan rating up 2.1 per cent to a 5-week high of 118.4 in the final week of April. The Reserve Bank’s cash rate remains steady at a record low 1.5 per cent where it is expected to stay for some time.

The Budget promises to deliver a strong economy, more jobs, guaranteed essential services and the government living within its means, so what does this mean to you?

Encouraging tax cuts
There’s immediate relief for Australians on low to middle incomes, as well as light at the end of the tunnel for higher-income earners. Those earning up to $90,000 will get a tax cut of up to $530 via an increase to the low and middle income tax offset as of July 1 2018.

Having raised it from $80,000 to $87,000 in 2017, the government is now bumping up the 37c on the dollar threshold to $90,000. By 2024-25, that threshold will be eliminated and those earning $200,000 or less will face a top tax rate of no more than 32.5c in the dollar.

Boomer benefits
As they have with every other life stage, the baby boomers look set to reinvent old age and how it is funded.

Older Australians who want to keep working can take advantage of the Pension Work Bonus being raised from $250 to $300 a fortnight. (This will allow them to earn up to $7,800 without having their pension reduced.)

The Pension Loan Scheme is also being expanded. This means many more retirees including full rate pensioners and self-funded retirees can boost their retirement income by up to $17,787 a year by borrowing against the equity they have in their home.

Older Australians wanting to stay in their own homes despite confronting medical challenges, can take advantage of the additional 14,000 high-level home care packages that have been provided. There’s also more money for palliative care and mental health services for those in residential aged care.

The Pharmaceutical Benefits Scheme has received a $1.4 billion boost to list more medicines including those to treat breast cancer and relapsing-remitting multiple sclerosis.

Super fees slashed
There’s not a lot in this Budget for younger Australians but they will at least get a better deal on their super.

Fees on accounts with balances of $6,000 or under will be capped at 3 per cent (of the balance). Exit fees will be banned when super funds are consolidated. The ATO will be supported to proactively consolidate any inactive super accounts a taxpayer has with their active account.

Rather than being the default option, life insurance will be offered on an opt-in basis for super fund members under 25.

Cigs up, beer down, commutes quicker, power cheaper
In more bad news for smokers, the Government is cracking down on the sale of black-market tobacco. But Australia’s craft beer lovers may enjoy more affordable artisanal ales following changes to the excise rate on small kegs.

The Government is funding infrastructure projects across the country. Among other benefits, this should result in safer, less congested roads. Australians will also benefit from the introduction of the national energy guarantee which is predicted to result in the power bill of an average household falling by $400 from 2020.

Counterfactual cost savings
Although these cost savings won’t affect the hip pocket, the measures are welcome news. The planned 0.5 per cent increase to the Medicare Levy to fund the NDIS has been scrapped. The franking credits cash refund remains. Negative gearing and the capital gains tax discount on investment properties has not been curbed. Furthermore, the government is funding its largesse through measures such as cracking down on welfare overpayments and targeting tax-shy multinationals rather than jacking up taxes and levies on working Australians.

Having taken the GFC and end of the mining boom in its stride, Australia’s AAA-rated economy continues to power along. The Budget is even set to return to modest surplus in 2019-20 and, barring any unforeseen events, the Treasurer looks likely to achieve the goals he has set.

Australia’s household debt is among the highest in the world and rising, thanks largely to worsening housing affordability and plentiful consumer credit. So how do we measure up and should we be worried?

Most global comparisons measure total household debt as a percentage of net income. At last count, Australia’s household debt to income was 213 per cent, the fifth highest in the developed world according to the OECD.i

Good debt vs bad debt
Debt is not necessarily bad if it’s used to grow wealth and you have enough income to service your loans. After all, borrowing to buy a home has been the cornerstone of wealth creation and financial security for generations of Australians. Borrowing to invest in assets such as shares and property that repay you over the long term, rather than the reverse, is also regarded as good debt.

Bad debt arises when you borrow to pay for things that don’t provide a financial return and that you probably couldn’t otherwise afford, such as that overseas holiday you paid for with your credit card. Unless you can afford to repay the debt in full when you get home, the debt can blow out and linger for years.

Most people take on debt in the expectation that the assets they buy will grow in value and their income will increase over time, reducing their debt burden. But what if these expectations aren’t met?

Wages not keeping up
Australian household debt has increased by 83 per cent in a decade, but our incomes aren’t keeping up.ii Wages growth has been stuck at or near 20-year lows since 2015. It’s currently tracking at around 2.1 per cent, barely above inflation of 1.9 per cent and half what it was a decade ago.

Households are generally considered to be under financial stress when their mortgage repayments or rent account for more than 30 per cent of their income. In the December 2017 quarter, it took 31.6 per cent of the median family income to meet average loan repayments and 25.8 of median income for median rent payments.iii

Despite this, most of us muddle through, paying our bills and trying to save a little extra to get ahead. But even good debt can turn bad if you’re not careful or your finances take a turn for the worse. Households with high debt are more vulnerable to financial setbacks such as unemployment or a large fall in house prices that could leave them owing more than their property is worth.

So while interest rates remain low, now is the time to take control of your finances and get on top of debt.

Tips for dealing with debt
Do a reality check. Add up all your borrowings and the interest you are paying on each. That includes mortgages, investment loans, personal loans and credit cards. While the mortgage is likely to be your biggest debt, it’s also likely to carry the lowest interest rate.

Complete a budget. Add up all income and expenditure for the past year. If you haven’t been keeping track of spending, make an estimate using your bank and credit card statements.

Make a plan. Using your budget estimate, work out how much income you have left each month to reduce your debts. If you have several credit cards and personal loans, concentrate on paying off the debt with the highest interest rate and highest balance first, and when that’s repaid in full move onto the next highest. Look at the interest rate on your home loan, negotiate a lower rate with your lender or switch providers.

Consolidate your debts. You might also consider consolidating ‘bad’ debts into one account after shopping around for the lowest interest rate.

Australia’s household debt may be high by global standards, but that only becomes a problem if you are struggling to meet repayments or sinking good money into bad debts. If you would like to discuss a debt reduction strategy, don’t hesitate to call.

i Household debt to income, OECD, 2016,

ii ‘Household income and wealth, Australia, 2015-16’, 30 October 2017, ABS,

iii Adelaide Bank/REIA Housing Affordability Report, December 2017 edition, released 6 March 2018.

Although we are only at the tip of the iceberg of blockchain’s immense potential, industry leaders like Bob Greifeld, CEO of Nasdaq, have already pegged the emerging technology as “the biggest opportunity set we can think of over the next decade”.i From the humble origins of Bitcoin, blockchain has since captured the imagination of everyone from Richard Branson to Bill Gates and virtually every large financial institution on the planet.

Its purpose? To maintain the truest representation of data and transactions throughout the world, by minimising fraud, human error and even system failure. And that’s without mentioning the financial benefits – for example an estimated $6bn per year is anticipated to be made in global savings by streamlining the clearing and settlement of transactions.ii

Blockchain is changing the way business is done all around the world, both for transactions as well as data processing where accuracy and security is paramount. If that sounds broad, that’s because it is: more and more applications for the technology are being discovered as it evolves.

Wait, what is blockchain?
A blockchain (singular) is a digital ledger that’s shared between many parties. Kind of like a database or a spreadsheet that everyone can see and update – but not edit or delete. When a transaction is completed, it becomes a block in the chain. The way it works means no one party has control; it’s decentralised. Each block in the chain contains a re-coded copy of part of the last block. It’s also easy to verify information or transactions, because each block in the chain comes with its own little timestamp.

This makes it suitable for a variety of commercial and practical purposes. Where once ledgers or transaction histories were proprietary, they’re now public (at least to the extent they need to be – there’s still privacy and personal secrecy at the individual’s entry point to the blockchain network). To contrast it with ‘traditional’ digital transactions, it’s viewable and verifiable by everyone (not just the two parties to the deal), and the record can’t be changed or deleted. If a transaction has to be corrected, the difference or reversion is worked out and another block is created.

What’s blockchain being used for right now?
Around the world, several private companies are working on ways to use blockchain for medical records.iii The advantage would be that it would be accessible from anywhere, any time, reducing guesswork and errors in critical situations. At the moment, different digital medical record systems are all in different ‘languages’, and privacy laws mean it’s hard to share a physical paper file. If you’re thinking, “hold up, wouldn’t that mean everyone would be able to see my private health information?!” don’t worry – each block is coded and can only be ‘opened’ with a private key. So, for example, you might have to give your doctor a password to access your info.

Close to home, Australian environmental advocates have recently piloted a project to track tuna from where it’s caught, right to the end consumer. It’s being done by the WWF in conjunction with a fishing company and a tech company. The idea is that instead of fishing boats being able to fudge records, or third party monitoring bodies being vulnerable to corruption, each stakeholder verifies their point in the process in real time. And it’s as simple as using smart phones to capture the proof.iv

What’s next?
The thing that’s got the business world so hyped about blockchain is that it’s got almost endless applications where transactions need to be secure and records unchangeable. There’s no doubt that blockchain will ruffle the feathers of businesses whose main value proposition is that they’re the sole repository for critical data. In the next few years, massive institutions like payment networks could disappear. And the international politics of regulating a decentralised system are going to be… intense, to say the least.

We’re teetering on the precipice of a massive change in the way we communicate security-sensitive information. It’ll be exciting to see where blockchain takes us next.