Federal Family Budget

While we may glaze over at the huge numbers involved, tomorrow’s Federal Budget is basically a bigger, more complex version of our own family budget. A balanced federal budget is the cornerstone of a thriving country, just a a balanced household budget is the cornerstone of a thriving family growing their wealth.

And we use roughly the same principles. Both require a dependable income, smart spending, controlled use of debt and shrewd investment to keep them strong… and growing.

So how can you run your family budget like the nation’s? Let’s have a look.

Income versus spending

The national budget surplus, or deficit as it currently stands, is a key measure of our country’s financial health and shows us how well the government is managing its money.

According to the Parliamentary Budget Office, our current deficit is expected to widen from $88 billion to $122 billion over the next four years.

If it continues to grow at such a high rate, the government will be forced to borrow more to pay their bills, which in the long run can be dangerous for the economy… Unless that past investment produces good returns through more tax revenue.

Tomorrow the government will announce their plan to bring the budget under control and eventually return to surplus.

And if you’re currently running a personal budget deficit, that’s exactly what you should do too.

First, draft up an accurate picture of your income and expenses every month… which the Treasurer and Finance Minister have been doing over the last couple of months. Then look for areas where you can either cut back on spending or increase the money coming in to bring your budget back into balance.

Debt

Whether you’re talking about a country or a family, debt isn’t necessarily a bad thing, as long as it’s managed well. Borrowing to invest which produces a return in the future is good debt. Bad debt is borrowing to simply live beyond your means.

Without debt, most of us wouldn’t be able to buy a home or a car, and the government could not fund any major spending projects or invest in our future.

Interestingly, the level of government debt and household debt in this country tell two very different stories.

Net government debt stands at $379.4 billion, around 19 per cent of GDP (the size of the economy), and is forecast to rise to $397.6 billion by 2017-18 (around 21 per cent of GDP). It’s actually very manageable compared to other developed economies.

But it’s a different story when it comes to the private sector.

At around 123% of GDP, Australia has one of the highest levels of private sector debt in the world thanks to… you guessed it… sky high property prices.

But the headline number only tells part of the story. Yes, we have massive mortgages, but also high incomes and record low interest rates… which means we are currently able to repay them.

In fact, RBA figures show Australians are now on average more than two years ahead on their mortgages (which we think deserves a pat on the back).

So there are two lessons to take out of these figures… Firstly, if you keep your budget under control you’re less likely to need debt to fund day-to-day expenses.

And secondly, it’s important to borrow within your means. Forget about current interest rates, can you afford to repay the mortgage if rates were to jump two per cent tomorrow?

Investment

When you review the spending measures announced in tomorrow’s federal budget, keep in mind that with each outlay the government is hoping to drive economic growth.

For example, when the government drops billions on defence, infrastructure spending, small business tax concessions, or tax schemes such as negative gearing, it is expecting to see a significant return on the investment over time.

Whether that’s more jobs, improved productivity or increased business activity which leases to profits and more tax paid, the government never spends without expecting growth… and it should be the same for you.

We always recommend saving at least 10 per cent of your income, but when it comes to savings it’s important to put that cash to work.

Start with high interest savings accounts or term deposits, and as you can afford it move up to larger growth assets such as shares or property.

Over time, spending in the form of investment is the most effective route to grow your wealth.

Money Musings

• Deflation; wow economists were embarrassed by getting last weeks CPI figure so wrong. Prices fell 0.2 per cent for the quarter with annual inflation at just 1.3 per cent.. well below the Reserve Bank’s target range of 2-3 per cent. But the break down of the figures is fascinating. The big fall in global oil prices made a huge impact with a 10 per cent drop in petrol prices which then rippled across to the 2.5 per cent drop in transport costs. There was also a major slowdown in housing cost rises and and actual fall in rents.
• Interest rate cut; the Reserve Bank is in a bind in terms of interest rates. The low inflation rate and the high Australian dollar is a perfect combination to cut rates to stimulate the economy and bring the currency down. Timing is the key here. Unusual to do it on Federal Budget day but if they wait until the following month they run the risk of being criticised for cutting during an election campaign. If there was a choice between the two options we’d suspect they’d do it tomorrow.
• Will the banks pass on an interest rate cut; they are whining already… Extra regulatory costs, high cost of funding, rising bad debts blah blah. I suspect they’ve been softening us up to raise loan rates anyway. An official rate cut would be perfect to hold a bit back.