As Treasurer Josh Frydenberg announced the Budget for 2022-2023 on Tuesday, expectations were high. But as the dust of the cash-splash announcement settled, experts could find some unexpected results in the fine print. As it stands, the budget can significantly increase the likelihood of interest rate hikes.
Even after inflation soared to its highest level since 2008, borrowers should brace themselves for mortgage rate hikes that may last for two years. This may increase mortgage payments by $8400 a year for a house valued at $700,000.
In an interview, economist Chris Richardson told ABC, "It will make it (interest rate hike) more likely. We still think the Reserve Bank will move later, but most economists expect something in the next few months. We are more confident that the Reserve Bank is enjoying these lower unemployment rates, is enjoying an economy moving faster and is willing to run some risks around inflation. But it is a very delicate line that everybody is walking."
All this and more can lead to interest rate hikes as early as June. This comes as bad news for both existing and aspiring homeowners. While it is easy to understand the government's need to reign in spending, the side effects of this budget may have unforeseen consequences for the population at large. Earlier this month, Commonwealth Bank economist Gareth Aird estimated that about a million home borrowers in the nation have never experienced an increase in their mortgage rates. If the budget inadvertently leads to interest rate hikes, this can wreak havoc on the savings of households till 2024.
It looks likely that the government is relying on the income of households to outpace inflation in the short run, but just enough so as not to trigger a series of interest rate hikes. But with the first hike already likely in June, this may also turn out to be a risky strategy a year down.
Government Spending in the 2022 Budget
The cost of living package of $250 one-off payments announced by Mr Frydenberg for six million recipients and an unexpected $1,500 tax rebate for workers (with an annual income of less than $126,000) can also contribute to the mix. It can lead to the Reserve Bank of Australia (RBA) increasing its cash rate.
So far, it looks like the Treasurer's gamble to increase spending in certain areas while reigning in other areas has backfired somewhat. However, the budget is not without its risks, and it will be interesting to see how events play out in the coming months.
Graeme John, Head of Growth at Joust, opines, "This budget seems to be more geared towards electioneering than anything else. There are a lot of populist measures in there which will win them votes, but they're not really going to do much to help the economy in the long term. Australians will be slugged with increased mortgage rates and higher living costs, while the big winners from this budget appear to be relatively higher income earners who will get a tax cut. This budget is a missed opportunity to help stimulate the economy and make it more affordable for all Australians."
The Reserve Bank of Australia had targeted an inflation rate of 2-3%. But the current inflation level stands at $3.8%. By June, this is tipped to rise to 4.25%, a level that has not been seen since the global financial crisis status of September 2008.
And shockingly, the cash rate remains low at 0.1% (the interest rate the RBA charges commercial banks). This seems to be a crisis in the making, especially since it has remained at this level for the past 17 months and is one of the primary contributors to surging property prices. The graph below shows that these are unprecedented cash rate levels since 1990.
In response to this, economists expect a panic increase in cash rates by Australia’s central bank later this year by as many as 4 times. This would mark a fiscal repair in the economy, and the country would wind up its massive pandemic-era stimulus.
What You Can Expect From Federal Budget 2022
- Middle-income earners up to $126,000 to get tax rebates up to $1,500 from 1st July.
- One-off $420 cost of living tax offset, costing the government a total of $4.1billion
- Fuel duty to be cut in half for the next 6 months, down from 44.2 cents to 22.1 per litre. This can save average households $300 for one car or $700 for two over 6 months.
- Universities to get extra spending on research commercialisation.
- One-off payment of $250 for pensioners, welfare recipients, and veterans.
- JobSeeker payment has been increased by $13.20 to $629.50 per fortnight. This is for a single person without children.
- Parenting payment increased by $18.10 to $874.10.
- The maximum assistance for rent payments increased to $145.80 for singles and up to $193.62 for families.
What do you think? Is the government justified in its decision to splash such cash in the budget?
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