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Economic defence against the virus was ‘cheap as chips’, says Deloitte

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Here’s a good line for the office water cooler: The federal government will spend about the same amount of income servicing its debt this financial year as it did the year before, and even less than the year before that, despite spending hundreds of billions of dollars helping Australians weather the pandemic.

There is no trickery at play here. The explanation is simple.

Interest rates have fallen to record lows – meaning the government has to pay less to borrow the same amount.

It’s a good nugget of information to have in your back pocket for when someone talks about younger Australians being condemned to a lifetime of paying off government debt – and one that figured prominently in a Deloitte Access Economics report released on Monday.

Describing our economic defence against the virus as “cheap as chips”, the economic consultancy said the main implication of low debt servicing costs is “that the collapse in interest rates has given governments more room to move”. Or in other words: Spend big.

“Australia used that beautifully through COVID via spending on JobKeeper and the Coronavirus Supplement,” Deloitte Access Economics partner Chris Richardson wrote in the report.

“And we continue to have more space to move than most other nations.”

Mr Richardson said that was no ideological statement.

“It simply flows logically from the changed world in which we now live.”

Taxpayer debt is becoming cheaper. Source: Treasury, Deloitte Access Economics

So, what does this mean for the budget?

That the Treasurer has ample room to move in next week’s budget is an important point to make, given he has set a target of driving down unemployment below pre-pandemic levels and the Reserve Bank has little space to cut interest rates further.

The government has so far flagged extra funding for aged care and child care in the budget while committing to a revamp of skills and training.

But Deloitte says on top of “big dollars” for aged care and major tweaks to JobMaker, targeted support will be required to help otherwise viable businesses affected by ongoing restrictions survive the coming months.

Bring back JobKeeper

“If the public policy risk is that otherwise viable businesses (and the jobs they support) are being pushed into closing by COVID-related events, then there’s a good reason to provide temporary support to tide families and businesses through the tough spot – indeed, that’s a reasonable description of JobKeeper,” the report says.

“Then again, the longer the crisis lasts (and it will clearly last some time longer yet for those whose livelihoods are connected to international borders), then the less the chance that businesses (and the jobs they support) will survive.”

Deloitte says the government should aim such policies at addressing problems rather than symptoms.

“For example, a lack of air travel is a symptom, so a program aimed at subsidising airfares on specific routes is a pretty blunt instrument to protect specific jobs,” the report says.

A better use of taxpayers’ money would be rolling out mini-versions of JobKeeper, as wage subsidies are normally a more efficient way of providing support to businesses that most need assistance.

JobSeeker boost unfair

Deloitte also added that while the Morrison government had presided over the first above-inflation increase in the nation’s unemployment benefit since 1994, “even with the additional $3.57 a day, the rate of JobSeeker still fails the fairness test – badly”.

“Had JobSeeker kept pace with wage growth over the last quarter of a century, then it would be $90 a week higher than the new rate,” the report says.

Deloitte says the direct cost of the $25-a-week increase would be $8 billion over the forward estimates, with much of that to be recovered through higher taxation and stronger economic growth as recipients go out and spend the extra cash on essentials.

“Previous work by Deloitte Access Economics for the Australian Council of Social Services shows that for every $3 spent on unemployment benefits, the eventual total net cost to the federal budget is only $1,” the report says.

“That’s because higher incomes for the unemployed are spent – which isn’t a surprise given that, as a group, they are the poorest Australians.”

Australia has the second-lowest unemployment benefit in the OECD.

When Treasurer Josh Frydenberg hands down the budget on May 11, Deloitte are expecting the following:

  • The better-than-expected recovery to have boosted the budget bottom line by $17 billion in 2020-21 and $3 billion in 2021-22, when compared to forecasts made in December
  • National income in 2020-21 to be $31 billion or 1.6 per cent higher than Treasury forecast in December
  • The rapid recovery in the jobs market to have boosted the government’s personal income tax take by $5 billion this financial year and $14 billion next
  • An extra $9 billion in profit taxes both this financial year and next, thanks to high iron ore prices, healthy sharemarkets and recovering gas prices
  • Confident consumers to have splashed so much cash that revenues from spending taxes (including GST and excises and customs duties) will be up $6 billion this financial year and $5 billion next
  • Overall government revenues in 2020-21 to be $21 billion higher than forecast in December
  • The government to report underlying cash deficits of $167 billion this financial year and $87 billion next financial year.

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‘Mountain of equity’: Millions of home owners could save thousands

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If you’ve become a home owner in the past five years it might be worth getting an appraisal – you’re probably sitting on a “mountain of equity”.

As we’re all aware, house prices have soared lately. And while that’s bad news for rapidly worsening inequality, it also means those that do own a home could save money on their mortgages, upgrade their properties or even borrow to finance that renovation they’ve been wanting to get done.

Refinancing could save you thousands in interest repayments a year.

You’ll be in a particularly strong position if you’ve also been able to keep up with your mortgage repayments during COVID, because you now own a larger proportion of a house that has rapidly increased in value lately.

It’s a virtuous cycle that’s making the gap between the haves and have-nots much larger in Australia by pushing up property prices even faster.

Owner occupiers have been the keystone of the latest property boom, with most being existing owners upgrading their homes.

Who could blame them? RateCity research published this week finds an owner occupier in Sydney who bought at the median price in 2019 with a 20 per cent deposit has now seen their wealth increase by $402,000.

Apply the same conditions to Melbourne and wealth has risen $192,000.

This assumes property owners kept up with their mortgage repayments, which the majority of home owners have done while working from home and taking part in a $300 billion government cash splash during COVID.

“Millions of homeowners are sitting on a growing mountain of equity, some without even realising it,” RateCity research director Sally Tindall said.

How to benefit

If you’re in this situation, getting the value of your home appraised could be the first step to a better home loan or moving up the property ladder.

“If you’ve owned your own home for at least a couple of years, and have been diligent about paying down your debt, you could refinance to a lower rate,” Ms Tindall said.

“Lots of lenders offer interest rate discounts to new customers with loan-to-value ratios below 70 per cent, including ‘big four’ banks CBA and Westpac.”

What’s a loan-to-value ratio? Put simply, it’s the difference between the size of your home loan and the value of your property.

So, as an example, if your home is worth $1 million and your mortgage is $100,000 you have a loan-to-value ratio (LVR) of 10 per cent.

The lower your LVR the easier it will be to refinance your loan at a lower interest rate or borrow more to purchase a higher-value property.

First home buyers might also be able to remove the guarantor on their loan sooner than they thought because of rapidly increasing prices.

About 58 per cent of the lowest variable interest rates available are open only to those with deposits of 30 per cent or more, RateCity said.

In other words, rising property prices may have moved you into the club of home owners that can achieve lower interest rates on their mortgages.

A median Sydney property purchased on an 80 per cent LVR in 2019 could now be refinanced on an LVR as low as 55 per cent.

If those conditions are applied in Melbourne, LVR falls to 63 per cent.

 

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Here’s why Australians won’t be hit by the soaring gas prices we’re seeing overseas

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Australians have dodged the bullet of skyrocketing gas prices currently hitting consumers in Europe and Asia.

While prices in the major gas hubs of those regions have spiralled up by a factor of five, in Australia a brief spike eased in September.

That means local consumers won’t be facing big jumps in household bills into next year.

Australian gas prices jumped in June and July after outages at coal-fired power plants in Victoria and Queensland boosted demand for gas generation.

That spike was short lived due to warm weather in some states and lockdowns in Victoria and NSW eroding demand, according to research by EnergyQuest.

“You’ve had warmer weather though the major capitals, the effects of the lockdowns and increased renewables, which reduced the demand for gas generation,” EnergyQuest CEO Graeme Bethune said.

Power prices fell

Those factors have also fed into power prices, with electricity costs falling in September in comparison with a year earlier.

What is interesting about the table above is that not only did average power prices drop, but the peak price charged by generators when power is in short supply also dropped.

That was despite the ongoing problems at the Victorian and Queensland power generators.

Part of the explanation is that there is increased output from renewables as rooftop solar grew, and new wind and solar generation came online.

That meant that gas power was called on less often to meet peak demand, which in turn held down power prices.

The inverse was true in Europe, where a 20 per cent fall in wind output over recent months helped run down gas supplies, contributing to the price spike, Mr Bethune said.

The future of power prices in part will depend on renewable output.

“If the wind blows strongly and there is plenty of sunshine across eastern Australia then it will keep pressure off gas prices,” Mr Bethune said.

The influence of renewables across the system in the last year is evident in this chart on power supplies.

Although wind has been stable in terms of its contribution to the power equation, outputs from hydro, solar farms and rooftop solar have risen.

The result is that coal has been pushed down from 65 per cent of power production to a record low of 60 per cent and that should help hold down both gas and electricity costs.

Even if offshore gas prices continue to spike Australian gas producers would not be in a position to push up local prices to match it.

“A lot of the export contracts for LNG [liquified natural gas] out of Queensland are set against the oil price and that has not risen by anywhere near the amount gas had,” Mr Bethune said.

“Then you have the federal government which has made clear to LNG exporters that they need to make enough gas available to the local market.

“They’re doing that regardless of the fact that they could make more money in the export market.”

Domestic users are supplied from long term contracts that cannot be easily changed when gas prices rise, so that would be another brake on prices.

However, while it is comforting to know local gas prices won’t spike to offshore levels, Australian consumers are still not getting as good a deal on prices as they should be, according to Bruce Mountain, Director of Victoria Energy Policy Centre at Victoria University.

“For small customers the gas price is not the big deal. The biggest things are the operation of the retail market and the costs levied by the owners of the gas-distribution pipes,” Professor Mountain said.

“Gas supply has been very profitable for the big gas companies.”

That was in part because consumers don’t bargain-hunt for retailers, and the charges levied to use the pipes and wires of the energy distributors are too high.

Regulators set these charges and could crack down on them but don’t, Professor Mountain said.

Since privatisation margins earned in energy distribution have increased dramatically.

Power distributor AusNet Services, under takeover offers from two groups, “is currently making a margin of 19 per cent – they’re far too profitable,” Professor Mountain said.

When power was distributed by [the state-owned] SECV there was a margin of 3 per cent on sales, Professor Mountain said.

Household power bills could be 15 per cent cheaper if the distribution businesses were less profitable, he said, with the situation similar for the gas sector.

But the move away from gas as a household fuel, necessary to reduce greenhouse emissions, will help deliver cheaper energy.

“Devices that use gas [for household tasks] are much less efficient that those using electricity,” Professor Mountain said.

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Scott Morrison talked Glasgow, China with News Corp boss over ‘after-dinner drinks’

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Prime Minister Scott Morrison discussed the Glasgow climate summit, China and the Biden administration with News Corp executives in New York last month, the company’s global boss has told a Senate inquiry.

Appearing before a Senate probe into media diversity via video link on Friday, News Corp’s global chief executive Robert Thomson revealed he spoke with the PM about international affairs over “after-dinner drinks”.

Mr Morrison was in New York to represent Australia at United Nations’ talks.

Mr Thomson told the inquiry on Friday he presumed the PM wanted to meet because he knew “many” world leaders attending the UN summit.

“I had presumed he wanted some insight about some foreign policy matters,” Mr Thomson said.

Mr Thomson confirmed Mr Morrison didn’t meet News chairman Rupert Murdoch while in New York. He also claimed there was no discussion of the looming federal election.

Mr Thomson said the Glasgow summit came up “in passing” between the pair, but they didn’t talk about News Corp’s planned 16-page net-zero spread across its Australian publications, which has ignited a firestorm of criticism Down Under.

The main topics of discussion were Japan, China, Afghanistan and the “contours” of the Biden administration, Mr Thomson told the inquiry.

“The Prime Minister and I don’t necessarily agree on China,” he said.

Mr Thomson (on TV) said he presumed the PM wanted foreign policy insights. Photo: AAP

Mr Thomson was also asked by Labor senator Kim Carr about whether News Corp directed local editors to take positions on political issues.

Mr Thomson said News Corp’s New York executives had no involvement in recent features on net-zero carbon emissions and that its Australian editors weren’t told from the US what to write.

But he said the company did expect editors to operate within a certain philosophical framework.

“As a company, we have a philosophy about certain issues,” he said.

“We have a philosophy about individual freedom, about the role of the market, about the size of government.”

Mr Thomson said that – as a former editor – he had “discussions” with News Corp’s editors, but that they had a “large amount of local autonomy”.

Senator Carr and the inquiry’s chair, Greens senator Sarah Hanson-Young, grilled the News Corp executive on the publisher’s track record on climate, accusing its Australian papers of platforming climate deniers for more than a decade.

But Mr Thomson said News Corp has been consistent on climate dating as far back as 2004, citing Mr Murdoch’s 2006 statement that the “planet deserves the benefit of the doubt”.

News Corp Australia has just finished a two-week campaign of climate coverage that included its major Australian mastheads running 16-page spreads about net-zero emissions.

The series had many critics, who argued News Corp had a long-held editorial hostility on climate action, including attacks on past Labor government policies targeting emission reduction efforts.

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