If we were to walk out the front door of our office and gather up a group of millennials right now, I think it is fair to say there would not be much love for Dr Jim Chalmers. The RBA was forced to increase interest rates recently by 0.25%, bringing the current cash rate up to 4.6%. The two themes consistently being replayed to Australian s right now are inflation and interest rates. Two terms I dare the younger generation are sick of hearing about.
Well before the war in the middle east, our government spending was out of control. Spending more than they collect in taxes and charges. Increasing government debt levels by very large numbers, thereby increasing interest costs. Refusing to listen to the warnings being given to them by not just the RBA, but even economists and finance professionals who could see the writing on the wall. In the US, Donald Trump has become very good at blaming the US Fed for everything – insisting interest rates were too high and trying to bully them into cutting interest rates to further grow the economy. Fair to say that hasn’t gone the way he envisaged. While Albo and Jim haven’t never stooped as low as to blame the RBA for where interest rates sit, they have however refused to accept any responsibility for their actions. Leadership comes with responsibility and I would argue it is a failure or leadership to not take responsibility for your own actions – good or bad. It is blatantly obvious that government spending is out of control so it would be nice to see Albo and Jim acknowledge this rather than continue to deflect blame like old mate Donald in the USA.
As a general population, it is fair to say we are becoming frustrated when the RBA delivers it regular speeches. To be honest, I feel sorry for Michelle Bullock. She is just doing her job and from what I have observed so far, doing it well. Her responsibility is to keep inflation under control and she has one lever to do this – interest rates. The RBA board is desperate to keep inflation under control – if it doesn’t, the current cost of living issue will only spiral out of control. Neither the RBA board or the Federal Government control the war in the middle east and it’s impact on oil/fuel prices. This component of the inflation picture sits outside of their control and to be fair, the Federal Government did their best to try to address this by reducing the fuel excise for a period of time.
What Governor Bullock has consistently said meeting after meeting however is this – governments need to rein in their spending. If I had told my 8-year-old daughter every other month on a repeated basis that she needs to stop spending her pocket money if she wants to buy a new toy in 3 months’ time, I would hope this would have sunk in after a little while. The message doesn’t seem to have sunk in with Albo and Jim however, and now Australians are going to pay the price, particularly the younger generation.
When I wrote my last article post the Federal Budget in May, I posed the question as to whether or not young people were really better off. The government had starting intervening in the property market and the proposed government spending was clearly going to have inflationary impacts. With a focus on the younger generation, some of the key points I raised in my article in May were:
- Rather than encouraging and supporting small business, the budget targets them, making success riskier and less rewarding for entrepreneurial Australians.
- While lower house prices may help first home buyers enter the market, lower growth and higher ownership costs could make it harder to progress to the next home.
- Higher government spending risks higher debt, inflation and interest rates, potentially reducing borrowing capacity and making home ownership even harder for young Australians.
- More responsible government spending today would mean lower debt tomorrow, reducing the burden on younger generations and creating greater flexibility for future tax reform.
Unfortunately for the younger generation, the above points are starting to play out and not in a positive way.
Regarding small businesses, an uncertain environment kills optimism, making starting a new business even riskier. To add to this, the government is still twiddling its thumbs when it comes to the proposed changes to Family Trusts as well. Not only is the risk of starting a new business there like it always has been, there is now structural uncertainty around this as well as higher interest rates on finance should it be required, if you can even get it now that is.
House prices have come down in a lot of areas, particularly in Victoria – well done Jim, you “succeeded”. However, due to high cost of living pressures – think fuel, groceries, utility bills and the like – savings rates are also down and with interest rates increasing, obtaining finance just became a lot harder again. The dream of owning a home for the younger generation is slipping away despite all the government interventions.
And while we are on this point, it also comes as no surprise to me that the people who took the “risk” and got into the market with a 5% deposit through the government guaranteed scheme, find themselves in a horrible spot. Prices have come off, repayments have gone up and in a lot of cases, the 95% loan is now worth more than the entire property. Something I feel will remain the case for a fair while yet. Dare I say it but some parts of the USA still haven’t recovered from when this occurred over there in the GFC.
Lower capital growth and higher interest rates have led to a lot of people being in mortgage prisons – a term used when people with existing mortgages are unable to finance to a better loan with a better interest rate. Simply, this is because they are not able to obtain the same level of finance they have today (due to higher interest rates and therefore higher serviceability tests), meaning they are stuck with the loan they currently have until they are able to refinance at some point in the future.
And finally, the one no one is really talking about today because it is a future problem and we have enough current problems to worry about right now – the government debt level. It has to be paid back some day, presumably by the younger generation. Jim and Albo will be living their best retirement lifestyles when this becomes an issue though so we will worry about this point later.
With all of this being said, it is fairly clear on my view – young people are certainly not better off are they Jim. Our government spending has increased from $627BN in 2022/23 to $830BN in 2026/26 – that’s a 32% increase at a time when we need to be reining it in! Here are some damning stats from recent research conducted by SEC Newgate just to drum home the point:
- 55% of millennials have postponed moving out of home
- 19% of millennials have moved back into home
- 22% of millennials have moved further away from work and/or friends to reduce costs
- 33% of millennials have postponed career choices/changes
- 31% of millennials have delayed starting families
And finally, to tie this back to everyone and not just the younger generation, we are already seeing these concerns across our client base. Larger provisions being made for the next generation because the old $50-100k gift per child is no longer enough, parents helping existing property owners with partial mortgage repayments and retirement income needs increasing in the event kids have unexpectedly moved home once more. As per the same research quoted above, 15% of pre-retirees are even delaying their own retirement in order to be able to provide greater assistance to their children. Imagine doing all the hard work to be able to retire and then having to delay this due to no fault of your own, or your kids really to be fair. Times are tough out there no doubt about it.
So what does this mean for Jim and Albo – it’s pretty simple in my view. Take responsibility and slow spending. The one thing you can control is the one thing you are refusing to do. One saying I love is that when the going gets tough, the tough get going. There is certainly a component of the Australian population doing it tough right now. It would be refreshing to see the government start to do the same, rein in spending and give the younger generation a renewed sense of optimism once more.