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Aaron Downey

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2021 Federal Budget

What does it mean for you?

With Australia in a relatively strong economic position thanks to its handling of the COVID pandemic to date, this Budget serves as an important milestone in the country's continued economic recovery. With huge outlays already committed in the previous budget, this latest round leaves any notion of a surplus firmly in the rear view mirror, focusing instead on pumping cash into the economy to help struggling sectors, enhance innovation and improve social standards. Treasurer Josh Frydenberg said, "Australia is coming back".  

So who are the winners and losers? We take a look at the headlines.
  
AGED CARE
After the The Royal Commission into Aged Care Quality and Safety highlighted the need for vast improvements to the sector, it’s unsurprising that $17.7 billion has been earmarked for a whole-of-government response to remedy deep-seated issues over the next five years. The offering includes 80,000 additional home care packages and 33,000 new staff training places to help keep up with the stipulations of new minimum care requirements.
 

 
RESOURCES AND ENERGY
Funding for resources centered largely on securing the ready supply of gas, with a commitment of $58.6 million over the next four years to support gas infrastructure projects, in part aimed at alleviating potential shortfalls. $50.7 million was also allocated to implement a fuel security framework, to ensure the long-term fuel security of the nation. Talking of the longer-term, the budget also made room for a cleaner planet, with a moderate focus on emissions reduction. This comprised $1.2 billion set aside to 'establish Australia at the forefront of low emissions technology, innovation and commercialisation,' with initiatives including international partnerships and hydrogen export hubs. 
  

DIGITAL AND INNOVATION
Australia has emerged strongly from COVID, but to keep the nation competitive on the world stage, digital and innovation will be essential contributors. The budget reflected this, outlining the government's $1.2 billion Digital Economy Strategy, intended to build the infrastructure, skills and capability that Australia needs. A National AI Centre and Digital Capability Centres will be stood up, as well as tax offsets for gaming entities and an Emerging Aviation Technology Partnerships Program. 
 

WOMEN
With the government facing scrutiny over its treatment of women, the message of this year's Budget was strongly in support of helping women to learn, work and raise a family. $1.7 billion was committed to childcare support subsidies, including removing the subsidy cap for higher earners. This is forecast to help around 40,000 individuals to work an extra day per week and boost the level of GDP by up to $1.5 billion per year. $260 million was also ring fenced for improvements to frontline family violence support services, and further budget allocated to help women gain better access to legal counsel.
 
 
EXTENSIONS TO WRITE-OFFS AND OFFSETS
To encourage private sector investment, the Government has extended its instant asset write off measure by one year. Eligible businesses will be able to immediately write off the costs of assets they first use or install by June 30, 2023. This should bring forward investment by businesses and underpin private sector activity through the recovery.
 
Similarly the low and middle income tax offset has also been extended until the end of next financial year. This will deliver tax cuts worth up to $2,160 for couples, so long as the individuals earn less than $126,000 per year. It is hoped that this prolonging of tax cuts will help families to establish themselves financially over the longer-term, injecting some cash - and some confidence - back into the economy. 


COVID RESILIENCE
After a faltering start to the vaccine rollout, it's clear that building community resistance to COVID-19 is the only way that the country can return back to 'normal'. To that end, the government committed $1.9 billion towards the vaccine rollout, including distribution, monitoring and communication services. An unspecified financial boost will also be made to industry to support the onshore production of mRNA vaccinations. 


TRAVEL AND TOURISM
One sector that didn’t fare so well is travel. While it has previously received significant backing through JobKeeper, subsidised flights and support for travel agents, there were no additional measures for the sector in this budget. Instead the Budget’s underlying assumption that international travel won’t reopen until mid-next year highlights that the sector’s pain could be prolonged. 

If you have any questions about the Budget and how it may impact you, don’t hesitate to get in touch.
  
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COULD INTEREST RATES RISE SOONER THAN EXPECTED?
In response to the pandemic, central banks around the world flooded the market with liquidity. In Australia, the Reserve Bank did what it could to support job creation and economic recovery, setting the cash rate at an all time low of 0.25 in March 2020, and dropping it even further - to 0.1 - by November of the same year to stimulate the economy in the wake of rolling domestic lockdowns. 
In announcing such a low rate, the RBA suggested that it would remain at this level until 2024. The liquidity it provided helped support the Australian economy through its recovery from a brief recession in 2020. However, the pandemic has been far less devastating than it could have been on Australian shores, and the country has seen higher growth than expected both in employment figures and GDP. This relative success has prompted some economists to wonder whether rates will remain at such low levels for much longer.
  
What would rising interest rates mean for me?
If rates do rise, one of the more significant impacts will be on mortgages. The cash rate is a key component of bank’s borrowing costs and the major banks will traditionally pass on changes in the cash rate to their customers. So an increase in the cash rate could end up flowing through directly to increased mortgage repayments depending on your mortgage situation.
 
As part of its pandemic response the RBA instated its Term Funding Facility (TFF) in March 2020. The TFF provided low-cost funding to authorised deposit-taking institutions (ADIs) like banks for three years, allowing lenders to provide cheap mortgages, and plenty of buyers rushed to make the most of the offer. The TFF came to an end in June 2021, so as banks lose access to this cheap source of funding we may see more upwards pressure on mortgage rates. It’s a good idea to keep an eye on your repayments, check the terms and conditions on your home loan and be ready to rework your budget or refinance your mortgage if need be. 

An increased cash rate could also take some heat out of stock markets. Decreasing liquidity could see less money flowing into markets and pumping up asset prices.  Investors could also interpret higher rates as a response to rising inflation, and choose to shift their money into more defensive assets like gold or bonds that are better placed to weather inflation rises in the future.   

The RBA is well aware of the wide-ranging effects that movements in the cash rate can have on the broader economy and household balance sheets, so it is likely to move cautiously. Australia’s economic fundamentals look solid and there have been some early signs of rising inflation, so a change of tack from the RBA remains a possibility that should be considered for your personal circumstances. 

If you’d like to discuss your portfolio, finances or mortgage and what changes to the rates might mean for you then please get in touch.
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THE DIFFERENCE BETWEEN BUY NOW PAY LATER AND CREDIT CARDs

The Buy Now Pay Later (BNPL) market has exploded in Australia over the past couple of years, as new players like Humm and Klarna join more established market favourites like Afterpay. As BNPL becomes increasingly popular as a flexible repayment tool, shops around the country are signing up to make it an option for their customers. So what does this mean for the consumer, and how does BNPL compare to traditional credit cards?
Repayments
Both BNPL and credit cards allow the purchaser to delay handing over a total purchase amount at the time that they buy a product. Which BNPL product you choose will determine your repayment schedule, both in terms of the minimum necessary instalments and the timeline for making your repayments. Afterpay, for example, requires you to make four repayments every two weeks while Humm allows up to five repayments on a fortnightly basis for purchases under $2,000. Crucially, most BNPL services charge no interest, allowing you to make timely repayments of the total amount at no extra cost. 

Credit cards also give you a chance to make your repayments at no extra cost. Most come with an interest free period – on average around 44 or 55 days – meaning that effective management of your repayments can see you swerve any extra charges. However, if you fail to make all of your repayments within this window you’ll be charged interest on what you haven’t paid back.  

Interestingly, and perhaps inspired by growing consumer trends towards BNPL, a number of credit card providers are now offering 0% interest products – like CommBank’s Neo card. 

Fees and charges
 There are fees and charges associated with both BNPL services and credit cards. While there’s no formal ‘interest’ on BNPL repayments, providers will charge a late fee if you do not repay what you owe according to the schedule, and these fees can increase with each late repayment or follow-up reminder. In addition to charging interest, credit cards usually come with a sign up fee and an annual fee, although occasionally these will be waived in promotional periods.  

Be sure to look into all the fees and charges associated with a financial product before making a commitment.
 
Joining up
The rules for signing up to BNPL and obtaining a credit card are relatively similar. Both require users to be residents in Australia and over 18 years old, and both reserve the right to perform a credit check to ensure you are sufficiently well equipped to make repayments. 

What’s really clear is that whether you decide to use BNPL services or stick to the traditional credit card, making timely repayments and avoiding overstretching yourself financially are crucial to staying comfortable and in control.
 
 
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Aaron Downey

Principal / Financial Adviser

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