A matter of priorities weigh needs and wants

Published in the Herald Sun, May 2013 by Karina Barrymore

Don't get bogged down in the political bun-fight during next week’s Federal Budget. 

When all the economic jargon is stripped out, it’s just the same as any household budget.

Prime Minister Julia Gillard and Treasurer Wayne Swan will have spent hours sitting at the cabinet table in Parliament House working out the numbers, just as ordinary people do at their own kitchen tables.

The only difference is the amounts billions of dollars versus hundreds.

The Federal Budget is exactly the same as a family budget. It’s probably the best analogy there is,’’ AMP Capital Investors chief economist Shane Oliver says.

A family has income coming from things like wages, bank deposits and investments and it spends money on food, housing, education, clothing and so on. This is the same for the government.

It has money coming in from companies, individuals, GST and its own investments and then it has to balance out how it will spend it.’’

And that’s when the politics comes in to play or the household disputes.

Different governments, like different people, give a higher priority and spend more on some items than others.

If you wipe away all the hype around the Budget or the anxiety of making up a household budget, it’s a way of helping make choices and decide priorities, Wealth Within fund manager Dale Gillham says.

Contrary to most people’s beliefs, a budget does not actually restrict your spending or your lifestyle,’’ Mr. Gillham says.

The purpose of a budget is actually to do the exact opposite. 

It ensures you are spending your money in areas that are important to you and so you can achieve or maintain the lifestyle you choose.’’

The trick to budgets is to decide a rating system for how to allocate your money, such as 'essential’, 'important’ and 'lifestyle’.

The Federal Government breaks up its budget in to areas such as health, transport, infrastructure, education, defence and so on.

It then decides which areas are more critical to get funding to now and which are not. Individuals should follow the same process.’’

Families, for example would include housing, food and energy as essential you can’t live without them while a car, superannuation or investments are important but not essential.

Lifestyle areas of your budget would be your pay television subscription, alcohol, buying your lunch, going out to dinner, presents for the family and the list goes on,’’ Mr. Gillham says.

Just as the Federal Government allocates our public money to areas that are critical, we should do the same with our home budget: essential items first, then important items and finally, if there is any money left, lifestyle.’’

Mortgage Choice spokeswoman Belinda Williamson says the traditional May political budget month is also a good time to review household finances.

Consider booking yourself in for an annual home loan health check to see how your current loan stacks up against others currently available.

Since taking out your loan or last reviewing it, you might have changed jobs, switched to part-time work or extended your family,’’ Ms. Williamson says.

The recent interest rate cuts could represent a real cost saving. If possible, use the savings to pay off more on the loan or build up a financial buffer.’’

Deficits just like any household, if you don’t have enough income to pay all your expenses, your budget runs over and you have a shortfall, or deficit.

The same goes for government. Next week the Federal Government is expected to announce it has a shortfall of about $15 billion this financial year and that it will over spend again next year by potentially another $16 billion.

Accumulated debt during good years, households and governments save or invest extra money so they have funds available later for big purchases or for when costs increase.

In years when there is nothing left in the kitty, the shortfall has to be borrowed.

If this goes on for several years the accumulated debt years the accumulated debt can become a problem in itself. 

Paying the interest and repaying the initial borrowings becomes an extra budget expense to be found each year.

Australia has net accumulated debt of about $150 billion. New deficits will add to this total.

Debt ratio How much debt is too much? Australia’s accumulated debt is about 10 per cent of the country’s annual economic output gross domestic product.

That means for every $100 of national income, we owe $10.

This is low compared with many countries, including the US, which has accumulated debt equal to 90 per cent of its annual GDP. 

Japan’s debt ratio is about 140 per cent while across the Eurozone it’s across the Eurozone it’s about 74 per cent.

In comparison, the ratio of the average Aussie household debt to income is about 150 per cent.

While households borrow money on credit cards, loans and mortgages, countries and governments borrow money by issuing bonds.

These are investment products that promise to pay the people who buy them a certain interest rate and, eventually, repay the capital.

At the moment, the Australian government pays investors about 2.8 per cent for the money it borrows, which is significantly cheaper than double-digit credit card rates or mortgage rates of 6 per cent to 7 per cent.

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