Fiscal dominance.
The government is on a spending frenzy and it is causing a few issues.
Look at the out going Queensland Premier who was splashing cash around trying to buy votes and win the election.
Look at the spending on the care economy.
Look at the spending on infrastructure.
Look at the state debt levels.
There is huge amounts of fiscal spending occurring at multiple layers of the country being driven by government policy.
Most of these causes are worth spending on, but that does not mean there are not second order consequences and issues.
One issue is these programs cause inflation.
Fiscal spending can increase the spending in the economy which is inflationary.
Another issue is that it can crowd out private markets and business. For example, a huge amount of the new jobs created this year have been government sponsored jobs.
This means that small businesses are losing potential employees. Even big businesses, like CBA are losing employees.
A lot of people are going to work for the government, either directly in a department, or in directly on a government funded project.
This means the size of the government is getting bigger, and all spending from the government is essentially a form of direct (income tax) or indirect (inflation) taxation.
This is not an easy concept to understand, but in simple terms the more the government spends, the more money there is the economy, the more inflation there is, the more you are taxed.
Not only are businesses competing with other businesses in their market, now they might even be competing with the government.
I’ve got some important lending news in this month’s newsletter, as well as updates about the economy:
Business borrowing rises 32.4%
Workforce hits record levels
Govt makes key lending decision
Inflation falls to 2.7%
Read more below.
What a difference a year makes. Twelve months ago, business borrowing was at low levels compared to recent historical trends. Since then, it has significantly increased, in part due to the competitive lending environment.
Over the past 10 years, businesses have borrowed an average of $7.75 billion per month, according to the Australian Bureau of Statistics. In August 2023, businesses borrowed just $7.59 billion; but by August 2024, that had jumped to $10.05 billion, an increase of 32.4%.
Breaking down the numbers, borrowing to fund the purchase of property rose 21.7% year-on-year to $6.81 billion, while borrowing to fund construction rose 61.9% to $3.24 billion.
Lenders are keen to attract business customers, so there are a lot of sharp deals available, for both new loans and refinancing. The key is to choose the right lender, because interest rates, fees and borrowing terms can vary widely from institution to institution.
Please contact me if you need assistance, because you’ll almost certainly get a better result through a broker than a bank. I’d also encourage you to reach out if you got your loan more than two years ago, because there’s a good chance I could help you refinance to a better finance package.
The share of the working-age population who either have a job or are actively looking for one has never been higher.
The participation rate in September hit a record 67.2%, up from 67.1% the month before and 66.5% the year before, according to the Australian Bureau of Statistics (ABS).
According to the minutes of the Reserve Bank of Australia’s latest monetary policy meeting, this rise in participation is due to “a combination of jobs being readily available and the effect of financial pressures from the higher cost of living”.
For employers, a larger workforce is good news, because that makes it easier to attract staff and puts downward pressure on wages growth.
Over the year to September, the unemployment rate rose from 3.6% to 4.1%, which suggests that the number of jobs being created has not kept pace with the number of people entering the workforce.
Nevertheless, the ABS’s head of labour statistics, Bjorn Jarvis, said “unemployment and underemployment measures are still low, especially compared with what we saw before the pandemic”, which “suggests the labour market continues to be relatively tight”.
The exemption that small businesses currently have from the responsible lending obligations has been extended by two years, until October 2026.
Under the exemption, businesses that have annual revenues of less than $5 million and employ fewer than 100 staff can access credit without being assessed against the responsible lending obligations, so long as there is a genuine business purpose.
The National Consumer Credit Protection Regulations will be amended to extend the exemption. The exemption was first introduced in April 2020 and had previously been extended three times.
Australian Banking Association Acting CEO Vanessa Beggs said it was critical for banks to be able to provide small businesses with the funds they needed to operate efficiently.
“One in four SMEs report wanting to increase their capital investment, so this extension will help ensure small businesses across Australia can continue to access the credit they need to thrive and grow,” she said.
“Small businesses are the lifeblood of our economy. Making it easier for them to access credit gives them more opportunities to employ Australians, upgrade their facilities and expand their operations.”
Inflation falls to 2.7%In welcome news for businesses, the consumer price index, which measures inflation, has continued trending down.
After peaking at 8.4% in December 2022, inflation has fallen to 2.7% as of August 2024, according to the Australian Bureau of Statistics. That will reduce pressure on workers to ask for raises and suppliers to charge higher prices.
The Reserve Bank of Australia (RBA) has been trying to reduce inflation to its target range of 2-3%, but it's unclear whether inflation is now sustainably within that band. That's because, over the past two years, there have been periods when inflation has reversed course and started rising again, albeit briefly.
On a related note, the ‘trimmed mean’ inflation rate (which excludes the most items with the largest price changes from inflation calculations), which the RBA regards as more reliable than the headline inflation rate, remains at 3.4%. As a result, the RBA might feel inflation is still too high.
The RBA is unlikely to start lowering interest rates until it believes there is little risk of inflation taking off again.
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