Budget 2021: Treasury offers the inside running on what lies ahead

There’s a big tip here: house prices will keep rising, but maybe not apartments. Picture: Getty

Most people won’t bother to read the federal budget. Why would they? Budgets are as dry as the Simpson and as dense as the Tasmania wilderness.

But if you dig into the budget papers, there is every chance you will unveil a handy guide for the next few years. Treasury makes forecasts about a range of things. Sure, those officials don’t get everything right, but they do more thinking about these things than most people ... so it’s a guide worth following. Here goes:

Interest rates

Treasury’s forecast, like the Reserve Bank’s, says rates are going nowhere. “While government borrowing has increased sharply since the onset of the COVID-19 pandemic, the cost of servicing this debt remains modest owing to very low interest rates.”

The government took this to heart by doubling borrowings (to $617bn) in the past three years, while reducing its total interest payments by $400m a year. It’s refinanced the debt, so its average interest rate is just 0.88 per cent.

You need to follow its lead: if you are paying more than 2.25 per cent for a variable mortgage, it’s time to ring the bank. One last thing: with the government borrowing so much, it really can’t afford rates to rise either.

The dollar

The government uses US77c as the basis for its budget. Now this is a big call, especially as iron ore prices have climbed in the past week above $US200 a tonne.

But the government says iron ore will fall to $US55 a tonne by the third quarter next year, which would take pressure off the dollar. In the meantime, keeping the dollar lower now is the Reserve Bank. Its bond-buying program is effectively holding the dollar down. Governor Philip Lowe has on several occasions said this is a deliberate strategy. While the dollar is lower, the strategy is to keep your investing and your shopping here at home. The time to head overseas is when the dollar pops higher.

One warning: central banks trying to manage their currencies lower have a habit of tripping up if giant global hedge funds decide to take them on. Remember, the last time iron ore went above $US150 a tonne the Aussie dollar was buying more than $US1.

Your job

The government is basically telling you, in the budget, that if you want a pay rise, you will have to get a second income.

It’s not a good message for single-income families. Wages growth is forecast to grow 1.5 per cent next year and 2.25 per cent the following year: pretty much matching inflation; but not exceeding it. To go forward in real terms, you will need a pay rise — or extra income. The good news is there should be plenty of jobs going; especially while international borders are closed. The unemployment rate is forecast to fall from 5.5 per cent to 5 per cent to 4.75 per cent in the next three years. And this is why the government has increased subsidies for childcare: to eliminate financial barriers to put more people in work. In other words, there will be money out there, but you will have to work for it.

House prices

There’s a big tip here: house prices will keep rising, but maybe not apartments. The budget says: “The near-term strength in dwelling investment is expected to be led by detached housing construction following record-high house approvals over late 2020 and early 2021.

“It is not yet clear what structural changes will result from the pandemic, particularly given the greater propensity to work from home during the pandemic. Changing preferences for more outer-city, spacious and detached housing may also limit growth in apartment construction in coming years.”

The message is there: houses are the way to go until international borders reopen.

Your business

Here, the government has given you every incentive to grow and to invest. It’s tipping, this year, a 12.5 per cent increase in business investment, which is massive given there has been precious little in the past decade.

Things like the extension of the instant asset write-offs — for businesses with turnovers up to $5bn a year — and the loss clawback, where a business that loses money can reclaim taxes paid in previous years, are massive boosts.

Add to this the budget tells you household consumption is forecast to rise by 5½ per cent in 2021-22 and by 4 per cent in 2022-23 — and that consumer sentiment is the highest in 11 years — and you have a rich brew of opportunity.

Sky News Business Editor Ross Greenwood hosts Business Weekend at 11am AEST each Sunday.