Where did the rate and tax cuts go? Debt

Recessionberg is looking for tax cuts. Via Domain:

The Morrison government is looking at ways to deliver tax relief to middle income earners as a much-needed boost to the economy after the nation suffered its biggest one-month fall in jobs in more than three years.

Treasurer Josh Frydenberg said the government was “always looking” at ways to cut taxes as the Australian Bureau of Statistics reported total employment fell by 19,000 in October. It was the largest drop in employment since August 2016 and only the second monthly drop since then.

…Mr Frydenberg, whose mid-year budget update next month will have to contain sharp downgrades to unemployment and wage growth forecasts, said the government remained committed to a budget surplus.

In short, the L-plated Treasurer is pretending to look.  Just as well. From Fitch’s ironically named Dinkum Index comes a Irving Fisher moment for Australian tax cut enthusiasts:

Fitch monitors repayment rates as they can affect RMBS investors’ payouts, depending on mortgage performance and interest-rate levels. High repayment rates are usually a positive indicator of household wealth, credit availability and a strong housing market. Australian borrowers tend to repay their mortgages ahead of schedule. This provides a servicing buffer so they can stay out of arrears longer if they experience an income break or interest-rate rise. Borrowers remained ahead of their scheduled payments in 3Q19.

The Prime RM BS Repayment Index

The Dinkum RMBS Index borrower payment rate (BPR) increased by 320bp to 21.4% in 3Q19 from the previous quarter, while the conditional prepayment rate (CPR) increased by 330bp qoq to 19.0%. Prepayment rates remained low through 2017 and 2018 but have now risen from their lowest level since 2000. The increase may be due to Australia’s lower interest rates and changes in APRA’s servicing guidelines leading to more borrowers refinancing. Fitch forecasts the CPR to remain close to 20.0% in 2020.

In recent months, the CPRs for transactions issued by non-bank lenders and those issued by banks have aligned; CPRs for non-bank lenders had been lower than for banks for the majority of the time since the 2019 global financial crisis.

Prepayment levels plummeted as the income depression took its toll and the moment households got a bit of free cash flow they slapped it on the mortgage for the best avialable return.

The index suggests that further tax and rate cuts will simply raise repayments further, check out pre-GFC levels.

If you want stimulus during a debt deflation then the government has to spend the dough. But Recessionberg does not want stimulus, he wants more RBA rate cuts and QE leading to higher house prices for Scummo’s mates.

David Llewellyn-Smith


  1. While some cuts will undoubtedly be used to pay off debt, it’s a big stretch to claim that all (or 99%) of cuts will flow to deleveraging. For starters, many people don’t have a mortgage or have a small mortgage — which isn’t to deny that many do.

    As for the government spending money on infrastructure, great idea if it can get value for money. But here’s the thing. When I see workers on government projects here in Melbourne, from what I witness productivity isn’t exactly their first priority. And from what I hear they’re being paid way more than minimum wage for this.

    On a wider level if the assertion is that tax & rate cuts are useless, the corollary of this is that tax & rate rises are harmless. Which of course isn’t correct.

    • That reminds me of the woman some years back who when interview on TV said: “I don’t have much debt”. When asked “How much do you have?” her answer was “About $20,000”. To which the interviewer asked her “But what about the $12,000,000 of mortgages that you have against your property portfolio?”. Her response? ” That’s not debt! They’re mortgages. Everyone has those!”.
      Debt repayment isn’t just about paying down mortgages….

      • Jumping jack flash

        Yes, and this sentiment is indicative of much of Australia.
        Mortgages are absolutely necessary now, and taking on a gargantuan debt pile is viewed as natural as breathing.

        And to not be able to access the debt that is required is simply unfair.

        The fundamental problem with this though is that houses are simply not inherently productive (without adding more debt), and debt is not and never can be free.

        Due to these fundamental problems, their new system is completely unviable, unsustainable, and unstable.

    • No one said tax cuts were useless, that’s a straw man mate. The point is just that they are mostly ineffective for boosting consumer spending when households are worried.

      They are great for me. I get a tax cut and I put that straight on the savings pile.

        • For sure. As noted, nobody said they were entirely useless, that was your straw man.

          They will do a little bit. Just not a lot of bang for the buck.

          • Not my straw — it’s your straw that it’s my straw.

            But I’m guessing that the tax cuts won’t do much for low earners hence your accusatory comment.

          • Tax cuts won’t do much for low income earners, unemployed or pensioners – all of whom are more likely to spend (not save) and extra cash that lands in their lap.

            Even better (if you care about stimulus) is for the govt to spend it directly. Ie build things, improve things, upgrade things. Hopefully in a way that boosts productivity or amenity.

  2. Jumping jack flash

    “If you want stimulus during a debt deflation then the government has to spend the dough. But Recessionberg does not want stimulus, he wants more RBA rate cuts and QE leading to higher house prices for Scummo’s mates.”

    Rising house prices means rising GDP and an improved economy. They’ve put numbers against it now, so it must be true.

    Everyone “feels” richer when they are carrying around a massive pile of debt. Debt which not only is a smoking crater in the economy where money used to be, but which also sucks additional money out of the economy every day as interest repayments.

    But we all know now that the feeling of being richer is the most important thing. Actually being richer and having additional money to spend is for the financially unenlightened.

  3. At some point though if households repair their balance sheet it will eventually be good for consumer spending down the track; so long as someone else takes the slack and spends (i.e Government, corporates or we start being a net exporter). Ironically we could of exported our way out of this mess (mining, our natural gas, milk formula, agriculture, nutrients in general etc) as I suspect as the planet overpopulates will be the new black again (just like inflation effects essentials more than discretionary spending) if we didn’t sell it all off already.

    There’s very little hope out there and households know that we’ve so mismanaged everything despite being one of the luckiest resource blessed countries in the world that no matter what good headwinds come our way there’s no way we can possibly benefit from them now. Makes me somewhat sad to be honest.