Your plan for tax and rate cuts

Finances go backwards occasionally. Precious few could say it’s never happened to them.

Sometimes it’s because markets are imploding. Stock and/or property markets occasionally tank, temporarily at least flushing possibly considerable wealth down the s-bend.

Other times, it’s because we’re out of work. It’s understandably difficult to move forward with no income and nothing to do but drink beer.

And, of course, there are periods in our lives when expenditure is just higher than normal. Taking on a new, big, mortgage. Putting the kids through private school. Deciding to push ahead with a renovation. Almost any time you take a holiday. Christmas. A luckless weekend on the punt …

But when your expenses are out of control, or even just on the high side, do you deliberately go and cut your income? Do you go to your paymaster and ask for a pay cut?

Expenses $110. Income $100. Would you then go and ask for your take-home pay to be cut to $90?

No person in their right brain would do that, would they?

So why is the Federal Government going to do that in tomorrow night’s budget?

For 2.5 years, we have heard the Abbott and Turnbull Governments complain endlessly about a budget crisis. Too much locked-in spending (from the previous government, they moan). Too much debt (from the previous government, they claim). Not enough revenue (let’s raise the GST!). And, because of an unfriendly Senate, complaints about how little they’ve been able to do about it.

But, according to recent leaks to the media, tomorrow night’s first Turnbull Government budget is going to deliver income tax cuts. To “middle” income earners.

Say whaaat? Seriously? We’ve gone from a budget crisis to being able to hand back billions in income tax?

Like everyone, I’d like to pay less tax. Because, as the patron saint of tax minimisation, Kerry Francis Bullmore Packer, once said to a committee of the parliament: “I can tell you you’re not spending it that well that we should be donating extra.”

But let’s put tomorrow night’s Budget and tax cuts to one side. It’s just one element. The bigger picture that is far more concerning for us poor us punters.

Last week, we had news of our first “negative inflation” since 2008, when the GFC was grabbing us by the short’n’curlies. Prices, for the quarter to March 31, went backwards by 0.2 per cent. Annual inflation is now running at 1.3 per cent, below the RBA’s target of 2-3 per cent.

The chances of an interest rate cut (tomorrow) by the Reserve Bank immediately soared.

Simply, negative inflation means few are spending. When enough of us are spending, it puts upwards pressure on prices.

Interest rate cuts by the RBA suggest concern about the economy. With an interest rate cut, given that there are more borrowers than savers, allows the Reserve to pump money into the economy.

Tax cuts from the Federal Government could signal the same. But let’s be a little cynical, it’s probably more about pork-barrelling, with a likely election on 2 July.

Add to that property prices being a little shaky and our share market being wobbly for about a year now, and we’ve got … way overtime for being a little selfish about your own personal finances.

The dark clouds are gathering. Bad moons are arising. Trouble is on the way.

Cuts to interest rates and taxes suggest authorities wanting us to spend. That’s the way out of many economic holes. And probably this one.

Don’t get sucked in. Interest rate cuts are designed to get you to spend. As are tax cuts.

However, if you’re concerned about your job, have just taken on more debt, are worried about how next year’s school fees are going to be paid, do the opposite. Hold back. Don’t spend.

Be a little selfish. Direct your tax cuts straight into the redraw. Spend a little less. Both will help you build up a personal finance barrier. One that could get you through tough times the authorities fear is on the immediate horizon.

The RBA and the government don’t know your personal situation. And, to be brutal, they don’t actually care about you as an individual.

Be a little selfish. Don’t cheer too loud if Treasurer Scott Morrison stands up tomorrow and announces tax cuts. It is most certainly a signal of something hitting the fan very soon.

Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au.