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Sponsored: Lower interest rates add to challenges of not-for-profits

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Having recently arrived back in Australia from Asia at a busy period in the financial and political arena, it seems the perfect time for me to reflect on the state of the economy and hot button issues, particularly for not-for-profits, welfare agencies and those persons no longer working. Unfortunately, just as in many other parts of the world, the disparity between the well off and those in need continues to grow, but unlike some other countries in our region we will at least get the chance through our democratic process to express our views on policy and society when we vote on July 2 in a double-dissolution election.

May has been a tough month for not-for-profits. While housing investors are enjoying lower borrowing costs in the wake of a recent interest rate cut from the Reserve Bank of Australia (RBA), the move creates even more challenges for the charitable space. Hot on the heels of what was a difficult federal budget for the sector, the decision by the central bank to lower its cash rate to an all-time low makes it just that little bit harder for organisations which rely on investment income to maintain spending levels. The other group which is typically disadvantaged by lower interest rates is the almost two million self-funded retirees across the country. Many of them rely on term deposits for their income and so they feel the pinch when returns are low. A theme we often hear from this group − some of whom are retiring ‘baby boomers’ − is that having paid their taxes and struggled to service sky-high mortgage rates when they were in the workforce (the average variable rate peaked in 1989-90 at 17 per cent) they are now subsidising a generation of over-extended borrowers thanks to cheap borrowing costs. While the efficacy of this may be a matter for debate, some Australians have undoubtedly been on a borrowing binge − helped by mortgage rates well under 5 per cent− with the confidence to do gained through a quarter of a century of uninterrupted economic expansion.

Cheap mortgage rates are good news for property investors and owner-occupiers alike, but there are valid concerns that with the mining boom behind us, the economy is becoming too reliant on one area of the economy for growth. A broader based economy allows for greater certainty around longer-term revenue collection and therefore the redistribution of wealth. Household debt over the past decade has soared thanks largely to a preparedness to invest in property driven by factors including:

  • concerns about financial assets in the wake of the global financial crisis, and
  • tax concessions that encouraged additional investment into residential housing where average net returns from an income perspective are negative.

When investment decisions are driven largely by tax considerations it typically leads to an inefficient allocation of resources. There are solutions, but achieving them will clearly take strong leadership against many vested interests both state and federal.

Australia’s indebtedness compared to the rest of the world makes interesting reading. To be sure, Australian government debt as a percentage of the economy (gross domestic product or GDP) is relatively low in a global sense at around 30 per cent. What is of greater concern perhaps is that our total debt, including all levels of government, private companies and households, is approaching 300 per cent− rivalling the overall levels of the likes of Italy, Spain and the US. So in a sense the baby boomers may have a point: the RBA would be aware of the dent to spending and growth via higher debt servicing costs. If interest rates start to rise, this may prove an obstacle to higher rates at some point in the future.

With Chinese growth slowing, and in turn their demand for our exports, any increase in interest rates would appear to be a long way off unless the dollar was to take a dive from current levels and reignite inflation. Low interest rates have other potential risks for retirees in that they may allocate more to riskier investments such as equities to get better returns, so it’s a challenging economic environment for many as we head into the next federal election.

Top of the agenda at the poll will be the state of the economy, and while some will trumpet the benefits of low interest rates as being a boon for growth, and therefore in theory taking pressure off welfare agencies and not-for-profits, this argument is a little simplistic. When national debt was being reduced in the 1990s, this did allow the central bank to ease monetary policy as a counter balance for tight fiscal (i.e. budget) policy. But in 2016, the RBA is cutting interest rates because exports are softer, revenues are weaker and we are experiencing deflation (falling consumer prices) – something central bankers around the world fear. The reason for this is that it can cause domestic demand to drop substantially. For example, if you know the fridge or the washing machine you want to buy is going to be cheaper in a month or two then you will delay that purchase. As a result the economy slows and with it come problems for workers, welfare recipients, and not-for-profits. So, while the cut was not ideal for many in the aforementioned groups, there was arguably a valid policy case for doing so to help the economy to extend an enviable period of consistent growth that began in late 1991.

And for the sake of the not-for-profit space, let’s hope the monetary easing to this point – and the challenges they brought from an income perspective – is sufficient to extend that run of economic expansion a while longer.

About Benjamin Pedley and UCA Funds Management

In May, ethical funds manager UCA Funds Management announced Benjamin Pedley as its new Director Investments, in an appointment that sees Pedley return to Australia following 17 years in senior financial management positions across Asia. With over 20 years’ experience in financial markets,  Pedley was previously Head of Investment Strategy, Asia, for HSBC Private Bank based in Hong Kong.

UCA Funds Management is a dedicated ethical fund manager, with a mission to support Australia’s values-based organisations and personal investors to maintain financial sustainability − ethically and responsibly.​

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