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FURTHER official interest rate rises could choke off consumer spending and grind the economy to a halt, economists warn.

Herston Economics chief economist Clifford Bennett says if the Reserve Bank raises the cash rate to five per cent by year’s end, the economy would “grind to a standstill”.

The current cash rate is 4.25 per cent, after the RBA lifted the rate by a quarter of a percentage point on Tuesday in an effort to further rein in expansionary pressures.

It was the fifth monthly interest rate rise by the central bank since October last year.

“If the cash rate gets to 5 per cent … the domestic economy will grind to a standstill,” Mr Bennett said.

“We’re seeing in the Sydney press examples of them having to choose between buying groceries and paying their electricity bill and the added burden from the RBA is completely unwarranted, unnecessary and unwanted.”

RBA governor Glenn Stevens said it was appropriate to raise the cash rate towards its long-run average given that “the risk of serious economic contraction

Most economists say the average long-run cash rate is around 5 per cent.

Nomura Australia economist Stephen Roberts said rising interest rates meant consumers were paying a greater proportion of their income in servicing debt.

Data compiled by the central bank showed that when the cash rate was 3.75 per cent at the and of the December quarter of 2009, the average household was paying more than 10 per cent of its income, minus taxes and some other regular payments, on interest payments.

When the cash rate topped 18 per cent in December 1989, the average household was spending just under nine per cent of its income on interest payments.

The figures also show that in December quarter of 1989, household debt was slightly less than half household yearly income.

Twenty years later it was equal to one and a half times an average household’s yearly income.

“That data is from fourth quarter (2009) and you have to remember we’ve had two more interest rate rises already,” Mr Roberts said.

He said a lower interest rate of 3.75 per cent to 4 per cent would be more appropriate given the current difference between the cash rate and the interest rates of major lenders.

Official economic data now points to a slowing economy, with building approvals, employment and retail sales data for March all coming in under market expectations.

Mr Bennett said the data suggested Australia’s economic performance post the global financial crisis was weaker than first thought.

“When you look at the domestic economy, there are patchy elements,” he said.

“There are storm clouds on the horizon.”

Source  :  www.news.com.au

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Retailers are boosting staff numbers in anticipation of an improvement in consumer spending, according to the Australian Retailers Association.                 retail

The industry group’s executive director, Richard Evans, said surveys of association members showed a 12 per cent jump in employment for small and medium-sized retailers this month, painting a much more positive picture than figures released by the Australian Bureau of Statistics earlier this month.

The number of people employed in the retail sector fell by less than 0.1 per cent last month compared with February, on a seasonally adjusted basis, but the ABS also reported an increase in underutilisation—the proportion of the workforce that is either unemployed or not working as many hours as it would like.

The rate of underutilisation among female workers was 9.1per cent last month, compared with 6.4 per cent for men, which the ABS attributed to the larger proportion of women working in industries with high levels of casual employment, such as retail.

However, Mr Evans said most retailers were holding on to skilled staff in preparation for rising demand, with 68 per cent reporting no change in employment levels in the past quarter.

“A further 16 per cent of retailers actually increased their number of staff during the same period,” he said.

“Retailing works in cycles, and although the sector has experienced a downturn, good retailers are doing their best to hold on to skilled staff as consumer confidence continues to grow and a new type of consumer emerges.”

The same trend was in play among the bigger retailers, with David Jones boosting staffing levels around the Mother’s Day shopping period after the delivery of the federal government’s fiscal stimulus package in April led to a sharp rebound in sales.

Mr Evans said the stimulus package and lower interest rates meant most consumers had more cash available to spend, but “negative and fear-filled commentary” had fuelled a tendency among consumers to cut discretionary spending in favour of saving or paying off debt.

This meant shoppers would be in a better position to spend when confidence picks up again—with the ARA forecasting an improvement as soon as the September quarter.

Source  :  www.careerone.com.au

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The strategy :  To work out how the changes to the health insurance rebate affect me.

I suppose it means I’ll be paying more for my health insurance. That’s the gist of it though it will depend on whether Opposition leader Malcolm Turnbull delivers on his threat to block the legislation. As you may have picked up from the federal budget, the Government needs to find savings to fund higher pension payments.

One proposed measure is means testing the health insurance rebate, which currently allows you to claim a tax rebate of 30 per cent of the cost of your health insurance if you’re aged under 65, 35per cent if you’re 65 to 69 and 40 per cent if you’re 70 or older.

Most people ask their health fund to reduce their premiums to take account of the rebate rather than paying the full premium and claiming the rebate in their tax return. For someone under 65, a monthly insurance premium of $250 could be reduced to $175. That won’t change if you earn up to $75,000 if you’re single and $150,000 for families. But if your income is higher, your rebate will be reduced or cut out altogether.

How will that work? Let’s look at singles first. If you earn $75,001-$90,000, your rebate will be reduced to 20 per cent. If you earn $90,001-$120,000, the new rebate will be 10 per cent.

Once your income exceeds $120,000 you will be ineligible for the rebate.

For families, the combined income limits are $150,001-$180,000 for the 20per cent rebate, $180,001-$240,000 for the 10 per cent rebate and the rebate will disappear altogether once family income exceeds $240,000.

All income thresholds will be indexed to wages and will be adjusted for families with one child in the same way that thresholds are already adjusted for determining whether you have to pay the Medicare levy surcharge if you don’t have private health cover. The threshold is currently lifted by $1500 for each dependent child.

The Government says the definition of your income for the rebate will be the same as for the Medicare levy surcharge. Challenger’s head of technical services, Alex Denham, says this definition is changing from July 1 to include your taxable income, reportable fringe benefits, salary sacrificed to super or any personal deductible super contributions made and net investment losses. So higher-income earners won’t be able to use strategies such as salary sacrifice to get or increase their rebate.

Would I be better off dropping my health insurance and paying the Medicare levy surcharge? The proposed measures also include a rise in this surcharge precisely to stop this sort of behaviour.

The 1 per cent surcharge will rise to 1.25per cent once income exceeds $90,000 for singles or $180,000 for couples and to 1.5 per cent for incomes exceeding $120,000 or $240,000. That extra tax may cancel out any savings from dropping your health cover.

MLC’s head of technical services, Andrew Lawless, says a better option may be to make changes to your policy, such as increasing the excess you pay before claiming on the cover or reducing cover on ancillary benefits. However, to avoid the surcharge you must have hospital cover with an excess of $500 or less for singles or $1000 or less for families or couples per calendar year.

When will the changes come in? Not until July 1 next year, so you have time to check the final details if the measures are passed and weigh up your options.

It’s worth noting that the Medicare levy surcharge income limits will be indexed from their current levels of $70,000 for singles and $140,000 for couples to the new $75,000 and $150,000 levels at this time.

Source : www.watoday.com.au

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