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What cost of living crisis? Australian households have more money to spare than ever

By Myriam Robin
Monday, 02 September 2013

Average Australian households have seen their incomes rise by at least $5000 more than their expenses every year since 1988, according to a report released on Saturday.

Combined, this means disposable incomes for the average household have increased a whopping 65% since 1988. More than 15% of this growth has come since the global financial crisis.

This picture of a nation in rude financial health comes from a report by the National Centre for Social and Economic Modelling at the University of Canberra.

The inaugural report found that though incomes hadn’t risen as fast since 2008 as they had in the earlier part of that decade, cost of living pressures had slowed, meaning households saw their incomes rise while their expenses stayed about the same.

While expenses like utilities, health and education rose strongly over the period, lower interest rates meant mortgage pressure decreased markedly, as did many other aspects of household expenditure.

This is a surprising outcome, given cost of living has been much discussed in this election campaign. Policies like the carbon tax, which contributed to former Prime Minister Julia Gillard losing the support of her party room, were feared to have a detrimental effect on what were perceived to be already high cost-of-living pressures.

In fact, the amount of disposal income left over to households after subtracting the cost of living increases grew at 2.6% a year since 2007, which is the exact amount it had grown under the Howard government. Between 2007 and 2010, household expenses grew by 3.3% a year while incomes rose close to 6% a year, while from 2010 to June 2013, cost of living rose 1.6% a year while incomes rose 4.2%.

Increases in the cost of living have been “benign”, according to the report, but they have disproportionately hit renters and those on low incomes. Those on high incomes have generally seen their costs of living stay the same.

The report’s author, Ben Phillips, said cost of living has been an election issue for decades, and the influence of the narrative often has little to do with reality.

“Politicians have been talking about it for a long time. I suppose it really hits the buttons of voters.

“But the problem is that the discussion usually complete ignores the prices of things outside electricity, petrol and food, and completely ignores things like rising incomes.

“We all notice when prices go up. It annoys people. Income growth, however, isn’t as visible.”

It’s the first time the National Centre for Social and Economic Modelling has released what is to be a quarterly report. Phillips says that it follows on from similar research the centre did in May 2012.

“We had an unprecedented level of interest in that data,” he says. “I had government departments and journalists calling me almost on a daily basis asking about it. Many wanted updated figures, so it became pretty clear there was a need for this sort of thing to be done regularly.”

The Household Budget Report combines Australian Bureau of Statistics data on household expenditure for different types of households with separate ABS data on income growth across different categories. It uses these two data sets to see how different types of households have seen their income grow relative to their expenditure.

The ABS currently has a similar, but far more limited measure intended to help governments assess income support measures. The National Centre for Social and Economic Modelling’s report differs in that it applies the same methodology to all types of households, and not just those on government assistance.

Read more: http://www.propertyobserver.com.au/economy/what-cost-of-living-crisis-australian-households-have-more-money-to-spare-than-ever/2013090264722

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Cost of Living?

There’s a perception among many Australians that they are doing it tough, that they are being squeezed by cost of living pressures and that their financial position is fragile.

A recent poll from Essential Vision found that of those who thought the economy was “poor”, 27 percent of respondents judged that “increasing cost of living” was the main reason for that assessment. In similar surveys, a significant proportion of the respondents highlight cost of living issues as reasons for their voting intention or degree of (dis)satisfaction with the government.

Cost of living also features prominently in the rhetoric of politicians of all colours as they tap into the insecurities of voters ahead of the September 14 election. It is a high profile issue.

While no doubt there are some people who are genuinely confronting financial difficulties, for the country as a whole there is scant macroeconomic evidence to even vaguely justify this assessment.

For there to be legitimate cost of living pressures, general prices need to be rising more than incomes. This would be the case in the following stylised example where someone starting on an income of $100 a day spends $100 a day on a range of goods and services.

If over the next two years, for example, their incomes rise by 5 percent to $105 but the basket of goods and services they buy rises 10 percent to $110, there are genuine cost of living pressures. In this example, the person will have to cut consumption to move back to break even on their finances, or dip into their savings or borrow money if they want to maintain their consumption levels.

It is that simple.

The data on income growth and price increases over the past decade show something vastly different to the example above. The facts completely sink the notion that the general population is being dogged by increasing cost of living pressures. Whether a five or 10 year time frame is used, wages growth has exceeded the rate of consumer price inflation by a wide margin.

In the last five years, average earnings have increased by 23.6 percent, a figure that has been boosted, in part, by the mining industry boom and solid wages gains for mine workers and in related sectors. Over the past five years, the consumer price index, which measures the price change for the basket of goods and services purchased by the average household, has risen by 14.5 percent. In other words, the purchasing power of someone on average weekly earnings has increased by close to 10 percent over that time.

In this example, a person on an income of $100 five years ago is now earning $123.60, while the cost of their basket of goods and services has risen to $114.50. They are clearly better off, having $9.10 more to buy extra or better things, with the cost of living easing quite markedly.

Over the past 10 years, the gains are more marked. Average earnings have risen by 54.2 percent while the consumer price index has risen by 31.4 percent, which means that the purchasing power for someone on average earnings has risen by over 20 percent in that time.

Over the past decade, household finances have also been boosted, quite massively, with some of the largest income tax cuts ever seen. These income tax cuts were delivered by both the Howard and Rudd governments and have injected tens of billions of dollars per annum into the pockets of householders.

Reinforcing the case that shows that the cost of living has been falling has been a rise in household savings rates at the same time growth in household consumption expenditure has been growing solidly. Furthermore, the growth in household credit has slowed to a 35 year low, so borrowers are improving their balance sheets with lower debt and lower leverage.

These indicators do not fit with tough financial times for consumers.

The perception of the cost of living pressures appears to be more of a problem of the cost of consumption, which is a bias of consumers to spend money on what could be termed luxury items, indulgencies and non-necessities. If people become used to having an overseas holiday every year, or upgrading to a $50,000 car every few years, or decide that private schooling for their children is preferable to public education and then find they are having cash flow issues, they might feel times are tough and have cost of living pressures.

This is also the case if you voluntarily go to a bank and borrow an excessive amount to buy a house that is big, well appointed and geographically desirable. Any cost of living pressures from servicing a large mortgage is self-inflected pressure when a smaller, less fancy and geographically inferior house would lower your debt burden.

All of which suggests that the cost of living issue is a big furphy. There is no widespread financial pressure on consumers from weak wages growth or high inflation or a poorly performing economy. This, unfortunately, won’t stop the issue dominating the discussion in the upcoming election campaign.

Read more: http://www.melbournereview.com.au/commentary/article/cost-of-living