Save vs. Spend

How Australians’ Budgets are Adding Up

Debt, both public and private, can be used productively to build a credit reputation or can be used to bolster growth strategies. It can even become net productive by resulting in income or profit that can offset the cost of borrowing in the first place. For example, an investment in new equipment or new technology can increase commercial-industrial activity and bring with it return.
Since peaking in 2011, decreasing export prices and weakened commodity prices have wiped out approximately $40 billion from Australia’s annual national income. This is paired with reduced government revenues, increased public expenditures, a decade of flat productivity (with multifactor productivity falling in 2013), high production costs and soft overall jobs growth. Australia’s public finances are the focus of the government, who hope to manage this increasing debt moving forward.

There are two ways to measure public debt; gross debt and net debt (gross debt less financial assets). Although Australia’s public debt levels are at the highest since the 1940s, the IMF shows that Australia is second only to Chile for having the lowest level of gross debt among Organisation for Economic Co-operation and Development (OECD) countries.

In terms of net debt, Australia is behind Chile, Denmark, New Zealand, Norway and Sweden for lowest levels among OECD countries. Australia’s public finances have weakened since 2008 as the nation has become a net borrower. Public debt is expected to reach $324 billion by 2016-17, totalling over 18 per cent of the country’s gross domestic product (GDP), but by no means are Australia’s public finances of dire concern.

Australia is ranked fourth in OECD countries in terms of average household income, fifth in per capita GDP and boasts the seventh highest employment rate. In 2013, Australia’s total gross assets were worth more than its outstanding liabilities as net worth amounted to 55 per cent of GDP. Australia’s public and private debt to GDP ratio is 217 per cent (levels of 260-275 per cent will have a depressive impact on the economy).

When public debt accumulates, it can have an inflationary impact on the economy. When private debt accumulates to unsustainable levels it can have a significant impact on a nation’s GDP. Mortgage bubbles and credit crises can have a worldwide impact, requiring governments to make necessary policy and legislative changes in order to insulate national and global economies from financial collapse.

Are Australians saving or spending?
Private debt grew exponentially in Australia between 1964 and 2008 and remains high by international comparison. Private debt levels have contributed to the commercial and residential housing bubbles in the mid-1970s, the Sydney housing bubble in the early-1980s and the global financial system breakdown. Nonfinancial business debt and investor debt also saw rapid increases leading up to the global financial crisis.

A significant proportion of private debt in Australia is comprised of mortgage debt and the mortgage debt to GDP ratio has increased markedly from 15.9 per cent in 1988, to 86.9 per cent in 2014. Most debt is taken on by households to fund housing, as opposed to borrowing for productive purposes. Australia’s central bank reduced borrowing rates and maintained them at low levels in order to stimulate growth.

The choice of the government to hold the interest rate at 2.5 per cent has been a relief to many Australians. Owing close to $2 trillion to banks and other lenders, Australians have one of the highest debt burdens in the world. When rates increase, it impacts affordability and thus the entire housing market. In 2013, average Australian household debt was 1.8 times household disposable income.

Australians have reined in the pace of their borrowing, as between 2001-2007 household debt per person was increasing at an annual rate of 10 per cent, a rate that has since been reduced to 2 per cent. Reassuringly, 72 per cent of Australian household debt is owed by households in the top 40 per cent of income earners who have a greater capacity to service their debt loads and maintain spending levels.

Personal debt peaked in 2007 at 13.7 per cent, with more conservative spending habits lowering that number to 9.0 per cent in 2014. The total consolidated non-financial business, non-banking financial business and household debt ratio peaked at 273.4 per cent of GDP in 2008. After the global financial crisis, non-financial business and non-banking financial sectors deleveraged whereas household debt continued to increase.

Mortgage debt levels reached a new peak in 2014, indicitative of the housing booms that have been going on in Sydney and Melbourne. The Reserve Bank of Australia in its bi-annual Financial Stability Review shows that, on average, Australians are two years ahead on mortgage repayments. This came about as some banks did not automatically change rates, and thus payment amounts, when rates had fallen, with most Australians not interested in reducing their repayments.

According to a 2014 report by St.George Melbourne Institute, Australians have been optimizing low interest rates while starting to cut debt levels and increasing their savings. As well, the number of people who are drawing on savings to service their debt is at its lowest point in nine months. Bank deposits are Australians’ favourite methods of saving, with 61 per cent of people saving money for holidays and 57 per cent of people being prepared for a rainy day.

According to research conducted by ING, on average, Australians are spending what they make. About 20.5 per cent of their monthly wages goes towards housing, equal to $990 a month, taken as an average of metropolitan, rural and regional areas. Similarly, 15.5 per cent (an average of $633) of their salaries are going to monthly household bills, such as telephone, utilities, power, internet or insurance.

Other monthly expenditures include grocery costs that total 12.1 per cent (or $531) income per a month. Australians spend 6.9 per cent of their salaries on transportation costs ($299), 4.3 per cent on entertainment ($203), 4.2 per cent on health related expenses ($174) and 3.2 per cent on clothing ($141). It is also clear that Australians prioritize vacation time as they are saving $2952 for holidays annually.

ING’s research found that only 18 per cent of Australians are spending more than they earned each month, with 6.4 per cent of salaries dedicated to monthly savings for a total of $329 a month. Of those who spend more than they earn on essentials, ING also found that they carried more credit card debt on average. The results showed that though Australians are spending what they are earning, they are spending the bare minimum on necessary goods and services.

In addition to costs associated with necessary goods and services, Australians are allocating an average of 9.9 per cent of their monthly salaries to service debts such as credit cards for a monthly total of $428. Most credit card payments only cover the interest and do little to pay down the principle of these consumer debts. More money goes towards servicing debts each month than goes to savings.

As these numbers are taken as averages, disparities can be seen when analysing the figures on a state-by-state basis. Household imbalances can present a serious risk to financial stability, even more than falling commodity and export prices, or even when compared to public debt levels. Borrowing for productive purposes can result in a positive outcome, but debts must be managed, and interest levels must be maintained in order to prevent future bubbles and potential economic catastrophe.

Interest rates remain low with no immediate threat of increase. If rates were to increase, there could be a detrimental impact on Australians’ abilities to service existing debt loads. Consumer spending, and thus economic growth, would be severely dampened. From an economic standpoint, Australians have made saving a priority insofar as they can, and individuals have reined in personal borrowing and spending levels, which bodes well for a strengthening the Australian economy.

Australians should remember to shop around for the best rates, and if carrying a number of credit cards or debts simultaneously, it could be beneficial to look for ways to reduce monthly payments while still having an impact on the principle. Australia has negligible levels of public debt and quite high levels of private debt, and as a result of modest deleveraging, the government must ensure that new sources of growth are found to sustain these levels moving forward.

Making Sense of Management

Management is the art, or science, of getting things done through people. Sounds fairly straightforward – except for the fact that people are not robots waiting to do our bidding. People have their own minds, motivations, and goals. So how do managers keep operations – and the people behind them – running as planned?

December 13, 2018, 4:12 PM AEDT