Doing it tough an illusion for many
Steve Burrell
November 6, 2007
THE expectation that the Reserve Bank will increase interest rates tomorrow morning will be cited as another telling example of how clever Kevin Rudd has been in adopting his "kitchen table economics" strategy.
By shifting the focus from "big picture" figures such as three-decade lows in unemployment, strong economic growth and record personal wealth to household budget issues such as the cost of fruit, higher home loan repayments and soaring petrol prices Rudd has reframed the economic debate in his favour.
To the extent that many people seem to think they are doing it tough - a perception sure to be reinforced when their mortgage goes up - that's a reasonable interpretation.
But a closer look at the reality of kitchen table economics suggests that rising incomes, lower taxes, more jobs and a greater affordability of many basic goods mean a lot of voters are actually well ahead of the game financially. They may not think so but, at least for some, it may actually be true that they never had it so good.
Take an interesting recent analysis of average retail prices by CommSec's chief economist, Craig James. After taking into account rising incomes - which, believe it or not, have generally outpaced prices - and tax cuts over the past five budgets, more than two-thirds of a basket of 50 regularly purchased supermarket goods have become more affordable over the past six years. In that period, overall after-tax wages have risen 35.6 per cent, outpacing an 18.3 per cent increase in overall prices. But there have been very different price movements within that aggregate measure.
James finds, for example, that milk has become 18.5 per cent more affordable since September 2001. Bread is 6.9 per cent, T-bone steak 2.7 per cent and chicken more than 30 per cent more affordable. Tinned salmon is more than 45 per cent easier to buy in terms of take-home pay purchasing power.
Bananas, on the other hand, are almost 40 per cent less affordable than six years ago, although a kilo of oranges "costs" 15.7 per cent less. Petrol, as everyone would have noticed, is dearer, but was only 8.7 per cent less affordable over this particular period of comparison.
"The household budgets of Aussie consumers have improved in large part because wages have outpaced prices while taxes have also consistently fallen over time, boosting take-home salaries," James says.
The problem for John Howard and Peter Costello is that many voters don't seem to have noticed. "Consumers tend to believe that they are getting further behind with their budgets rather than getting ahead. The reason is that most focus is on goods that go up in price, rather than fall, as well as a tendency to abstract from wage and tax changes," James notes.
Many argue this greater purchasing power has been swamped by higher home loan repayments, thanks to nine successive interest rate rises over this same period.
According to the latest census, the average Australian monthly mortgage repayment was about $1300, implying an average mortgage of around $175,000. (Other ABS figures suggest the median outstanding home loan in 2005-06 was only $134,000.)
The nine rate rises since May 2002 have added $253 a month, or $3035 a year, to that average home loan repayment, and this week's rise would add another $29, or $353 a year.
This compares to $2800 a year in tax cuts for someone on the (now) average wage of around $56,000 over that same period - leaving them $235 a year, or less than $20 a month, worse off compared to a time when rates were at their lowest in a generation. And that's ignoring the effect of rising incomes and increases in "middle class welfare" such as family benefits.
Since the last election, the repayment has gone up $143 a month, or $1719 a year, while tax on that $56,000 salary has been cut by $1877.
Of course, these averages hide myriad different circumstances. Some people will have higher mortgages and be paying a lot more - the figures for Sydney and Melbourne, in particular, would be considerably higher. But equally, many people will have a smaller mortgage or have gained more from tax cuts.
Look at the numbers another way. As the UBS economist Scott Haslem points out, August's rate rise will cost the household sector $2.3 billion extra this year - well short of the $7.5 billion in tax cuts and cash handouts in the budget. Even if the Reserve lifts rates tomorrow and again in February, the interest burden will be $4.7 billion for the 2007-08 year.
Haslem estimates the full-year effect of three rate rises in 2007-08 would rise to $9.1 billion for 2008-09. But from July next year, tax cuts will add a further $9.7 billion to household disposable incomes - a total of $17 billion for the two years and enough to offset three further rate rises, he says.
And what about the issue of the day, home affordability and "mortgage stress"?
While this is supposedly a widespread crisis, Reserve Bank figures show just 0.22 per cent of mortgagors are 90 days or more behind in repayments.
And while the latest ABS figures show mortgage costs as a proportion of gross household income have risen slightly on average in recent years, the extent and impact varies dramatically between parts of Australia and between age and income groups. In fact, even in the "mortgage stress capital" of Sydney, census figures show home loan affordability for those already with mortgages actually improved in many suburbs between 2001 and 2006 thanks to rising incomes.
The point of all this is not to suggest that everyone is now in financial nirvana - some people are genuinely doing it tough. But this is far from universal and many are considerably better off than five years ago. Remember that next time either side unveils yet another pork-barrel of middle class welfare in the name of easing the pressure on the "average" family.
This story was found at: http://www.smh.com.au/articles/2007/11/05/1194117959157.html
Steve Burrell
November 6, 2007
THE expectation that the Reserve Bank will increase interest rates tomorrow morning will be cited as another telling example of how clever Kevin Rudd has been in adopting his "kitchen table economics" strategy.
By shifting the focus from "big picture" figures such as three-decade lows in unemployment, strong economic growth and record personal wealth to household budget issues such as the cost of fruit, higher home loan repayments and soaring petrol prices Rudd has reframed the economic debate in his favour.
To the extent that many people seem to think they are doing it tough - a perception sure to be reinforced when their mortgage goes up - that's a reasonable interpretation.
But a closer look at the reality of kitchen table economics suggests that rising incomes, lower taxes, more jobs and a greater affordability of many basic goods mean a lot of voters are actually well ahead of the game financially. They may not think so but, at least for some, it may actually be true that they never had it so good.
Take an interesting recent analysis of average retail prices by CommSec's chief economist, Craig James. After taking into account rising incomes - which, believe it or not, have generally outpaced prices - and tax cuts over the past five budgets, more than two-thirds of a basket of 50 regularly purchased supermarket goods have become more affordable over the past six years. In that period, overall after-tax wages have risen 35.6 per cent, outpacing an 18.3 per cent increase in overall prices. But there have been very different price movements within that aggregate measure.
James finds, for example, that milk has become 18.5 per cent more affordable since September 2001. Bread is 6.9 per cent, T-bone steak 2.7 per cent and chicken more than 30 per cent more affordable. Tinned salmon is more than 45 per cent easier to buy in terms of take-home pay purchasing power.
Bananas, on the other hand, are almost 40 per cent less affordable than six years ago, although a kilo of oranges "costs" 15.7 per cent less. Petrol, as everyone would have noticed, is dearer, but was only 8.7 per cent less affordable over this particular period of comparison.
"The household budgets of Aussie consumers have improved in large part because wages have outpaced prices while taxes have also consistently fallen over time, boosting take-home salaries," James says.
The problem for John Howard and Peter Costello is that many voters don't seem to have noticed. "Consumers tend to believe that they are getting further behind with their budgets rather than getting ahead. The reason is that most focus is on goods that go up in price, rather than fall, as well as a tendency to abstract from wage and tax changes," James notes.
Many argue this greater purchasing power has been swamped by higher home loan repayments, thanks to nine successive interest rate rises over this same period.
According to the latest census, the average Australian monthly mortgage repayment was about $1300, implying an average mortgage of around $175,000. (Other ABS figures suggest the median outstanding home loan in 2005-06 was only $134,000.)
The nine rate rises since May 2002 have added $253 a month, or $3035 a year, to that average home loan repayment, and this week's rise would add another $29, or $353 a year.
This compares to $2800 a year in tax cuts for someone on the (now) average wage of around $56,000 over that same period - leaving them $235 a year, or less than $20 a month, worse off compared to a time when rates were at their lowest in a generation. And that's ignoring the effect of rising incomes and increases in "middle class welfare" such as family benefits.
Since the last election, the repayment has gone up $143 a month, or $1719 a year, while tax on that $56,000 salary has been cut by $1877.
Of course, these averages hide myriad different circumstances. Some people will have higher mortgages and be paying a lot more - the figures for Sydney and Melbourne, in particular, would be considerably higher. But equally, many people will have a smaller mortgage or have gained more from tax cuts.
Look at the numbers another way. As the UBS economist Scott Haslem points out, August's rate rise will cost the household sector $2.3 billion extra this year - well short of the $7.5 billion in tax cuts and cash handouts in the budget. Even if the Reserve lifts rates tomorrow and again in February, the interest burden will be $4.7 billion for the 2007-08 year.
Haslem estimates the full-year effect of three rate rises in 2007-08 would rise to $9.1 billion for 2008-09. But from July next year, tax cuts will add a further $9.7 billion to household disposable incomes - a total of $17 billion for the two years and enough to offset three further rate rises, he says.
And what about the issue of the day, home affordability and "mortgage stress"?
While this is supposedly a widespread crisis, Reserve Bank figures show just 0.22 per cent of mortgagors are 90 days or more behind in repayments.
And while the latest ABS figures show mortgage costs as a proportion of gross household income have risen slightly on average in recent years, the extent and impact varies dramatically between parts of Australia and between age and income groups. In fact, even in the "mortgage stress capital" of Sydney, census figures show home loan affordability for those already with mortgages actually improved in many suburbs between 2001 and 2006 thanks to rising incomes.
The point of all this is not to suggest that everyone is now in financial nirvana - some people are genuinely doing it tough. But this is far from universal and many are considerably better off than five years ago. Remember that next time either side unveils yet another pork-barrel of middle class welfare in the name of easing the pressure on the "average" family.
This story was found at: http://www.smh.com.au/articles/2007/11/05/1194117959157.html
