Apart from showing near-zero GDP growth for the quarter, the latest national accounts released today by the Australian Bureau of Statistics include the startling (to me, anyway) information that Australia now has negative household savings. I’ve reproduced the relevant bit of the release below.
Household saving ratio
In both trend and seasonally adjusted terms the household saving ratio was negative in the June quarter 2003 implying that household consumption was greater than household disposable income. In trend terms the ratio was -1.2% in the June quarter and in seasonally adjusted terms it was -1.3%. The deterioration in the saving ratio in recent quarters has been driven by both a slow down in the rate of growth of disposable income and the continued strength of household consumption expenditure. The movement in disposable income has been affected by the very weak income results for the farm sector arising from the drought. The impact occurs because the household sector defined in the national accounts includes unincorporated businesses and therefore includes most farm businesses. Consequently, most farm income (included as a significant component of ‘gross mixed income’ ) is also part of total household income. Although seasonally adjusted household saving has been negative in the past three quarters, net national saving has been positive over the same period. The net national saving ratio in the June quarter was 2.5% in seasonally adjusted terms.
Caution should be exercised in interpreting the household saving ratio in recent years, because major components of household income and expenditure may still be subject to significant revisions. The impact of these revisions on the saving ratio can cause changes in the apparent direction of the trend. The following graph presents the household saving ratio derived from trend and seasonally adjusted data (see Explanatory Notes).
As the graph shows, although the latest figures may be distorted by the drought etc., the long-term trend has been clearly negative, and the decline goes back further than this (the Fitzgerald report on declining national savings was commissioned at the beginning of this period.
When I responded to the Fitzgerald report, I argued that it was misleading because it failed to take account of investment in human capital. But we’ve done miserably on this score in the last decade or so, with school completion rates declining in the early 90s (they’ve since recovered a bit) and domestic higher education commencements frozen since 1996. In both cases, there was a direct link to expenditure cuts imposed in the name of economic efficiency.
I haven’t yet managed to work through to an aggregate national savings figure. But with the Federal government budget roughly balanced in accrual terms, the contribution from government savings can’t be large, and I’d be surprised if retained earnings of corporations accruing to Australian owners amounted to more than 3 or 4 per cent of GDP. So this suggests that Australian national savings are approximately zero, or in other words, that all net investment in Australia must now be financed by foreign debt or equity investment.
One reason for this negative saving is the fact that, thanks to the property bubble, people can spend more than they earn and still, apparently, get richer. But there’s a fallacy of composition here. We can’t all sell our houses to cash in this wealth – if we did, prices would fall and the wealth would disappear.
Of course, if we could persuade some overseas buyers to purchase a million or so houses at current prices, our problems with foreign debt would be over. But although it’s not precisely true that the only potential buyers of Australian houses are Australian residents, it’s a good enough approximation for economic analysis. A few thousand wealthy HongKongers may want a Sydney bolthole, and there are probably a few thousand more footloose global professionals in the market, but not enough, I think, to make a real difference.
Update My wife Nancy, who’s paying more attention than I am, tells me there’s nothing new in the negative household savings story, which is confirmed by a look at the graph (savings have been negative for three or four quarters now) and a quick Google. As so often, I’m a bit behind the times, but I’m still surprised there hasn’t been more comment on this.
John Quiggin 
So are we gunna go belly up like Argentina?
This is a lot of writing about a residial in the national accounts which is highly likely to be revised either to make it worse ( My bet) or less worse.
Everybody with a job contributes to super, and lots of people are paying off their houses. That’s a lot of household saving in itself. Can it really be true that people are going into debt or running down their other assets to buy consumption items, so much so that it offsets their super and house saving?
I’d be surprised if the corporate sector savings are as low as you say. Corporates haven’t been going into much debt, so they must be financing a lot of their investment with retained earnings.
So the household savings ratio turns negative at the same time as our balance of payments stays negative and Oz interest rates are high internationally. Q. Are foreigners financing the housing boom and if they are, will they continue to do so in the medium term? It may be that such a modest increase in demand can produce large price increases in cities with limited supply(eg Sydney)
In Adelaide the Govt. placed a limit to urban sprawl development around the city about 12months ago, which has driven panic demand. The catch-cry now is ‘urban infill’ with developers buying up houses on traditional quarter acre blocks and subdividing. Even the SA Housing Trust is doing the same with its public housing slum areas (most notably The Parks area to the north of Adelaide) You could walk from roof to roof in these renewed subdivisions.
As well I have anecdotal evidence from a brother-in-law in real estate, that Sydney and Melbourne investors are spending up big. These are mainly ex-pat South Australians who are investors being pushed out of Syd/Melb markets by cost, or are securing a cheap retirement property. (Look out for a big retreat out of Syd/Melb by these baby-boomers who were attracted by employment to the bigger apples from the 70’s) A similar tale with a friend wanting to make a business move back to Bega (a provincial NSW country town) There, similar big city retirees have doubled prices in the last 12-18 months. As well Asian university students appear to be bringing wealthy parent’s investment dollars in their wake. Q With the floating of the dollar and free capital flows, how would we know how much real estate is owned or being bought by foreigners?
While I think there is a certain inevitable overshooting in any boom, I’m not dismissing the notion of a sustained ‘ratchet effect’ in Oz RE prices for some of the reasons outlined. Where are the alternative stores of wealth? New York, Baghdad or Djakarta?
I assume the release you quoted is talking about net saving. (Otherwise this sentence – included in your quote – would not make sense: ‘Although seasonally adjusted household saving has been negative in the past three quarters, net national saving has been positive over the same period.’ Your own comment that foreigners by and large pay for net investment is consistent with this.)
The ABS calculates household capital consumption consistently around 6%. When you subtract this from gross saving you get a decline over the decade not from 10% to 5% of GDP, but 4% to -1%, which looks a lot worse.
This doesn’t of course invalidate any of your conclusions.
Milton, my estimate is derived very roughly, as follows. Corporate profits = 10 per cent of GDP. 40 per cent accrues to foreigners leaving 6 per cent, half of which is distributed as dividends, leaving 3 per cent + a 1 per cent margin of error. If anyone wants to do the work and get the right number, it will save me time.
James, you’re entirely right that I’m focusing on net variables, which are the economically relevant ones when considering long term issues as opposed to short term measures of economic activity.
Household savings should be considered with superannuation stats. While our own personal savings may have depleted, our superannuation fund investments have not, and superfund increments far exceed the erosion of savings. Perhaps the issue is again one of personal discretion: do we save and look after ourselves, or do we let big brother government and financial institutions look after our hard earned?
The ABS stats take account of superannuation savings