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HOUSEHOLD INCOME, EXPENDITURE AND WEALTH
The restriction to cash incomes is one of practical measurement and is assessed to provide a reasonable, broad picture of the level and distribution of income. However, readers are advised that the relative mix of cash and non-cash incomes across sub-populations will be different, and can change over time.
While income is usually received by individuals, it is normally shared between partners in a couple relationship and with dependent children. To a lesser degree, there may be sharing with other members of the household. Even when there is no transfer of income between members of a household, nor provision of free or cheap accommodation, members are still likely to benefit from the economies of scale that arise from the sharing of dwellings. The income measures shown in this section therefore relate to household income.
To calculate the equivalised disposable income of a household, each member of the household is allocated 'equivalence points'. Taking the first adult in the household as having a weight of 1 point, each additional person aged 15 years or older is allocated 0.5 of a point, and each child under the age of 15 years is allocated 0.3 of a point. Equivalised disposable household income is then derived by dividing disposable household income by a factor equal to the sum of the 'equivalence points' allocated to the household members. The equivalised disposable income of a single person household is the same as its unequivalised disposable income.
In 2005-06, average (mean) equivalised disposable household income for all persons living in private dwellings (i.e. the income that a single person household would require to maintain the same standard of living as the average person living in all private dwellings in Australia) was $644 per week. There were approximately 19.9 million people living in private dwellings.
After adjusting for changes in prices, average real equivalised disposable household income in 2005-06 ($644 per week) was 10% higher than in 2003-04 ($585 per week) and 34% higher than in 1994-95 ($481 per week).
While equivalised income generally provides a useful indicator of economic wellbeing, there are some circumstances which present particular difficulties. Some households in the lowest income decile report extremely low and even negative income in the survey, particularly if they incur losses in their unincorporated business or have negative returns from other investments. In general, these households can draw on economic resources other than income to maintain their standard of living. The lowest income decile is, therefore, excluded from the group used to assess 'low income' households in this chapter.
For low income people (represented by the 20% of people with household income between the bottom 10% and bottom 30% of incomes), average equivalised disposable household income grew by 8% ($24 per week) from 2003-04 to 2005-06. An 8% increase was also recorded for middle income people and a 13% increase for high income people (graph 9.1). Over the period from 1994-95 to 2005-06 there was a 31% increase in the average real incomes of low income people compared with 32% for middle income people and 36% for high income people.
Households with different characteristics tend to have different income levels, as shown in table 9.2. Wages and salaries were the principal source of income for households with middle and high income levels in 2005-06, while government pensions and allowances dominated for low income households. However, low income households had the highest incidence of full ownership of their home, reflecting the high proportion of older people in the low income category.
Middle income households contained more people on average than high income households (2.8 compared with 2.5) but contained considerably fewer employed persons (1.5 compared with 1.9). In part, this reflects the different age profiles of the two groups, with middle income households containing more people of non-working age. Low income households had an average of 0.6 employed persons and housed an average of 2.5 persons.
Income levels across the population partly reflect the different life-cycle stages that people have reached. A typical life cycle includes childhood, early adulthood, and the forming and maturing of families. Table 9.3 compares households in different life-cycle stages.
Of the groups included in table 9.3, younger couples without children had the highest average equivalised disposable household income of $888 per week, with an average of 1.9 employed persons in the household. For couples with dependent children only, and with the eldest child being under five years, average equivalised disposable household income was $683 per week (23% lower than for the young couples without children). This lower income principally reflects the lower average number of employed persons in these households (1.5) and the larger average number of persons in these households (3.4) over which incomes are shared.
Average incomes were higher for households with non-dependent children, reflecting higher proportions of employed persons in these households, but incomes were lower again for households comprising older couples and lone persons, where the numbers of employed persons were substantially lower.
People living in households where the reference person was aged 65 years and over had the lowest average incomes, with lone persons' incomes at $363 per week, somewhat lower than for couple only households ($458 per week). Older lone persons were more likely than older couples to have government pensions and allowances as their principal source of income (78% compared with 68%), while couples were more likely to fully own their home (86% compared to 74%).
Households comprising one parent with dependent children had an average income of $446 per week, similar to that of older couples ($458 per week), but only 13% fully owned their home and, therefore, a substantially greater proportion had to make mortgage or rental payments from their income. Of these households, 51% had government pensions and allowances as their principal source of income. On average there were 0.8 employed persons in the household.
States and territories
There were considerable differences in the average levels of income between the states and territories. Tasmania's average equivalised disposable household income was 15% below the national average and South Australia was 6% below. In table 9.4 the Australian Capital Territory and the Northern Territory are shown to have the highest average incomes (22% and 12% above the national average respectively). The high income levels reflect in part the younger age profile of the Australian Capital Territory and the Northern Territory and the greater number of employed persons per household. However, it also reflects the exclusion from the results of households in areas of the Northern Territory defined as very remote which, if included, would be likely to reduce the average income in that territory. New South Wales recorded an average equivalised disposable household income 2% above the national average.
There are also considerable differences between the equivalised disposable household incomes recorded in the capital cities of Australia compared with those earned elsewhere. At the national level, average incomes in the capital cities were 16% above those in the balance of state, with all states recording capital city average incomes above those in the balance of state. Separate information for balance of state is not available for the Australian Capital Territory and the Northern Territory. The largest differences recorded were for New South Wales and Tasmania where the capital city incomes were 25% and 17% respectively, above the average incomes across the rest of the state.
While the average equivalised disposable household income of all households in Australia in 2005-06 was $644 per week, the median (i.e. the midpoint when all people are ranked in ascending order of income) was lower at $563 per week. This difference reflects the typically asymmetric distribution of income where a relatively small number of people have relatively high household incomes, and a large number of people have relatively lower household incomes (graph 9.5).
Percentile ratios are one measure of the spread of incomes across the population. To illustrate the full spread of the income distribution, the percentile ratio needs to refer to points near the extremes of the income distribution, for example, the P90/P10 ratio. P90 (i.e. the income level dividing the bottom 90% of the population from the top 10%) and P10 (i.e. dividing the bottom 10% of the population from the rest) are shown in graph 9.5. In 2005-06, P90 was $1,073 per week and P10 was $274 per week, giving a P90/P10 ratio of 3.92. Various percentile ratios for selected years are shown in table 9.6, and the changes in these ratios can provide a picture of changing income distribution over time.
Another measure of income distribution is provided by the income shares going to groups of people at different points in the income distribution. Table 9.6 shows that, in 2005-06, 10.6% of total equivalised disposable household income went to people in the 'low income' group (i.e. the 20% of the population in the second and third income deciles), with 38.5% going to the 'high income' group (represented by the 20% of the population in the highest income quintile).
Some of the change in the income distribution measures between 2003-04 and 2005-06 reflects changes in personal income tax rates and thresholds. For example, if the 2003-04 taxation rates and thresholds had been applied to 2005-06 incomes, the Gini coefficient would have been 0.303 rather than 0.307. The higher numbers of employed persons per household, the very strong growth in total wages reported between 2003-04 and 2005-06 (up 17%), and the strong rise in reported investment incomes (up 38%), will also have impacted on the summary distributional measures.
While it is difficult to assess changes in income distribution over longer time periods due to methodological improvements introduced with the 2003-04 survey, it appears that there has been no significant change in income inequality from the mid-1990s to 2005-06. The change in income distribution since 1997-98 is affected by the inclusion of all salary sacrificed amounts in 2003-04 and 2005-06, and the exclusion of an unknown amount in 1997-98.
The latest household expenditure information available is from the 2003-04 Household Expenditure Survey, conducted by the ABS. This survey collected detailed information on the expenditure, income and characeristics of households in Australia.
The household is the usual unit of analysis for expenditure because it is assumed that sharing of the use of goods and services occurs at this level. If smaller units are adopted, for example, persons, then it is difficult to attribute the use of shared items such as accommodation and household goods, and of expenditure on items consumed by others, such as food.
In 2003-04, Australian households spent an average of $893 per week on goods and services (table 9.7). The level and pattern of expenditure differed between households, reflecting characteristics such as income, household composition, household size and location.
Predictably, the level of household expenditure differs between households with differing income levels. In 2003-04, low income households (represented by the 20% of people in the second and third income deciles) spent $564 per week on goods and services, compared with $1,316 spent by high income households (those in the highest income quintile). Low and high income households had average gross weekly incomes of $509 and $2,299 respectively.
The composition of a household's weekly expenditure is also affected by the level of household income. For example, food and non-alcoholic drinks accounted for 21% of the expenditure on goods and services of low income households, compared with 15% for high income households. In general, the proportion spent on household services, domestic fuel and power and tobacco products also declined as household income rose, while the proportion spent on recreation, clothing and footwear, and alcohol increased.
Since the Household Expenditure Survey does not collect information on all forms of income and expenditure, and there are significant timing differences between the different components of income and expenditure collected, caution should be exercised in comparing the income and expenditure data. Nevertheless, for the low income group, average weekly household income as measured in the survey is less than average weekly household expenditure.
This does not necessarily mean that these households are spending beyond their means. Some of these households will have had higher income in the past and so can finance their expenditure by drawing on past savings. This is especially so for retired people. Other households may take out loans in the expectation of higher incomes at a later time.
Wealth is a net concept measuring the extent to which the value of household assets exceeds the value of liabilities. The 2003-04 and 2005-06 Surveys of Income and Housing collected a comprehensive range of information on household assets and liabilities to enable the production of statistics on net worth (or wealth). In 2005-06, the mean value of household assets was $655,300 (table 9.8). The mean value of household liabilities was $92,500, resulting in average household net worth of $562,900.
Owner occupied dwellings were the main form of asset held by households. Around 70% of all households own their home outright or with a mortgage, with an average home value of $412,500. When averaged across all households, that is, across both owner occupiers and non-owner occupiers, the average was $286,100 and represented 44% of total average household assets. About 20% of households owned property other than their own home, including holiday homes and residential and non-residential property for rent. These accounted for 14% of total household assets. Balances in superannuation funds were the largest financial asset held by households, averaging $84,500 per household across all households and accounting for 13% of total household assets. Around 75% of households had some superannuation assets.
Loans outstanding on owner occupied dwellings were the largest household liability. They averaged $142,300 for owner occupier households with a mortgage, giving them a net value in their dwellings of $275,000. Across all households, the average value of loans outstanding on owner occupied dwellings was $49,900, or 54% of total household liabilities. Loans outstanding for other property averaged $29,200 and accounted for 32% of total household liabilities.
The distribution of wealth (net worth) across households is unequal, partly reflecting the common pattern of people gradually accumulating wealth throughout their working life. In 2005-06, the 20% of households with the lowest net worth accounted for only 1% of the net worth of all households, with an average net worth of $27,400 per household. The share of net worth increases with each higher net worth quintile, with 6% for the second quintile, 12% for the third quintile, 20% for the fourth quintile, while the wealthiest 20% of households in Australia accounted for 61% of total household net worth, with average net worth of $1.7 million (m) per household.
The picture of wealth (net worth) is a little different and more equally distributed when viewed from the perspective of the distribution of incomes. The households in which the 20% of people with the lowest household incomes live accounted for 15% of total household net worth, similar to the shares of net worth held by the households with people in the second and third household income quintiles. The households in which the 20% of people with the highest household incomes live accounted for 39% of total household net worth.