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FEATURE ARTICLE: COMPLEMENTING GDP ANALYSIS WITH A HOUSEHOLD PERSPECTIVE
Over the last 20 years the Australian economy has experienced GDP growth averaging 3.2% each year. This is a period in which the Australian economy was characterised by two distinctively different economic environments. Figure 1 covers the period from 1989-90 to 2001-02 and shows the recovery of the Australian economy after the recession in the early 1990s followed by a slowdown towards the end of the period. During this period, GDP averaged 3.3% growth per year compared to 3.3% average growth in real gross disposable income. Figure 1 shows that the growth rates of GDP and real gross disposable income track closely over this period. This is because the terms of trade impact was relatively insignificant during this period.
In contrast, Figure 2 shows the period from 2001-02 to 2012-13. This period is largely defined by a prolonged mining boom(footnote 3) , which was one of the factors driving an appreciation of the dollar. Australia enjoyed a significant increase in its Terms of trade during this period.
From 2001-02 to 2012-13 GDP in volume terms grew by 3.1% per year while RGDI grew more rapidly at 4.0% per year. Figure 2 shows the large gap in growth between RGDI and GDP in the last decade indicating that the purchasing power of domestic income has grown significantly faster than the production of goods and services. This is due to the income gains arising predominantly from the Terms of trade.
The above analysis shows that information published regularly as part of the quarterly National Accounts can add significantly to our understanding of the health of the economy. RGDI, however, does not explain how much of the growth in Australia's real income has flowed to households. The following sections look at real income growth from a household perspective.
HOUSEHOLD INCOME ACCOUNT
The ABS publishes an annual household income account in the Australian System of National Accounts (cat. no. 5204.0). One of the aggregates in the household income account is gross disposable income. Gross disposable income measures the difference between total income receivable and total income payable by the household sector and reflects the economic resources available to households for consumption or saving.
The ABS publishes gross disposable income in current price terms. To allow for a meaningful comparison with chain volume measures, gross disposable income needs to be adjusted to remove the effects of price inflation.
The best price index to do this is the Household Final Consumption Expenditure (HFCE) Implicit price deflator (IPD). The HFCE IPD measures the price change of household consumption. It is a weighted set of consumer prices based on consumer spending patterns and is used below to deflate the components of the household income account. The HFCE IPD is broadly similar to CPI, with the main difference being more regular reweighting and scope. For more information on HFCE, see "Measuring Price change in the Australian Economy" March Quarter 2004 Australian National Accounts: National income, Expenditure and Product (cat. no. 5206.0).
Real household income
Real household income grew 4.0% each year during the period from 2001-02 to 2012-13, compared to a 2.9% growth each year between 1989-90 and 2001-02. The most marked difference in growth between the two timeframes is a stronger Terms of trade effect during the second period. A positive Terms of trade effect increases the income earned by Australia. For Australian households, domestic consumers are most likely to have benefited from cheaper imports and indirectly through higher demand for labour as well as higher earnings received on financial assets such as superannuation and equities.
Analysis of real household income components
The household income account presents the sources of household income against the uses of household income. As described above, gross disposable income is the difference between total incomes received and total income paid.
Table 2 shows a decomposition of the household income account including the main contributors to gross disposable income. Each component below has been deflated with the HFCE IPD and expressed in terms of average annual growth rates for each period. The analysis below focuses on the period from 2001-02 to 2012-13.
Sources of Income
Total gross income grew by 4.1% per year during the period 2001-02 to 2012-13. This was driven by growth across most components; with the largest being gross operating surplus on dwellings, compensation of employees and property income.
Gross operating surplus- dwellings owned by persons
Gross operating surplus measures the return to households from owning dwellings. The increase is mostly due to rental income increases (actual and imputed) over the last decade, supported by the growth in dwelling rents which increased by 5.3% per year, a higher average annual increase than during the previous decade(footnote 4) .
Compensation of employees
One of the main sources of income receivable by households is Compensation of employees, which accounts for more than half the value of total income receivable by households. Compensation of employees is comprised of wages and salaries (in cash and in kind) as well as social contributions received from employers, such as superannuation and workers' compensation contributions. Compensation of employees grew 2.9% per year over the period 1989-90 to 2001-02 increasing to 3.8% per year over the period 2001-02 to 2012-13.
Total property income receivable
Total property income receivable includes interest and dividend income received as a result of ownership of financial assets. Growth in property income received by households increased significantly during the last decade across all components, with the biggest driver being in growth in superannuation fund earnings. Legislative changes in superannuation policy and increases in investment income of superannuation funds have largely generated this growth.
Uses of Income
Overall, household use of income grew by 4.4% per year over the period from 2001-02 to 2012-13. This stronger growth in use of income means that growth in gross disposable income was weaker than growth in sources of income: gross disposable income grew by 4.1% per year. Part of the reason for this is interest payable on dwellings grew much more quickly than total income received, but was offset by consumer debt interest, which grew slower.
Interest payable on dwellings
Interest payable on dwellings grew 8.8% per year between 2001-02 and 2012-13. This represents a significant increase compared to the previous period despite a significant fall in interest rates that commenced around 2007 and remains at low levels.
The rise in interest payable on dwellings indicates that despite historically low interest rates, households have taken on more financing per year for dwelling purchases, which has increased the amount of interest payable.
Consumer debt interest grew 2.7% per year between 2001-02 and 2012-13 compared to 0.2% per year between 1989-90 and 2001-02. This is a relatively stronger growth than the previous decade but when compared to the growth in income received, growth in consumer debt interest is still relatively slower.
Income tax payable
Income tax payable represents taxes on the income of households and accounts for more than half of total income payable by households. This item grew 3.4% per year between 2001-02 and 2012-13. This is less than growth in total income received on which the taxation is levied, suggesting that households have benefited from taxation changes over this period.
The average household over the last decade has benefited from growth in Australia's production, measured by GDP, however this is only part of the story. RGDI supplements the GDP analysis by adjusting for the Terms of trade. The use of the household income account delves even further to show that growth in real household income has been driven by growth in Compensation of employees, higher returns on financial and dwelling assets, relatively cheaper imported consumer goods, as well as more complex distributional effects such as income tax changes.
This analysis supports the recommendations from Stiglitz et al and shows the benefits of examining GDP in conjunction with other economic indicators to better reflect the health of an economy. The analysis also highlights the challenges of using a single indicator to measure economic performance and social progress in a complex economy. The indicators in this article are only a part of the range of indicators produced in the national accounts framework used to understand the Australian economy and the material well-being of its households.
1 Stiglitz, J. Sen, A and Fitoussi, J. (2010) Report by the Commission on the Measurement of Economic Performance and Social Progress, The Commission of the Measurement of Economic Performance and Social Progress (CMEPSP). <back
2 Australian Bureau of Statistics (ABS) 2004, Feature article – The terms of trade and the National Accounts (cat. no. 5206.0), ABS, Canberra (accessed at www.abs.gov.au) <back
3 Connolly, E. Orsmond, D. 2011 The Mining Industry: From bust to boom, Research Discussion paper, Reserve Bank of Australia, Sydney, December. <back
4 Consumer Price Index (cat. no. 6401.0) Percentage change from corresponding quarter of previous year, Rents; Australia. <back
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