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4.1. The current account is anchored to the notion of a household 'consuming' over a defined reference period. Consumption is a necessary activity in the sense that a household has needs and wants, the satisfaction of which is a condition of its existence (e.g. household members have to eat to stay alive). The definition of the household reflects this - i.e. a household comprises persons 'who make common provision for food or other essentials for living' (see Chapter 7).
4.9. An understanding of the relationships between the diverse flows in the current account is crucial to the formulation of a measure of economic well-being.
4.11. In a strict accounting convention using an 'income and outlay account', income equates to current receipts; consumption, direct taxes and saving equate to current disbursements (see Table 3.1). Current receipts (Y) will always equal current disbursements (C + T + S) in the reference period.
4.12. Gross income can be replaced by an alternative measure of a household's regular resources available for consumption by deducting direct taxes from the receipts side of the accounts to produce a measure of disposable income. This disposable income (y) is then defined as:
4.13. These measures of gross and disposable income will be useful for different analytical purposes.
4.14. Disposable income may prove to be greater or less than consumption in any given reference period. If disposable income is greater than consumption, then saving is a positive flow that moves into the capital account. Where consumption is greater than disposable income, then the saving is negative or a dissaving. This means that, during the reference period, households have financed some of their consumption by drawing on the capital account. This drawing may have comprised a running down of past savings by taking cash out of the bank, or by selling financial assets or non-financial assets. Alternatively, the extra funds may have been gained by incurring a liability in the form of a loan. Both the drawing on assets and the incurring of liabilities are activities that take place in the capital account and are described in Chapter 5.
4.15. The following sections in this chapter discuss, in some detail, the main concepts of income, consumption, taxes and saving that make up the current receipts and disbursements model of the current account. More formal definitions and classifications of the components are set out in Chapters 8 - 11.
4.16. Income is an extremely difficult concept to define and agree upon. The term is sometimes used loosely to refer only to the main component of income for most households - i.e. wages and salaries or business income. Others use the term very widely to include all receipts including lump sum receipts and receipts that draw on the household's capital.
(While this definition differs from the Haig-Simon definition commonly used, it is not incompatible with that definition in the broad scheme of the ICW Framework. The irregular and/or non-recurring receipts that the ICW definition of income excludes are accounted for in the Capital Account and Other Changes In Stocks Account. They are later combined with income in the broader measure of economic well-being - see Chapter 6.)
4.22. Income covers both cash and in-kind receipts and these may or may not be acquired via the market place. It comprises primary income, property income, transfer income and other non-market income.
4.23. Other non-market income includes the value of unpaid household work and other household services including those provided by the use of the owner-occupied dwelling and household consumer durables.
4.24. Conceptually, income in the ICW is net of expenses incurred in deriving this income. However, for practical reasons, the deduction of these expenses may need to be limited to situations where the expenses are widely recognised by taxation laws and are of a considerable size. Such limiting operational criteria mean that, in practical terms, there will be some likelihood of being able to collect reliable data on income after expenses.
4.25. Therefore, operationally, it will often be easier to collect business and rental income net of expenses than it will be to collect, for example, wage and salary income net of employee costs such as transport, dry cleaning, etc.
4.26. Income is also net of depreciation of capital equipment used to generate income. Thus, income from unincorporated enterprises, for example, is net of both business expenses and depreciation. Similarly, estimation of the value of services provided to the household by household consumer durables should also take into account the depreciation of the capital items.
4.27. Income excludes intra-household transfers. This exclusion is applied because the household is the default statistical unit and the inclusion of these transfers would result in double-counting of income at the household level.
4.28. Consumption is the process of 'using up' goods and services. However, there are different types of goods and different types of using up.
4.33. Final consumption expenditure includes the value of indirect taxes paid on the purchase of consumption goods. For some analyses it may be desirable to separate out these taxes from the rest of the purchase value of goods. (Such indirect taxes are currently imputed in the ABS fiscal incidence study where indirect taxes on all purchased items (both non-durables and durables) are combined with direct taxes, direct and indirect government benefits to measure the redistributional effects of government taxes and benefits on household income.)
4.34. In-kind consumption encompasses services and non-durable goods acquired both via the market place (e.g. free or subsidised car provided by employer), and without recourse to the market place (e.g. services provided by own consumer durables, unpaid household work, etc.). It also covers services and goods provided in-kind in the form of gifts, etc. from other households.
4.35. Other current transfers relate to compulsory inter-household transfers such as child support, voluntary cash transfers and gifts purchased within the reference period that are given to other households for their consumption.
Direct taxes, compulsory fees and fines
4.36. Direct taxes, compulsory fees and fines are defined as all direct compulsory transfers to government and all compulsory fees and fines paid to government. By far the major component of this group of outlays is the direct taxes which constitute a regular and recurring payment out of the household that reduces the amount of income available for consumption and saving.
4.37. Net disposable income is defined as gross income minus the value of direct taxes and compulsory fees and fines. It represents that income available to the household for consumption and saving.
4.38. Saving is that part of current income (after direct taxes) that is not directly used up or transferred as part of household current consumption. Saving is therefore, in the current account, a derived item which depends on a knowledge of income, consumption and taxes for its derivation.
4.41. At present, two major uses of on-going saving for Australian households are the repayment of mortgage principal on their home and the contributions made to superannuation funds out of their regular income.