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Real net national disposable income(a) per capita
Progress and the headline indicator
National income reflects Australia's capacity to purchase goods and services. It influences material living standards and is also important for other aspects of progress.
Australia experienced significant real income growth during the past decade. Between 1992-93 and 2002-03, real net national disposable income per capita grew by around 2.8% a year - appreciably faster than during the preceding twenty-year period.1
The headline indicator exhibits some advantages over other measures of income (see box), but it does not account for everything of importance. National income does not take account of some non-market activities (such as unpaid household work) that contribute to material living standards. Some analysts would prefer an income measure that is adjusted to take account of changes in the value of natural assets, such as increases in value due to technological advances in mining, depletion of resources used in the production process, or environmental degradation from pollution. These influences are not built into the headline income measure, but commentaries on other progress indicators provide some more information.
Not all income is spent on the current consumption of goods and services. Part of income may be used to acquire goods and services for consumption today, or set aside as savings for future consumption. Income that is saved can be used for investment purposes in the form of, say, houses, machinery or financial assets. These assets can directly satisfy individual and societal needs, or can generate future income and support future consumption.
Real net national disposable income per capita(a): longer term view
A more detailed discussion of consumption and saving follows.
If a nation experiences income growth, there may be an increase in consumption or saving or both.
Among the different forms of consumption, final consumption expenditure (FCE) is the most directly relevant to an assessment of progress. FCE is the acquisition of goods and services used for the direct satisfaction of individual or collective wants. It is distinguished from 'intermediate consumption' (the using up of goods and services in the production of other goods and services) and 'consumption of fixed capital' (depreciation).
Consumption grew throughout the 1990s. Between 1992-93 and 2002-03, real FCE per capita rose by almost 2.3% a year.
Real final consumption expenditure(a) per capita
Real household final consumption(a) per capita
Both households and governments incur final consumption expenditure. There were some fluctuations in the relative contributions of the two sectors during the past decade, but in both 1992-93 and 2002-03, households accounted for about three-quarters of the total and government for about one-quarter. The government contribution started to decline slightly towards the end of the decade as a result of government policy to reduce the rate of growth of spending in the public sector.
Real per capita household consumption expenditure grew by 2.6% per year between 1992-93 and 2002-03. Household expenditure on communication showed particularly strong growth (an increase of over 9% per year in real per capita terms). This partly reflected increased availability and use of both mobile phones and the Internet. Australians have often been quick to take up new consumer technologies. For more detail, see the commentary Communication.
Household expenditure on recreation and culture also grew strongly (up by 4.7% per year on average).
The share of household expenditure on items that could be considered essential for daily existence (namely, food, clothing, housing and utilities) fell during the past decade (down from 37.9% in 1992-93 to 34.8% in 2002-03), reflecting the increase in real incomes.
Real government consumption expenditure per capita grew by 1.5% a year between 1992-93 and 2002-03. Education and health were among the largest expenditures throughout the decade.
Saving is one means of funding investment, which is the formation of fixed capital used in the production of goods and services (see the National Wealth chapter for a more detailed discussion of the concept of investment). Income that is saved rather than spent on current consumption can be used to accumulate assets (wealth) that will generate future income and support future consumption.
During the past decade, there was a 2.2 percentage point rise in the ratio of net national saving to GDP (from 0.9% to 3.1%). But the longer term trend has been downward; between 1962-63 and 2002-03 the ratio fell overall from around 9% to about 3%. Similar downward trends in national saving have been observed in some other developed countries, such as the United States of America and the United Kingdom.
There is an important distinction between gross and net national saving (see box). The ratio of depreciation to gross saving has risen during the past forty years - from an average of around 64% in the 1960s to around 83% in 2003. This means that proportionately less of Australia's gross saving has been devoted to increasing the national stock of fixed capital and more to replacing the existing stock. A fuller discussion on capital stock and investment can be found in the commentary National wealth.
Net national saving as a proportion of GDP
Sectors within a nation can have different saving behaviour, and net national saving can be dissected to show the trends in saving by the following sectors - households, general government and corporations.
Over the longer term (from the 1960s onward), the household sector has been the main contributor to national saving. However, since the early 1970s, the net saving of the household sector relative to GDP has fallen.
The general government sector went from being a net saver during the 1960s to a net dissaver between the 1970s and early 1990s. But during the 1990s, government dissaving was progressively reduced and between 1997-98 and 2002-03 the government sector was again a net saver.
The corporate sector (financial and non-financial corporations) has seen considerable fluctuations in saving since the 1960s. For much of the 1990s, however, the corporate sector has been a net saver.
Net national saving as a proportion of GDP, by sector
A strong influence on national income is the production of goods and services. Production can increase if the factors of production - capital and labour and so on - are built up or are used more efficiently.
During the past decade, different industries have exhibited substantially different rates of real output growth. Broadly, many service industries showed stronger growth than most goods-producing industries.
Industry gross value added (IGVA) is the total value of goods and services produced by an industry, after deducting the cost of goods and services used up in the process of production.
Among the industries showing strongest growth in real IGVA between 1992-93 and 2002-03 were Communication services (averaging close to 8% a year), Property and business services, Construction and Wholesale trade (all averaging over 5% a year).
Real industry gross value added(a), average annual growth rates - 1992-93 to 2002-03
Some differences within Australia
By state and territory
The headline indicator, real net disposable income per capita, is available only at the national level. To understand some of the trends underlying the national indicator, one can look at state contributions to GDP.
Real gross state domestic income (RGSDI) is the total value of goods and services produced in a state or territory, after deducting the cost of goods and services used up in the process of production and taking into account changes in state terms of trade. The comparable Australian estimate is real gross domestic income.
RGSDI per capita grew in every state and territory between 1992-93 to 2002-03. Growth was strongest in Northern Territory, Western Australia and Victoria (respectively averaging 3.4%, 3.3% and 3.1% per year) and weakest in Tasmania (averaging 2.0% per year). There were wide and persistent disparities in per capita RGSDI levels among the states and territories between 1992-93 and 2002-03. In 2002-03, per capita RGSDI levels ranged roughly between $26,000 and $46,000 (reference year 2002-03), with Tasmania the lowest and the ACT the highest.2
But state disposable incomes (if we could measure them) might not be so diverse, because there are significant transfer payments and other financial flows between states that can moderate the differences. Examples include Commonwealth government taxes and expenditures, and incomes transferred between other states or territories and the rest of the world.
Real gross state domestic income per capita, average annual growth rates - 1992-93 to 2002-03
Household income distribution
While aggregate national income growth is a key element of progress, the distribution of household income (household income is only a part of national income) is also considered by many to be important in determining progress in this dimension.
The table presents information about changes in average disposable income and its distribution among low, middle and high income households. Different households require different amounts of income to maintain the same standard of living: larger households normally need more income than smaller households, and adults need more than children, for example. And so income data have been equivalised to put different households on an equal footing (this is explained in more detail in the Financial hardship commentary).
Between 1994-95 and 2000-01 the average real income of all households increased by 12%. But income grew at different rates for different groups with the average income of high income households growing more quickly than that of low income households. The real income of low income households (i.e. the 20% of people with household incomes between the bottom 10% and the bottom 30% of incomes) increased by 8%, while the real income of middle income and high income groups increased by 11% and 14% respectively. One should remember that these figures are not necessarily tracking changes in the same households over time. For example, some of the households that had a relatively low income in 1994-95 might, through changed circumstances, have income in the middle, say, of the income distribution by 2000-01 (and vice versa).
Various measures of income distribution are included in the table that follows. Percentile ratios are one measure of the spread of incomes across the population. The P90/P10 ratio, for example, is the ratio of income at the 90th percentile (P90) to that at the 10th (P10). Another measure of income distribution is provided by the income shares going to groups of people at different points in the income distribution. The Gini coefficient is a single statistic that lies between 0 and 1 and is a summary indicator of the degree of inequality (values closer to 0 representing a lesser degree of inequality, and values closer to 1 representing greater inequality).
Changes in income distribution measures tend to be relatively small from year to year but trends can emerge over longer time periods. While nearly all the indicators in the table rose over the period 1994-95 to 2000-01, only the increase in the P90/P10 ratio and the decline in the share of total income going to people with low income are sufficiently large to be regarded as statistically significant at the 95% confidence level (that is such differences are, 95 times out of 100, likely to be genuine rather than the result of chance). Meanwhile the change in the Gini coefficient is statistically significant at the 90% level. And so the indicators suggest a possible rise in income inequality over the second half of the 1990s.
Selected measures of equivalised disposable household income(a)
Factors influencing change
The most fundamental influence on income growth is growth in the volume of goods and services produced (real Gross Domestic Product, (GDP)). Between 1992-93 and 2002-03, Australia's real GDP grew by around 46% (averaging growth of 3.8% a year); in the same decade, population grew by around 12% (averaging just under 1.2% a year).
GDP is, in turn, influenced by changes in labour, capital and other inputs to production, and by productivity change. Between 1992-93 and 2002-03, capital services used in market sector production grew by more than 52% (averaging growth of around 4.3% a year). In the same decade, the labour input to market sector production rose by almost 13% (averaging around 1.2% a year).
During the past decade, improvements in productivity (the amount of output per unit of input) have made a strong contribution to GDP growth. Between 1992-93 and 2002-03, market sector multifactor productivity rose by 14% (averaging 1.3% a year).
Domestic production is not the only influence on national income growth. Between 1992-93 and 2002-03, income receivable from overseas rose by more than 86%, while income payable overseas rose just over 100%.
Household consumption expenditure behaviour has changed appreciably throughout the decade - in part reflecting new technologies and the growth in expenditure on some services.
Trends in government consumption have in part reflected policy emphases and some changes in the mix of public and private provision of services.
Both cyclical and behavioural influences can affect national and sectoral savings. For example, the economic cycle has a significant influence on government saving (as outlays tend to rise and receipts tend to fall during an economic downturn). In Australia, the government sector experienced a period of dissaving following the recession in 1991. The rise in government saving in recent years in part reflected sustained economic growth and fiscal consolidation.
Real gross domestic product(a) per capita
The possible changes to the corporate sector's distribution of profits in the form of dividends during the 1990s may also have influenced saving activity over the last decade.
Changes in rates of inflation can also affect saving rates. A certain amount of saving is required to 'protect' the real value of assets which would otherwise fall due to inflation. In periods of lower inflation - such as the 1990s - less saving might need to be set aside for this purpose.
Domestic economic events are not the only influence on national income. In particular, changes in the relative prices of Australia's exports and imports (the terms of trade) affect real national income.
In recent years, Australia's terms of trade have shown fairly wide oscillations. Overall, between 1992-93 and 2002-03, there was significant improvement, reflecting changes in both the prices and the composition of traded goods and services.
Australia’s terms of trade(a)
Imports give the residents of a country access to goods and services that cannot be produced (or cannot be produced as cheaply) in the domestic economy. Exports are one important way of funding purchases of imports and of maintaining levels of domestic production, income and employment. Thus, changes in the terms of trade can affect the volume of goods and services that must be exported to fund a given volume of imports.
The goods and services that make up a country's exports are typically quite different from those that make up its imports - for example, agricultural and mining products account for a fairly large proportion of Australia's exports, whereas manufactured goods and some services account for a large proportion of our imports.
During much of the twentieth century, there has been a general trend toward falling prices of primary commodities (especially agricultural products) relative to other traded goods and services. This reflects both shifts in the composition of worldwide demand and supply, and the effect of improvements in productivity. Around that long-term trend, however, there have been oscillations (each lasting several years) that have reflected short-to-medium run changes in demand and supply conditions. In more recent times, there have been sustained falls in the prices of many manufactured goods, particularly computers and similar goods.
During the period 1992-93 to 2002-03, Australia's terms of trade fluctuated widely, but showed an improvement over the decade (up by 12.6%, reflecting a 12.6% rise in export prices but on average, no change in import prices). The terms of trade started to improve from 1993-94 after experiencing a period of deterioration a few years earlier. However, it again deteriorated in 1998-99 (by 5%), owing largely to fluctuations in import prices. Rising export prices thereafter continued to improve the terms of trade to a level significantly above a decade earlier.1
Population in work(a)
Links to other dimensions of progress
Australia's national income provides the material basis for many other dimensions of progress. For example, improvements in health and education may rely on expenditures funded out of income - such as the salaries of nurses and teachers, or the construction of hospitals and schools. Conversely, a healthier, more educated population can better engage in the economic activity that generates income.
Income can be spent on protecting or restoring the environment. But income-generating economic activity may also go hand in hand with environmental depletion or degradation. Some of the growth in income may be channelled to the accumulation of national wealth that will generate future income. Or it may be spent to improve the welfare of economically disadvantaged Australians.
The income dimension of progress is strongly linked to work. Changes in income may reflect demographic and labour market trends. Income growth may result partly from a trade-off for longer working hours and reduced leisure.
See also the commentaries National wealth, Productivity, Education and training, Health, Financial hardship, Work, The natural landscape, The human environment, and International environmental concerns.