Many Australians find it difficult to save. As a nation, we are among the worst savers in the developed world. Nearly forty per cent of working Australians do not have enough savings to last them more than one month if they lost their job.
Banks and other authorised deposit-taking institutions (ADIs) convert household savings into loans for other households wishing to finance the purchase of a home. Demand for home finance, however, exceeds the supply of deposits as Australians borrow more than they save.
To fund this imbalance, our banks and other lenders borrow money offshore to lend for domestic purposes. This creates a reliance on global capital markets and a resultant exposure to credit market price changes as occurred during the GFC.
Our household saving - the difference between household disposable income and household consumption - has declined over the last three decades. In fiscal 2003 it became negative and remains so. Due to easy access to consumer credit (eg, credit cards, home equity loans) households have seen less reason to save for emergencies.
Also, Australia is currently in her 19th year of uninterrupted economic expansion and households tend to save less in the good times and put more away when the outlook is less promising. Which is why the saving ratio is viewed as a barometer of the overall state of the economy.
But higher saving ratios are not of unlimited benefit as they come at the cost of lower consumption ratios. Too much saving translates directly into too little consumer demand. This is what occurred during the GFC when many households stopped spending, creating a paradox of thrift.
To an economist, saving is the decision to defer consumption and to store this deferred consumption in some form of asset. Savings are one of the most heavily taxed forms of assets under the current tax system and this discourages savings. Maybe the yet-to-be-released Henry Review will address this?
One of the concerns behind the introduction of compulsory superannuation in 1986 was the decline of the household saving rate in Australia. Superannuation has forced us to save for retirement but has not changed the “voluntary” saving ratio.
The end result is that we are generating insufficient savings to fund the investment needed to build our great nation. We have become dependent on foreign savings making us a debtor nation. A large part of our current account deficit comprises the interest on the money we borrow from abroad.
Australian households need to move from conspicuous consumption to inconspicuous saving. You can do your bit by tucking away some money each pay day for a rainy day. Next week I’ll give you some tips on helping your kids develop good savings habits.
Regards
Paul J. Thomas
Podcast is available here 