Tightening the purse strings may be a saving grace
It is not as sexy as spending, but the trend of saving is on the rise and there is no sign of it abating any time soon, writes Ross Gittins.
It is not as sexy as spending, but the trend of saving is on the rise and there is no sign of it abating any time soon, writes Ross Gittins. WHO would believe it? Australia is turning into a nation of savers. We've already lifted our rate of saving we save more than people in other developed countries and we're likely to increase our saving rate further.This is the surprising message in this year's Budget Statement 4 otherwise known as Treasury's sermon. The facts and figures that follow come from there.Expressed as a proportion of gross domestic product, gross national saving fell significantly from the mid-1970s until the early 1990s. Between 1992-93 and 2004-05, it was fairly steady at about 21 per cent. It began to rise in 2005-06 well before the global financial crisis and since the crisis it's shot up to reach almost 25 per cent in 2011.This is well above the average for the developed economies of less than 19 per cent. Now, their saving rates are down because they're still trying to put the Great Recession behind them, and it's arguable that some part of our increased saving since the crisis is also a passing reaction to the uncertainty it continues to cause. But we were well above them before the crisis.The nation's rate of saving is the sum of the saving done by the three sectors of our economy: the households, the companies and the governments. Households save when they spend less than all their income on consumption. Companies save when they retain part of their after-tax profits rather than paying all of them out in dividends. Governments save when their revenue exceeds their recurrent spending.Most of the reason for the increase in national saving and for expecting it to increase further rests with households. The household saving rate declined steadily from the mid-1970s to the mid-noughties, but then it increased significantly and is now 11.5 per cent of GDP, up from a low of just under 6 per cent in 2002-03.One reason for this turnaround is the maturing of the compulsory superannuation system. Award-based super was introduced in 1985, but the scheme really got going in 1992, when they began phasing up employer contributions to 9 per cent of ordinary-time wages by 2002.The value of Australia's super savings is now as much as $1.3 trillion, equivalent to 95 per cent of annual GDP (compared with the average for the developed countries of 68 per cent). Treasury estimates the scheme now makes a gross contribution to national saving of 1.5 percentage points.Treasury says the more recent increase in household saving is likely to reflect a combination of increased consumer caution following the crisis and a return to more sustainable rates of consumption growth.It says the fall in household saving up to the mid-noughties primarily reflected a prolonged, but essentially one-off, structural adjustment to financial deregulation from the early '80s and the transition to a low-inflation (and hence low nominal interest-rate) environment from the early '90s. Easier access to credit and lower rates led to greater borrowing, rising house prices, high levels of confidence and thanks to big capital gains people reducing their saving rate and allowing their consumption spending to grow faster than their incomes.This adjustment process is likely to have been a significant driver of change in household saving. From the second half of the noughties, however, households began to slow their accumulation of debt, and as a result the household saving rate began to rise.With this process now likely to have been completed, households as a whole can be expected to consolidate their financial position over coming years by returning to more normal levels of saving and borrowing.That's a quick explanation of why we've gone back to being good savers. But why expect our saving rate to go on rising? Partly because our (largely foreign-owned) mining companies are retaining a high proportion of their huge after-tax profits (which they're using to help finance their investment in additional production capacity).Partly because the federal politicians (and their state counterparts) are struggling to get their budgets back into operating surplus, meaning governments are shifting from dissaving to saving.But mainly because the compulsory super scheme will soon begin phasing up the contribution rate from 9 per cent of wages, reaching 12 per cent in 2019-20. Treasury estimates this will make a further gross contribution to the national saving rate of 1.5 percentage points of GDP over the next 25 years, with most of that expected to occur over the next decade.Just as every punter knows in their gut that deficit and debt are always a bad thing (it ain't true), so everyone knows saving is always a good thing. But what's so good about it?The main reason people save is to smooth their consumption over time. For instance, you consume less while you're working so you can have a higher standard of living when you're retired. You can even use saving to pass some of your income on to the next generation. And saving makes you more resilient by providing a buffer against unexpected adverse events.At a national level, borrowing less and saving more makes us more resilient to possible external shocks. And it helps moderate inflation pressure and so allows interest rates to be lower.
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