Where is all the money going?

The current electricity price debate is poorly indicative of the way households spend their cash. So if not on power bills, where is the money really going?

I suspect most people have little idea where they spend their money or how much they spend on each item they consume. The reason for this suspicion is the current debate over electricity prices and the related discussion on so-called cost of living pressures.

On any aggregate measure, there has been a decade-long easing in cost of living pressures for the average Australian household. This has been driven by a powerful mix of rising wages, rising pensions and lower taxes which have swamped the impact of generally small price rises and what is currently a very low rate of inflation. Complaints from the general community about "doing it tough” are hard to fathom.

To electricity first. The average household allocates a little over 2 per cent of spending to the consumption of electricity. If gas and "other household fuel” (wood, heating oil and the like) are added to electricity, the total spend is around 2.5 per cent.

According to the national accounts, household expenditure on electricity, gas and other fuel was a touch over $19 billion in the year to the March quarter 2012 (according to the latest available data). Total household final consumption expenditure over the same period was $786 billion, meaning that total household energy consumption accounted for 2.4 per cent of all household consumption spending. Using the weights for the June quarter CPI as a cross check and spending on electricity was 2.2 per cent of household expenditure. In other words, the numbers line up.

By way of comparison, 4.8 per cent of household spending is on petrol (including diesel and gas), double that of electricity. Since the June quarter 2008, petrol prices have fallen 2.5 per cent, but you don’t hear too much of that is the atmospherics and high drama of these "tough” times. A quite remarkable (to my mind) 3.6 per cent of household spending is on alcoholic beverages, cigarettes and tobacco. That’s about 50 per cent more than is spent on electricity. It is even more extreme for hotels, restaurants and cafes, which account for 7.1 per cent of household expenditure – nearly three times the amount spent on electricity.

There are around 8.6 million households in Australia, meaning the average annual expenditure on electricity is currently about $2,000. Five years ago, the average expenditure was around $1,200 a year.
The average annual household electricity bill has risen by $800 over that time, which translates to around $15.40 a week. At face value this seems a lot. Note that the average household spends $117 a week on hotels, restaurants and cafes.

But let’s have a look at the other side of the household financial accounts – income.

Over those same five years, average weekly earnings have risen by $180 a week (recall there are an average of 1.4 people in paid employment in each household) and for a single age pensioner, the weekly pension has risen by around $80 a week. And almost by definition, a single pension would have a much smaller electricity bill than the average household, especially when generous rebates and the like are taken into account.

In the most simple terms, while there has been a large increase in electricity bills in the last five years, the prices of other goods and services have increased by a small amount (2.5 per cent per annum on average). This means quite simply that overall cost of living pressures have been easing. Wages growth has outpaced inflation by an average of 1.7 per cent per annum over the past five years which has provided a significant boost to living standards.

All of the above figures and facts are based on averages. Some households have no one who smokes, or spend more than 2.5 per cent of their income on electricity. Some people are unemployed, and some get big pay rises and spend lots of money eating out. This means that there are always people and households that are below average on any of these measures and inevitably some are doing it tough now. But based on the aggregate data, that number is relatively small and there are many more people who are much better off now than five years ago.

Footnote: The source for these data is the Australian Bureau of Statistics and the consumption patterns are, not surprisingly, similar whether the data are taken from the national accounts, the weights in the consumer price index or the household expenditure survey.


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