As gap between rich and poor widens, how well-off are we?


The government is crowing about the cut in interest rates, claiming that it shows that its economic policies are paying off. It spruiks the cuts as taking care of the needs of its pet target group, “working families” who are complaining about financial stress. The opposition is making its own noises about cost-of-living pressures in the hope of scaring potential voters to rust on to its parties.

Most of the widespread media responses are stories of how pressured families will welcome the presumed mortgage payment cuts. They report on cases who claim the cut will make a difference between living on the edge and maybe being able save. This reporting reinforces the idea of financial disasters being very close for most of the population.

This reporting is part of a widespread belief that we are doing it tough. Families feel they are facing increasing bills but reducing income. Some politicians tell them more cuts to their living standards are coming with more financial pressures from new taxes. The government claims most are overcompensated, which makes one wonder why tax them? It all adds to the sense that financial crises are here and about to get worse.

Therefore, when NATSEM, a respected research group, produces figures showing that our financial income has increased faster than the rising costs, there is a level of incredulity. It claims:

“Figure 2 displays a time series of income and expenditure for all Australian households where all measures are deflated (CPI growth removed) and averaged across households. The figure clearly shows that incomes and expenditure have out-paced inflation. In fact, after-tax (disposable) income grew over the last 25 years by 45 per cent, which may give rise to the conclusion that living standards in Australia have improved tremendously.”

Why doesn’t that seem right? How can its figures show that all its categories of income recipients are actually better off? Why does the carefully researched study tell us that we are actually doing quite well, when everybody feels financially stressed and worse off?

The clue in this contradiction is in the differences between the bald quantum of income and the feelings we have about it. The trouble with economists has always been that they don’t do feelings. Most assume we are rational and self-interested, as well as being capable of the necessary calculations that allow us to do the sums. On that basis, we ought to know we have more money and know that our standard of living is improving if we spend more on discretionary items. As we tend not to behave like that, there are now economists who recognise the irrationality of many responses e.g. we feel losing money is more painful than not getting the same amount in the first place.

Therefore, people’s reactions to their financial situation will be affected by how they feel about a range of issues and may create misperceptions of our relative situation. Research also shows we compare ourselves with how we see others, rather than count what we have. So. if everyone’s income has similarly increased, we may feel things are much the same as they were before, and as the NATSEM study showed that the rise in incomes has been similar at most levels, we won’t feel richer.

It needs to be noted that, as its figures are based on category averages, the status of the relatively few very rich and the really poor, will not show up. There is a perception that the really rich people are getting much richer, and it is obvious that those dependent on dole payments are grossly underpaid. It is possible that the obscenely rich, who get media coverage, may incite feelings of financial envy in the masses. Inequalities can create widespread feelings of anxiety and envy, which are then used by unscrupulous politicians to promote their party pitches. Some people undoubtedly are having problems. The report states:

“We can see in Table 2 that the lower income groups experienced larger cost of living increases than higher income households over both the short and longer term.”

Interestingly, its data also show increased expenditure on what is it labelled discretionary spending. Some of these items are not what people might consider discretionary, such as childcare. Others such as increased meals out suggest that these items may show that people are buying services to exchange time for money. This suggests that time pressure is another possible source of tensions that blur the value of money. Many people feel time poor, so it is possible that they are transposing this feeling to anxieties about money.This view is partially supported by the explanation given in the foreword by Craig Meller, managing director of AMP Financial Services, which funds this study:

“Debate around the cost of living is unlikely to abate any time soon but it’s reassuring to know that a lot of what we are spending our money on are things that allow us to spend more time with our friends and families. If spending money on a holiday means quality time with our family, eating out means sharing a meal with friends and the latest smartphone means improved communication with those that matter to us then we are almost certainly living richer lives.”

Interestingly, and somewhat counter intuitively, the ATO tax statistics also just released for 2009-10 , show average incomes in high income areas have slipped as the GFC has hit. Peter Martin writes:

“New Tax Office data shows a sharp slowdown in income growth in Australia’s wealthiest suburbs, offset by rapidly climbing incomes in Australia’s poorest postcodes.

“In NSW the postcodes encompassing Point Piper, Edgecliff, Dover Heights, Northbridge and Mosman continue to report the highest taxable incomes. But the average incomes are little changed between 2006-07 and 2009-10, the two years that bookend the financial crisis. The average in Edgecliff and surrounding suburbs fell six per cent to $182,200 …

“In contrast the five poorest postcodes all did well. Encompassing small communities near Armidale, Cowra, Inverell and Condobolin, they enjoyed growth in average incomes of between 10 and 19 per cent.”

So maybe even that excuse for feeling bad is no longer as valid.