Sunday, 25 March 2012

Fancy another $13,000 a year in your pocket?

There is a lot of hysteria and outrage about cost of living pressures.  Electricity bills are rising by $400 a year.  The price of petrol is up 10 cents to $1.50 a litre, which means a tank will cost you $6.50 more.  The price of tobacco has also risen strongly which is "bad for struggling working families" especially with the average household spending more on tobacco than they do on electricity - not that you'd ever hear that reported.

Often forgotten in the discussion of cost of living are the falling prices for things like milk, clothes, shoes, household appliances, cars, TVs, computers and overseas holidays.

According to a Newspoll exit poll from the Queensland election, a staggering, unbelievable, 69% of people suggested cost of living pressures were an important factor swaying their vote.  I assume this means they voted for the LNP and not Labor!

This is extraordinary and shows how perceptions matter much more than reality.  And the Labor Party is as guilty as the Coalition in fuelling this mistruth with their oft repeated “families doing it tough” efforts to get on side with voters.

There are a couple of issues with this strategy – importantly, it is factually incorrect.  Second, it is tantamount to talking down the economy, adding to consumer disaffection and creating an impression that the Government is not delivering good outcomes to the people.  If the Government is telling me I am doing it tough, I must be - and it's their fault.

Let the Opposition talk down the economy, but for the Government to do it is one important reason for the current poll results.

So let’s look at some facts.

What is always forgotten or frankly ignored when looking in what is happening to the cost of living is the other side of household cash flows – wages.

In the 4 years through to the end of 2011, average earnings per worker rose $8,216 from $45,556 to $53,772 per annum.  This includes those working part-time.  For an average full-time worker, average earnings rose $12,029 over that 4 year period.

For the sake of discussion, I will use the overall average earnings figure – that is, an extra $8,216 over the last 4 years.  If we assume the tax take is at the marginal 30% rate (plus the 1.5% Medicare levy), it means an average worker takes home an extra $5,628 a year AFTER TAX than they were 4 years ago.

Now let’s work on the assumption that there are two workers on average incomes in a household – it could be one full-time and one-part-time – or just two average income earners; whatever.  This assumes average household income at the end of 2011 is around $107,544 per annum – a figure that is probably close to the mark if we use the less timely household income data which, by the way, also has a different coverage.

The important thing to note is that this household is taking home over $11,200 a year more – yes, in after tax dollars – than they were just 4 years ago. 

Let’s also work on an assumption that this average household has an average mortgage of $300,000.  At the end of 2007, there were paying 8.55% interest.  Now, they are paying an interest rate of around 7.4%.  This means an interest saving of $228 a month or $2,740 a year.

Let’s do some simple cash flow analysis.

The extra “available cash” of this average household has increased by around $13,000 a year.  This clearly is much more than is being eaten away from higher prices for electricity, tobacco or lamb. 

Just to cross check this – since the end of 2007, average earnings have risen by 18.0%:  the consumer price index, which of course includes all items that go up (like electricity) and down, has risen by 12.1%.  The purchasing power of someone on average wages has therefore risen by around 6%. 

So please no more crocodile tears.  Australian consumers are doing very well indeed.


  1. its all about the figures for an economist - do you actually buy anything or pay any bills?

    Cost $90 to fill the tank yesterday first time I have paid that much.

    costs are going up and people that live in the real world see it

  2. Dan: costs of some frequent-purchase items are going up, true. Have you also noted that fruit and veg are cheaper now than they have been in many years? Or that the price of petrol is still 20cpl BELOW its 2008 peak?

    Thought not.

    1. Like I said never has cost $90 to fill the car before - same car I had in 2008 petrol peak or no petrol peak.

      Fruit and veges cheaper questionable as all have there cheap over supply periods.

  3. The average mortgage would have to be the most lagging indicator ever used.

    How does the cash-flow analysis stack up if you compare someone taking out an 80% mortgage on an average house today, compared to someone who took out an 80% mortgage on an average house ten years ago? That's the real cost of living pressure - housing - and it's not pretty.

    1. Figures only up to 2009 but gives you some idea...

      Shows that the property price to income ratio increased by over 50% between 2002 and 2009.

  4. Dan,
    The price of petrol is something that no federal government can do anything about. It's the Liberal's glorious Free Market combined with the actions of Totalitarian States such as Iran & Saudi Arabia, playing politics with the market, that are causing the rises in the cost at the bowser at the moment. The Conservative Magic Pudding messiah, Tony Abbott, would be able to do 3/5ths of bugger all about petrol prices, and even less about Electricity price rises. And the sooner gullible fools like you realise that, the better for the country.
    By the way, of course it costs more now to fill your car than it did in 2008. That's a combination between inflation(which the ALP has kept lower than during the Howard years), and the increasing world price of crude oil over that period. Here's a suggestion, why don't you try downsizing your car to one which uses less petrol? If it takes $90 to fill the tank it must be a gas guzzler. Think smart, not the culture of complaint & intransigence.

  5. Yeah... all very well worked out on the back of a menu at a fancy restaurant mate but let me tell you some ACTUAL figures.

    I keep records of every cent we spend... part of the reason is because I am self employed (usually) and partly because I am a compulsive bugger.

    I will compare 2010 and 2011. And I will only use my wifes income as that remained stable over the 2 years. For the record my income in 2011 as a self employed subcontractor was about 30% of the 2010 amount.

    My wife earned $721 MORE in 2011 than in 2010
    Our electricity for 2011 was $265 MORE than in 2010 when calculated out over the same amount of kwh's used
    Water was $300 more in 2011 than in 2010.
    Car insurance was $210 MORE for $1000 amount of cover
    Contents insurance was $290 MORE for same amount of cover
    Money spent on diesel over same distances travelled was $200 MORE in 2011 than in 2010
    Groceries are a bit harder to calculate as our kids are growing and eating more. I do know however that we spent $480 more on groceries and household items in 2011 than in 2010.
    Kids soccer, drama and dance classes increased a total of $60 between 2010 and 2011
    Our doctor raised the price of a consultation from $55 to $60. We still get the same amount back from Medicare.
    The minimum payment for scheduled medicine went up in 2011. If you have kids you notice this. A trip to the chemist with a script went up from $19 to $25
    Childcare fees went up by $5 a day. Luckily this is rebated for us although we still have to fork it out in the first place.
    Foxtel raised their subscription price by $5 per month AND took away the 2 free movies for Platinum accounts. In effect a $17 a month price rise.
    The cost of our A service with Ford rose by $60.

    On top of this should you EVER be a day or 2 late with payments these days as sometimes people are you are slugged with outrageous late fees and penalty fees. Pay with a credit card and now you are charged 1 to 2%. Pay with Eftpos now in some places and you are also charged up to 2%. Thos pesky ATM fees that we were assured would go DOWN with the competition now cost up to $2.50 at some machines.

    Real World beats Academic World every time. You guys just dont have a clue.

    1. In the 'real' world our family has had the same pain inflicted on it, so this is what we did. First, we looked at how much water and electricity we were using and reduced it (cut back on showers and the dishwasher) - this helped our bills and we are doing our bit for the environment! Then we shopped around for insurance and let our current one know we could get a better deal, they reduced our insurance to match. Cancelled Foxtel and bought a TV top box, which provided great savings for a $130 outlay. Told the kids to start saving their pocket money for extra -curriculum activities outside of what we could afford. In effect we realised we had become lazy about how we were managing our budget and spending. Yes, the cost of living goes up, but it is all relative. We think it is better to try and do something about your own circumstances then just whinge.

    2. Firstly, I wasn't whinging. Second you have assumed that we haven't already made these changes. In fact except for the Foxtel one (we are on a contract) we have.
      My point (which you have missed completely) was that economists can come up with all the stats and macro-economic figures they like ... they bear little resemblance to the real world.
      I am glad you are not only fiscally efficient but also so conceited about the fact you feel you can solve the problems of the budgetary flagrant the world over.
      I have however been unemployed for 3 months and my wife, a teacher was only able to obtain a 3 day a week contract this year. We have pared everything back to the bare minimum. As soon as the Foxtel Contract is up that is going too.
      Like I said, my original comments had little or nothing to do with budgeting. They are just to point out that regardless of what the ABS may be saying, REAL cost of living pressures are on the increase.

    3. Your original comments had everything to do with budgeting. You said yourself that you record every cent you spend.

      Your cost of living pressures are on the increase because YOU have had a 70% decrease in your self-employed income. You wouldn't have noticed otherwise.

      And, I'd hazard a guess, you wouldn't have given a rat's arsk about anybody else if your nose was above water.

      Now that you're down and dirty and struggling to make ends meet, you want to blame the government.

      How about you blame yourself for living beyond your means and expecting the government to make up the shortfall.

    4. Umm no... please re-read.. I could point out your fundamental mistake but that would be way too cruel.

      Oh what the hell.. maybe you ARE too stupid to see your mistake... I ONLY used my wifes income .. not that it really mattered anyway. It was just to point out that while her income did increase, out everyday costs increased by a greater amount.

    5. You're way too kind.
      I won't be horrified if you point out a fundamental mistake. Just do it.

      I know you only used your wife's income AND I used your increases in costs and how that juxtaposed with your wife's income - BUT you did point out that your own 2011 income had been reduced to 30% of your 2010 income.

      AND that's where your problem lies. The fact that your income decreased by 70%. Otherwise the increase in price of living would have made no difference if your earnings hadn't fallen.

  6. Ah, yes, here we have the self-employed contractor who probably set up as a business for tax minimisation purposes. It may have seemed a hell of a lot more attractive than being a PAYG earner.

    And that same self-employed contractor who then claimed Australia was not affected by the GFC and that no government stimulus was required to keep the self-employed contractors in work.

    Indeed, the self-same self-employed contractors who declared the Labor government stimulus was not just unnecessary but bleated that it was wasteful, and continued to think that it was all their own doing that they were successful in their business.

    Now, that self-same self-employed contractor is crying that his income decreased by 70% in 2011. Why did it decrease? Bad business practice? The end of the stimulus package that you claimed was BS?

    And, 30% of what? What was your income in 2010? $100,000? So, your income in 2011 was $30,000?

    Without your business figure contributing to the family income, the increase in your expenditure is meaningless.

    Still, guess you gave it a go.

    So, let’s see:
    Electricity increased by $265.
    Water $300
    Car Insurance $210
    Content $290
    Diesel $200
    Groceries/household items $480
    Kids $60
    Dr consultation $5 per visit
    Prescriptions $6 per script
    Childcare $35 per week (rebated)
    Foxtel $17 per month ($204 pa)
    Car service $60
    Bank fees variable, depending on being on time and/or method of pyt
    So, apart from the variables of family illness (out of your control) and bank charges (within your control), your total extra expenditure was $2069. Your wife had an income increase of $721, therefore you had to find $1348+ to fund this.

    You can immediately decrease your expenditure by relieving yourself of Foxtel (the extra $204 pa PLUS what you’re paying for the service in the first place). Pay TV is not a must-have (and may contribute to your health bill!).

    Electricity prices have escalated because supply companies are charging you for not maintaining their infrastructure. Complain to them.

    Water prices have increased because of measures introduced to drought-proof Australia, including construction of de-sal plants. You may think we don’t need these at the moment, but you’ll be bloody glad we have them next time Australia suffers drought.

    Car insurance has increased because of extreme weather. Say hello to hail damage. Reduce by taking out TPP instead of Comprehensive – and make sure you drive carefully.

    Contents insurance. I don’t know why you’ve separated this out from house insurance – but there have been an inordinate amount of losses due to fire and floods in Australia over the past couple of years.

    Kids entertainment/sports costs always increase exponentially as they age.

    You say nothing about interest rates and mortgage repayments. Guess you have that under control or own your own home - since you've said nothing about rent increases.

    Perhaps you should get out of your self-employed contractor work and go back to being employed by those unions who actually do something about making sure workers are protected.

    If you wife got an increase in her take home salary, I'll be you a pound to a penny she's in an employment area where unions are trying to look out for her welfare.

    1. Wow. You are psychic too.. your argument (?) isn't even worth rebuttal it is that irrelevant.

    2. And your reply is nonsensical

      I gave you the time of day, explain why you think my argument is irrelevant, considering I addressed your entire post.

    3. Your reply was irrelevant. Totally .. as is your waffle further on about Unions.

      One more time for the Tories ... I merely posted a set of actual real life expenses for actual people that have INCREASED.

      Make of that what you will... hell, you could probably make an origami swan and a small breeding box for ferrets..... both of which would be equally as relevant as your other contributions.

    4. Okay, I understand you have no idea how to rebut an argument with facts, other than your REAL life experiences where you have admitted that as a business person (self-employed contractor) you're a failure and unable to provide for your family.

      That's okay. Lot's of working-class blokes who have been sucked into being self-employed contractors have found themselves in the same position. Their families being supported by their wives who hold traditional employment.

  7. For Stephen

    Hah, I see your wife is a teacher. The Teacher Unions have fought every step of the way to get rid of contracts, and to get pay increases.

    Why is she on a contract? Where did that come from?


    From the same people who told you self-employed contracting was the way to go.

    Did you know that between 2005 and 2007 the Howard govt got a $344 billion windfall from the mining boom.

    And what was left at the end? $20 billion.

    And guess what they spent 90% of it on? Telling folk like you that you deserved welfare. They gave away $314 billion to Australia's so-called middle class.

    What they were actually doing was pretending you'd moved up a notch, but in reality you were still working class. And that's what you are now.

    During the the first year of Labor, 2008, a decrease of $110 billion was wiped off revenue because of the GFC.

    The mining companies (who we're told saved Australia) were the first to lay off workers. How many? 15,000 of them. It was the price of the minerals that propped up the export dollar. Nothing to do with productivity.

    I could go on.

  8. Stephen's response is one of the problems with all commentary these days - I call it the triumph of common-sense over science. What it does is promote personal experience about science and statistics, and then demands for policy solutions to those personal experience. For example:

    - Mandatory commitment won't stop me betting on the pokies THEREFORE mandatory commitment won't work.
    - We've got record rains where I live THEREFORE global warming is wrong.
    - My costs keep going up THEREFORE the ABS, Treasury etc is wrong on inflation.

    So forget about learning, forget about the Enlightenment. An individual's personal experience is as valid as everyone else's, so if they say they are "doing it tough" then we can't use science or statistics to say otherwise.

    I had an argument with some friends over the changes to the private health insurance rebate. A couple, both earning over $125,000, just bought a new 4WD and caravana adding up to over $100k complaining that the Government takes away any incentive to get ahead! I did point out that they get to keep 60 cents in every extra dollar they earn.

    Frankly, Australians are becoming world-expert whingers who want the Government to keep prices low for ever (as consumers), want Government to keep out of the market (as business owners) and want to pay no taxes (as taxpayers).

    1. Umm your response here is way too simplistic... dare I say even damn silly... I merely provided a set of actual everyday expenses that have risen over the past 2 or 3 years.

      If you can turn that into some type of elitist navel gazing with a double pike of wankerdom extrapolated into a critique of the failing social fabric of the spoilt middle class then you may need to get a hobby... or a drug habit.

    2. I'm a bit sick of the science analogy, quite frankly. We're getting into a technocracy explanation at a fast rate.

      Instead, I'd call it the particular whinge versus the general whinge.

      That way, you take a personal experience and extrapolate it to the general experience and when the stats don't fall your way, you just claim those stats are WRONG - from either end of the spectrum.

      What's a few billion here among friends. Oooh, okay, we won't use the dishwasher unless it's an exceptional occasion.

      Hey, we're doing out bit. It's the rest of the bustards who don't care.

      And they like collectiveness on one score. The collective unconscious about how their own choices led them to consider themselves worthy aspirants in the first place!

      Move over, peeps, I'm coming through.

    3. It is meant to be simplistic, because developing national policy can't hope to take into account the circumstances of every individual. At the same time, its a classic economic fallacy to believe that the specific applies to the general, and the general applies to the specific. I could quote any number of price increases and decreases that affect me, but in the end it is meaningless in informing the development of policy for the country.

      As to my hobby, I have turned my great fortune in growing up and working in this country back to the community - volunteer firefighter.

  9. "Just to cross check this – since the end of 2007, average earnings have risen by 18.0%: the consumer price index, which of course includes all items that go up (like electricity) and down, has risen by 12.1%."

    That's where your fundamental mistake is.
    What about people who do not earn a salary? The participation rate is calculated at around 65%.
    An inflation of 12.1% over 4 years is outrageous. We need to take our inflation target back to 2% p.a. and the RBA has to be more vigilant.

    1. CPI also does not include housing - I would guess the real cost of living increase for a renter is more like 25%-30%.

    2. My mistake; rent is included in CPI, but it remains true that the price of existing housing (to purchase) is not included...

  10. Perhaps one explanation for the continued claims about cost of living pressures lies in the period under consideration? Your analysis runs from 2007 to 2011 - basically Labor's total period in office so far. However, if we split that into the two periods we've had (2007 to 2010 - Rudd/Gillard - and then 2010 to 2011 - Gillard) the story is a bit different. A single person on average wage had a real increase in income of 7.3% in period 1, but a fall of 0.6% in period 2. A single income couple with the earner on average wages had an increase of 6.9% in period 1 and a fall of 5.6% in period 2.

    You often post about the tightening the current Government is undertaking, and generally in positive terms. But that tightening is tending to make households go backwards, with amounts that vary depending on household composition. You may be right about the picture over the longer periods you have been using, but I suspect hip pocket memory is shorter term.