The FINANCIAL -- And while the proportion of households facing economic hardship has remained static in recent years, the total number of very poor households has risen with population growth to reach almost half a million people now.
These are two of the key findings from a KPMG Economics report ‘Financial Stress in Australian Households: the haves, the have-nots, the taxed-nots and the have-nothings’, issued today, which analyses the incomes and spending of Australian households over the past 20 years.
The report finds that the bottom 20 percent of households has recorded the highest rate of growth in investment income, at 8.5 percent per annum, compared to an average of 2.3 percent over the past decade for the other households.
This increase reflects a greater exposure to investment activities such as negatively geared property investment, which is confirmed by the substantial increase in value of second mortgage payments being paid by this quintile, according to KPMG.
Brendan Rynne, KPMG Australia Chief Economist, said: “While it is perhaps understandable that the poorest members of our society want to diversify and increase their incomes, this group is the least able to take on the financial risk associated with geared investment activity.
“It should be a matter of concern that households across the financial spectrum have been progressively increasing their debt levels at rates faster than their disposable incomes have grown.
“Any increase in our historically low interest rates would cause serious problems given the growth of outstanding residential loans over the past decade. This could come from increases in wholesale funding overseas rather than via a Reserve Bank rate hike. But it is clear from our analysis that if the bubble does burst it will not just be the better-off who will be directly affected, the poor will be too.”
Brendan Rynne added: “It is also alarming that those in the ‘have-nothing’ category – experiencing entrenched disadvantage, unable to afford heating or regular meals and requiring assistance from welfare groups – now number nearly half a million Australians.
“This group has grown in number by around 90,000 since the turn of the century and appears to consistently represent between 3-5 percent of the population.
”Slightly higher up the scale, it appears that 10-15 percent of people are consistently unable to pay bills as they fall due, while up to one-quarter of Australia’s households cannot afford one-week annual holidays away from home.
“This inability for a significant number of households to enjoy pleasures unquestionably creates divisions in society and reinforces a concept of ‘have’ and ‘have-nots’.
Key findings of the report are:
The ‘have-nothings’ in society now number around 460,000, which has risen in line with population growth in the last 20 years. So household financial stress has not worsened relatively, though it has in absolute numbers.
There consistently remains 3-5 percent of society who experience entrenched hardship, struggling to meet even basic needs such as meals and heating, despite myriad government policies and programs to combat poverty.
Household income has grown primarily because of investment income and government transfers not because of rising wages and salaries.
Just over one-third of the income of the poorest 20 percent of households in Australia is received through government transfers.
The second lowest-income 20 percent is getting relatively more than lowest in terms of dollar transfers received per dollar tax paid – suggesting policies to deliver welfare to the very poorest are less effective than to slightly-better off recipients, the second-lowest 20 percent of households.
Even the poorer members of society appear to be taking on negatively geared investments despite their inability to manage the financial risks.
Households are taking on higher amounts of mortgage debt, and so while financial stress appears relatively stable now, if interest rates increase it is likely that stress will increase too.
60 percent of households pay the same or lower amounts of income tax compared to the payments they receive from the government – in essence, 40 percent of households are subsidising income for 60 percent of households, illustrating the progressive nature of Australia’s tax system.
Brendan Rynne said: “While overall, the social safety net appears to be working as intended, it is curious that the second-lowest category receives proportionately more in transfer payments than they pay in tax compared with the very poorest people.
“This suggests welfare payments might need better targeting, with the better-off members of the second-lowest 20 percent of households approaching a ‘taxed-not’ middle-class welfare recipient status.
“The proportion of households that end up paying no net tax – but via an administratively costly money-go-round of paying income tax and then getting it all or more sum back via income support payments – has now reached 60 percent.
“This needs further review by the government as it suggests that the loosening of transfer payments after the GFC were never properly tightened up again – and it is very difficult to withdraw benefits once they have been granted.
“But the answer is not further ratcheting-up of marginal tax rates for higher earners – our analysis shows that the top 20 percent of households already pays 50 percent more income tax than the bottom 80 percent combined.”
Brendan Rynne added: “Given the general feeling in the community that life in Australia has got harder in recent years, it might surprise many that household financial stress and economic hardship has not gotten any worse, proportionately.
“But it has in total, given the increasing population, and as housing costs are the largest single expenditure that households face, fresh policies to target this issue are sorely needed.”