THE ECONOMY AND ECONOMIC RESOURCES


When measuring progress for the economy and economic resources, we consider five headline dimensions (although headline indicators are only available for four): national income; economic hardship; national wealth; housing (no headline indicator); and productivity. The headline indicators available suggest some progress over the past decade.


NATIONAL INCOME

National income is a measure of Australia's capacity to acquire goods and services for consumption. It is a determinant of material living standards and is also important for other aspects of progress. There are many different ways of measuring income. The headline measure - real net national disposable income per person - has a variety of features that make it an informative indicator of national progress.

• It is a per person measure. Total income could rise during periods of population growth, even though there may have been no improvement in Australians' average incomes. This measure excludes the impact of population changes.
• It is a real measure - it is adjusted to remove the effects of price change. Nominal or current price income could rise during periods of inflation, even though there may have been no increase in Australians' real capacity to buy goods and services.
• It takes account of income flows between Australia and overseas, and is adjusted for changes in the relative prices of our exports and imports (our 'terms of trade'). These international influences on Australia's income can increase or decrease Australians’ capacity to buy goods and services.
• It is a net measure - it takes account of the depreciation of machinery, buildings and other produced capital used in the production process. Hence, it reflects the income Australia can derive today while keeping intact the fixed capital needed to generate future income.

Australia experienced significant real income growth during the past decade. Between 1996-97 and 2006-07, real net national disposable income per person grew by 2.9% a year on average.


ECONOMIC HARDSHIP


Society generally accepts that people have a right to enjoy some minimum material standard of living, that is, to consume a minimum standard of goods and services. Household income is the major source of economic resources for most households and therefore a key determinant of economic wellbeing. The headline indicator shows the growth in average real equivalised disposable household income of people in the low income group (see Endnote 2). Although it provides no information about the number of people who might have an unacceptable standard of living, it does indicate how the average income of people in the low income group is changing.

The headline indicator shows that people in the low income group experienced a trend of rising real incomes between 1994-95 and 2005-06. The average real equivalised disposable household income of the low income group is estimated to have risen by 31% over the period, although part of the increase may reflect improvements to the way income was collected in the survey from 2003-04. The same individuals were not necessarily in this income grouping for the entire period. But for those people who were, rising incomes on average would have provided a capacity to improve their standard of living.

While some would interpret this increase in the real income of the low income group as progress, others would consider that it also needs to be weighed against changes in community standards. Although there is no direct measure of these, one approach is to compare changes with those of 'middle' Australians and so changes in the real income of people in the middle income group are also shown. The average real equivalised disposable household income of the middle income group was estimated to have risen by 32% between 1994-95 and 2005-06.

The headline indicator considers low income which is commonly associated with economic hardship. However, some people have access to forms of wealth which can be used to support their standard of living (e.g. bank deposits). Furthermore, economic hardship is a multidimensional issue that is often associated with problems such as lack of participation in work, substance abuse, poor health, low levels of education, inadequate housing, crime, social exclusion and a lack of opportunity for children.


NATIONAL WEALTH


National wealth and national income are very closely related. Along with the skills of the work force, a nation's wealth has a major effect on its capacity to generate income. Produced assets (such as machinery and equipment) are used in income-generating economic activity. Income, in turn, provides for saving that enables the accumulation of new wealth. The headline indicator, 'real national net worth per person' has features that make it an informative indicator of national progress.

• It is a net measure - it shows the amount by which Australia's assets exceed its liabilities to the rest of the world.
• It is a per person measure - total wealth could rise if the population grew, even though there may have been no improvement in Australians' average wealth. This measure excludes the impact of population changes.
• It is a real measure - it is adjusted to remove the effects of price change.

Between June 1997 and June 2007, Australia’s real net worth per person rose at an average annual rate of 0.9%. However, the headline indicator does not take account of everything that might be regarded as valuable. For example, it does not include some aspects of natural capital such as native forests and other natural assets not used for economic production; human capital (e.g. knowledge and skills); or social capital (e.g. social networks and trust).


HOUSING

Housing provides people with shelter, security and privacy. Having an adequate and appropriate place to live is fundamental to people's wellbeing, and there are many aspects to housing that affect the quality of people’s lives. Dwelling attributes, such as size, number of bedrooms, physical condition, location relative to amenities and services, and price, are all important and there is no one indicator that succinctly captures whether people's many needs and desires for suitable housing are being met.

Australians are continuing to invest significantly in the homes that they own. From June 1998 to June 2007, around $566 billion (in real terms) was invested in dwellings (excluding land) (see Endnote 4). The value of land and dwellings owned by the household sector at 30 June 2007 represented 58% of the value of all assets owned by the sector.

In 2005-06, while 2.8% of households across Australia required one or more extra bedrooms to accommodate their residents, 78% had one or more bedrooms spare (see Endnote 5). But poor or inadequate housing is a problem for some groups, especially for Aboriginal and Torres Strait Islander peoples living in remote areas.


PRODUCTIVITY


A nation's productivity is the volume of goods and services it produces (its output) for a given volume of inputs (such as labour and capital). A nation that achieves productivity growth produces more goods and services from its labour, capital, land, energy and other resources. Much, but not all, of Australia's output growth can be accounted for by increases in the inputs to production. The amount by which output growth exceeds input growth is the productivity improvement. Productivity growth can generate higher income and benefits might also accrue in the form of lower consumer prices.

Productivity can be measured in a variety of ways. The most comprehensive Australian measure available at present is multifactor productivity for the market sector. Multifactor productivity represents that part of the growth in output that cannot be explained by growth in labour and capital inputs. It measures dis-embodied technical change. Examples of multifactor productivity growth include improved production techniques, better management practices, and organisational change. Technological change, such as increased computing power, is embodied in the asset, and as such is captured in the capital inputs. During the decade 1996-97 to 2006-07, Australia experienced improved productivity growth, and multifactor productivity rose by 1.1% per year on average.


ENDNOTES

1. Reference year for real net national disposable income is 2005-06.

2. Disposable (after income tax) income amounts are equivalised by applying the OECD equivalence scale. The equivalised income amounts are also adjusted for changes in living costs as measured by the Consumer Price Index. No surveys were conducted in 1998-99, 2001-02 or 2004-05. The respective data for these three years shown in the graph for economic hardship are the midpoint values between the survey values of the previous year and the following year. The base of each index is at 1994-95 and equals 100.

The low income group comprises people in the 2nd and 3rd income deciles from the bottom of the distribution after being ranked, from lowest to highest, by their equivalised disposable household income. The middle income group comprises people in the middle income quintile (5th and 6th deciles) when all people are ranked, from lowest to highest, by their equivalised disposable household income.

People falling into the lowest decile are excluded from the low income group because, for many of them, the value of their income does not appear to be an appropriate indicator of the economic resources available to them. Their income tends to be significantly lower than would be available to them if they were reliant on the safety net of income support provided by social security pensions and allowances. At the same time, their expenditure levels tend to be higher than those of people in the second decile, indicating that they have access to economic resources other than income, such as wealth, to finance their expenditure.

3. Real national net worth is based on a volume measure with reference year of 2005-06.

4. See Australian System of National Accounts, 2006-07 (cat. no. 5204.0). Investment in dwellings is based on a volume measure with a reference year of 2005-06.

5. There is no single standard measure for housing utilisation. However, the Canadian National Occupancy Standard for housing appropriateness can be used as an indicator of potential overcrowding as it is relevant for Australia. It is based on a comparison of the number of bedrooms in a given dwelling and household demographics such as the number of usual residents, their relationship to one another, age and sex. Where the standard cannot be met, households are considered to be overcrowded. For more details see Housing Occupancy and Costs, Australia, 2005-06 (cat. no. 4130.0.55.001).

6. Reference year for multifactor productivity index is 2005-06.


REFERENCES

National income

Australian Bureau of Statistics 2007, Australian System of National Accounts, 2006-07, cat. no. 5204.0, ABS, Canberra.

Economic hardship

Australian Bureau of Statistics 2007, Household Income and Income Distribution, Australia, 2005-06, cat. no. 6523.0, ABS, Canberra.

National wealth

Australian Bureau of Statistics 2007, Australian Demographic Statistics, June quarter 2007, cat. no. 3101.0, ABS, Canberra.

Australian Bureau of Statistics 2007, Australian System of National Accounts, 2006-07, cat. no. 5204.0, ABS, Canberra.

Housing

Australian Bureau of Statistics 2007, Australian System of National Accounts, 2006-07, cat. no. 5204.0, ABS, Canberra.

Australian Bureau of Statistics 2007, Housing Occupancy and Costs, Australia, 2005-06, cat. no. 4130.0.55.001, ABS, Canberra.

Productivity

Australian Bureau of Statistics 2007, Australian System of National Accounts, 2006-07, cat. no. 5204.0, ABS, Canberra.