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Household saving could be defined as current after-tax income minus current household

consumption (ABS n.d. cited in Thorne & Cropp 2008).

Household saving ratio, which is expressed as a percentage, is household saving divided by
gross disposable income less depreciation (ABS n.d cited inThorne & Cropp 2008).

Overall, Australian household saving ratio has experienced a steady decrease from the peak
of approximately 18% of household gross disposable income in mid 1970s to around 1.5% in
2007/08. It is also worth noticing that dissaving did take place during the year 2002/03 when
household saving ratio eventually fell down to negative for the first time during the period
from mid 1970s to early 2000s. However, a slight increase in household saving ratio has
occurred in recent years and bring it back to positive again. In the future, the trend of
Australian household saving is found hardly predictable due to forces such as uncertainty
about future economic conditions and effects of monetary policy during economic hardship.

There is a broad range of motivations for saving, including life-cycle saving, precautionary
and bequest saving.
Life-cycle saving is saving for long term objectives in people’s lives such as retirement or
home purchase. In Australia, people attempt to save less for retirement due to the welfare
payment provided by government. Moreover, with the availability of credit, low down
payment when purchasing a house possibly reduce the need of life-cycle saving of
Australians as well. Thus, life-cycle saving seems less important to Australian people.
Another reason for saving is precautionary saving, which is saving for potential emergencies
or unexpected events such as job loss. This, however, could be an insignificant reason to
save recently. For example, when one loses his job, even with low saving he could still have
an adequate living for a certain time period due to the unemployment benefit scheme.
About bequest saving, which is done by the purpose of leaving an inheritance, is also found
relatively less important (Loundes 1999).
It could be seen that none of the above saving reasons is considered important to Australians.
Therefore, Australian people tend to have less incentive to save, which consequently leads to
a decline in household saving ratio over time.
As indicated by Thorne & Cropp (2008), over the years from 1975 to 2002/03, Australian
household saving ratio decreased from 18% to -4.4% of household disposable income. The
main reasons for this could be due to strong capital gains and rapid financial deregulation and
innovation over the period.
Firstly, it is noted that during the 1990s, the increasing number of shares acquired by
Australians associated with a relatively strong rise in share values have increased capital
gains and wealth without saving much (Bernake, Olekalns & Frank 2008, p.107). Especially
when household saving level became negative in early 2000s, this is found to coincide with
the period in which share prices incurred a sharp rise and eventually reached a peak in 2000
as illustrated in the “bull market” chart by Bernake, Olekalns & Frank 2008, p.108.
Therefore, it can be concluded that associated with capital gains, incentive to save could be
reduced by a certain amount.
Additionally, as shown in the equation below:
S private = Y - T – C
With S private comprises of household saving and business saving
(Y – T) stands for after tax income of private sector
C is consumption expenditure
Gains in household wealth tend to push up consumption but are not taken into account as
income, the proportion by which C has increased was larger than Y, therefore Australia’s
household saving rate has been declining since the period of mid 1970s.
Secondly, financial deregulation has also stimulated the access to credit. For instance, low
down payment of 10% or even 5% of the purchase housing price (Bernake, Olekalns & Frank
2008, p.113). This enables more consumption by households and consequently tend to reduce
the saving level (Hiebert 2006 cited in Thorne & Cropp 2008). Another explanation is that
because S private = S household + S business, as more unincorporated enterprises moved into the
corporate sector, more of S household would be now measured in S business. Thus, saving by
household would be reduced.

For the recently increasing trend in household saving, possible explanations include the rapid
increase in term of trade, slowdown in capital gains, change in tax structure and a sustained
rise in real interest rates in Australia.
Term of trade is calculated as the ratio of the export price index to the import price index
(Gore 2007, p.226). Term of trade boom implies that the price of exports has risen relative to
the price of imports, which has driven a rise in disposable income and subsequently results in
an increase consumption. This growth in household consumption, nevertheless, turns out to
be smaller than the growth in income. Therefore, there is still an increase in the level of
saving by Australian households.
Other reasons such as decrease in capital gains, the introduction of consumption tax (GST)
and decrease in income tax or rising real interest rates do not have enough evidence to
support or still have contradicting opinions about their effects on saving level in the period
from 2002/03 to 2007/08 (Thorne & Cropp 2008).
Reference list

Bernake, BS, Olekalns,N & Frank, RH 2008, Principles of macroeconomics, 2nd edn, McGaw
Hill, Australia.

Gore, AB 2007, Environmental research at the leading edge, Nova Publishers, New York.

Loundes, J 1999, Household saving behaviour in Australia, Melbourne Institute, accessed 14

August 2009, < http://www.melbourneinstitute.com/wp/wp1999n17.pdf>

Thorne, S & Cropp, J 2008, Household saving in Australia, The Treasury, accessed 10
August 2009,

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