Phil Ruthven examines current and former household spending and considers the implications this will have for business.
When we go far enough back in history, we find a degree of predictability about the future. Household spending is just such a case, where changes seem almost preordained. The structure of our economy and the relative importance of its industries changes in response to household spending priorities. And, to some extent, the reverse is true when innovation and productivity make more goods and services cheaper for a larger number of households.
Goods dominated our economy and household spending through the industrial age to the mid-1960s and services have come to dominate our current infotronics age to 2050 and beyond. The chart opposite shows the changing pattern of spending by households from 1900 to 2016.
Household income is a huge component of our economy, accounting for 88 per cent of our gross domestic product (GDP). In turn, this suggests that the components of the economy – via our industries – reflect the changing spending patterns in households. And they do. Of course, a more precise measure is the household share of the total market, which includes business and government expenditure, exports, and household spending. This is still very significant at 73 per cent.
So, what does this mean? Firstly, we see the shrinkage of spending on goods from 64 per cent of income in 1900 to 20 per cent today. And yet households get far greater volumes of goods today from that minority share than 120 years ago, thanks to the efficiency gains of the industrial age and the influx of cheaper imports.
Spending on goods
In the durables category in 2016 we have motor vehicles (1.2 per cent of all income); household durables (2.7 per cent); and other durables such as recreational (0.5 per cent). In the non-durables category, we have food (6.4 per cent); alcohol and tobacco (2.2 per cent); clothing (2.1 per cent); utilities such as electricity, gas and water (1.7 per cent), vehicle operation expenses (3.1 per cent including petrol) and other goods (0.5 per cent).
The one-fifth of all household income that is spent on goods is being further reduced by increased imports, continuing productivity in local manufacturing, and a revolution in distribution logistics that is lowering prices. Online shopping coupled with delivery via Australia Post, FedEx, and DHL will help shrink spending on goods from a fifth, to a sixth, then a seventh in the decades ahead. These efficiencies are paving the way for more spending on health, travel, outsourcing of household chores and more as we head towards the middle of this 21st century.
Owning and renting
The next two big categories in today’s household spending world are rent and capital related outgoings. The former has steadily increased over the past century to now exceed 14 per cent of household income – more recently boosted by the surge in house prices to a scary level, especially in Sydney which is in bubble territory, as is Melbourne (houses, but not apartments). In the case of “rent”, the Australian Bureau of Statistics includes imputed rent (equivalent rent by owner-occupiers) as well as actual rent.
Capital related outgoings include interest on mortgages, personal loans and credit cards, as well as depreciation of buildings, equipment and transfer payments. Principal repayments are not included in this review as they are a household balance sheet item, not a profit and loss item. That said, as our mortgage debt is the highest in the world as a share of household income (over 150 per cent), it is a very significant cash-flow item for households.
Rent and capital related spending swallow 28 per cent of household incomes. Indeed, if we add other financial and insurance costs plus savings, finance-related outgoings amount to a staggering 40 per cent. This is, of course, service expenditure not goods expenditure.
Taxes are a deceptive item on the chart. They seem to have peaked around 2000 then come down to just above 14 per cent of incomes. But total taxes didn’t do that. Only direct taxes are shown on the chart. The goods and services tax (GST) was introduced at that time and is spread across the other categories on the chart – as were sales and other indirect taxes before the GST – accounting for some 4 per cent of household income in 2016.
Even then, a total tax impost of less than 20 per cent of household income would seem low – until we realise that one in five households do not pay income taxes, and another fifth pay less than three per cent of all income taxes. So almost four million of the nation’s 9.7 million households pay negligible or no taxes; they are retirees, students, and low-income or unemployed households. Hence the lower than might-be-expected tax share of household income. Incidentally, the richest fifth of households pay some 63 per cent of all taxes.
The huge growth in spending on services has come as a result of outsourcing by households. In 2016, they spent $410 billion (27 per cent of all their gross income) on things they used to do on a DIY basis before the new age began in the mid-1960s. This amounts to around $820 per household per week, on average. It includes meals, cleaning, entertainment, financial advice, health and hundreds of other things now on a do-it-for-me basis. Nearly one in four of the nation’s 12 million jobs can be attributed to outsourcing over the past half-century.
What are the implications for business? Clearly the shrinking share of spending on goods is hollowing-out the number of providers, especially local manufacturers, and potentially doing the same to retailers as a result of the earlier mentioned online and distribution revolution.
The growth of services, however, is exciting. As little as one third of non-core household chores and activities has been outsourced so far, and while that level will never reach 100 per cent (due to guilt, or an enjoyment-cum-therapy of activities by householders) it stands to double in the next several decades. And much of this growth is being assisted by digital disruption made challenging by fast broadband, big data, AI software and analytics. Bring it on, as they say.
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