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What would happen if we all stopped spending our hard-earned coin? (ABC News: Gregory Nelson)
We recently told you about the frugal movement
— a trend in response to rising prices, stagnating or falling wages and
record debt, in which people are cutting their spending to just the
bare essentials.
That got us thinking: what if everyone actually decided to do this? Key points:
- Australians spent $955 billion on consumption in the 2015-16 financial year
- That equates to 58 per cent of our total GDP
- Saul Eslake calculates that if all households cut out everything other than the basics, total spending would be $523 billion less
One of Australia's leading economists has joined us to crunch the numbers. (Spoiler — this gets kind of terrifying before it gets kind of reassuring.)
Why go back to basics?
Let's take a look at some recent economic news: company profits are up but wages have dropped; Sunday penalty rates are being cut in some industries; and Australians have record debt.Not to mention the whole saving-for-a-deposit-on-a-house-you-can't-really-afford thing.
So, it wouldn't be much of a surprise if many of us tightened our purse strings and stopped spending money on small luxuries like new clothes, dining out at restaurants or heading out for a drink.
How much are we spending now?
Nearly $1 trillion, according to Saul Eslake, a former chief economist for ANZ Bank and Bank of America Merrill Lynch. He has broken it down for us."According to the national accounts, Australian households spent $955 billion on 'consumption' in the 2015-16 financial year, equivalent to just under 58 per cent of total GDP," Mr Eslake said.
Of that total, we spent:
- $94 billion on food (not including dining out)
- $31 billion on clothing
- $205 billion on housing
- $24 billion on utilities (that includes electricity, gas and fuel, but not petrol)
- $62 billion on health
Let's include another, say, $16 billion of that cash in our definition of basics, so we're up to a figure of $432 billion.
What else did we spend money on?
Transport and insurance, part of which Mr Eslake said could also be considered part of the "basics". "For example, households spent $30 billion in 2015-16 on transport services. This doesn't include purchase or operation of motor vehicles, but would include the cost of getting to and from work or school by public transport as well as luxuries like holidays," he said.
"Households also spent $22 billion on insurance and other financial services, some of which could be considered as 'essential' [fees for having a bank account or a credit card and charges for managing compulsory home and contents insurance premiums]."
So what's left over?
"If households cut out everything else [excluding transport and insurance] — a pretty heroic assumption — then total spending would have been about $523 billion less in 2015-16 than it actually was," Mr Eslake said.
That's the $955 billion we spent last year minus the $432 billion in savings we've just found.
But we're also importing stuff — $136 billion of stuff last financial year. Let's assume $100 billion of that amount would disappear if all consumers go frugal, Mr Eslake said.
If that were the case, we end up with a net reduction in spending within the Australian economy in the order of $423 billion.
"That represents about 26 per cent of GDP," he said, or a quarter of the size of the entire economy gone.
So what would actually happen if everyone did this?
In short, it wouldn't be good."So if everyone cut their spending back to the basics, and did it immediately, the result would be an almighty recession — indeed, a depression," Mr Eslake said."The impact would actually be greater than $424 billion or 26 per cent [of GDP], because businesses would cut back their investment spending as well, in response to the sudden drop in economic activity and prospects for future sales of their products.
"And of course there would be significant second-round effects, because people currently employed in providing 'non-basic' goods and services would lose their jobs."
Mr Eslake said it would also be harder for Australians to pay down the more than $2 trillion of debt households owed at the end of the 2016-16 financial year, according to the ABS.
Which jobs would be the first to go?
The ABC's David Taylor, who has written extensively about Australia's debt issues, said families were already pinching their pennies."[That] includes things like movie tickets, entertainment — including video games, TVs and iPads — holidays, dining out, furniture, and some types of clothing," he said.
"So the types of jobs that would go first are department store sales assistants, supply chain workers — [the people] getting the products to the stores.
"The hospitality industry would also be hit hard: waiters, chefs, cleaners, bar attendants, actors and musicians."
In other words, some of the workers affected by the cut in penalty rates we mentioned at the beginning — who might want to start curbing their spending — would be among the first and hardest hit if everyone else followed suit.
What's this known as?
Mr Eslake said it illustrated what famous economist John Maynard Keynes called the paradox of thrift."Because one household's spending is, in effect, another households' income," he said.
"If all households try simultaneously to increase their saving by reducing their spending, no-one will be able to increase their saving because everyone will experience a large drop in their incomes."
Cripes.
So where does savings stand in all this?
Mr Taylor said if everyone put money into a bank, the economy would grind to a halt."Bank deposits tell you a lot about economic activity," he said.
"Right now, savings ratios have dipped dramatically because mums and dads are diving into their savings to maintain their standard of living.
"Deposits act as a nice bit of insulation for the economy. While they do facilitate lending, economists view savings as a 'leakage' of money out of the economy."
Mr Eslake agreed some saving is good, but some spending is necessary.
"As a general proposition, it is a good idea for people to save a bit of their income if they can — recognising of course that many people don't earn enough to enable them easily to cover the 'basics', especially if it is for a first home, or for retirement — and also, to ensure that those savings are invested prudently, with an eye to the balance between risk and return," he said.
"Starting early, and saving a consistent amount over a long period, can produce big returns. On the other hand … if everyone tries to increase their saving all at once, the result will be bad for almost everyone."
In other words, don't feel bad about treating yourself to some smashed avo at brunch this weekend.
It's for the good of the country.
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