Shift-to-thrift warning falls on attentive ears
'People with debt are rushing to pay it off. Businesses have been doing their bit, too.'
TWO years ago, when the China boom was gathering momentum and people were talking about ''permanently'' higher commodity prices, Glenn Stevens offered some advice.
It might be ''prudent'', to save the bulk of our commodities windfall, the Reserve Bank governor suggested.
Sounds sensible. But central bankers are always saying that kind of thing, only to be ignored, right?
Since then, the economy has been whacked by a global slump, the eurozone crisis has worsened, and budget revenue has been written down by tens of billions.
The original mining tax from 2010 was meant to raise $12 billion over two years. Now there are doubts the more industry-friendly version will hit its lowered forecast of $6.5 billion over three years. So surely, it would be fair to assume Stevens' tip was overlooked, or at least overtaken by events.
Well, guess what? The country has indeed followed the governor's advice, at least to some extent.
But instead of saving more of the proceeds of the boom through the budget, it's been done by private citizens and businesses.
This is not the dominant story we hear, which criticises the eight years of pre-GFC tax cuts under the Howard and Rudd governments that were funded by an earlier phase of our commodity windfall.
As Stevens pointed out in a speech last week, however, the country has, in fact, been saving more of its natural resource pay cheque these past few years, even if the Commonwealth budget hasn't. For households, this extra saving has made cutting debt and slowing spending much less painful than it would have been otherwise.
When talking about national saving, it's easy to confuse the behaviour of the government with that of the whole economy. By this logic, if the budget is in deficit, it must mean the whole country is somehow failing in its financial management.
Opposition parties like to spread this misconception by conflating budget deficits with ''pain for all Australian families'', as Joe Hockey put it last month. But this narrow focus overlooks a huge shift in household behaviour.
In the mid-2000s, the average household was spending more than it earned (negative saving) thanks to soaring asset prices and growing use of debt. Now, we save a more respectable 10 cents in every dollar.
In a sign of this caution, the share of household financial assets held in term deposits has almost doubled since the GFC to 14 per cent, its highest level since the late 1990s.
People with debt are rushing to pay it off. Half of all mortgage borrowers are ahead of their repayment schedule - and 30 per cent of those have a buffer of two years or more. Businesses have been doing their bit, too.
Barclays economist Kieran Davies reports that business term deposits as a share of corporate profits are at a record high of 72 per cent - double the pre-crisis average.
Non-bank companies have funded about 10 per cent of their growth from retained earnings, up from 7.5 per cent before the GFC.
All this saving is easy to overlook, because it's taking place across millions of households and firms.
The budget deficit, on the other hand, is given huge amounts of attention by the media. And at $43.7 billion last financial year, it is without question, a big number.
But the undeniable fact is that national saving HAS been much higher in recent years.
According to Stevens, we are saving the highest share of national income since the late 1980s. Luckily, this shift to thrift occurred as we were getting a free kick to our incomes from rising export prices.
Even people working in industries unrelated to mining have benefited indirectly through the higher dollar, which increases everyone's purchasing power.
This income boost was unrelated to the sudden move towards greater household caution. All the same, it made for a smoother transition to an environment of slower spending growth and increased saving.
''Given that the change to household behaviour was probably inevitable, the income boost from the terms of trade arrived at a rather fortuitous time,'' Stevens says.
''It helped to accommodate a rise in household saving and a slowdown in the build-up of debt in a fairly benign fashion.''
So to claim that Australia has simply squandered the boom is a tad simplistic. Despite the failure to save much when commodity prices surged between 2002 and 2008, and despite the mining tax disappointment, we've done a better job at saving in recent years. And this has made the economy more stable.
But the bigger question still is whether we've taken full advantage of this one-off boom in a way that will benefit future generations.
Former Treasury secretary Ken Henry said last week there was a good chance we'd be importing many natural resources by the end of this century.
''Australians of the future will identify this generation as that which extracted unparalleled monetary reward from the continent's natural resources; a monetisation of non-renewable resources unmatched in any previous generation, and unlikely to be matched in any that follows,'' he said,
Saving more of the resources windfall was one of many things Henry said we should be doing to ensure a lasting legacy. He also named priorities such as ''path-breaking'' investment in science, ''high-yielding'' investment in human capital, and deepening links with our regional neighbours.
Compared with these lofty goals, putting a bit more of each pay cheque into the mortgage or savings account seems pretty small. But at least it's a start.
Ross Gittins is on leave.