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Gittins: Sailing close to the edge is tough

With the coming budget, spare a thought for those so poor they’re just about excluded from normal financial services, such has home content insurance or car insurance.

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Don't be too alarmed by all the talk of budget black holes and everything being on the table in Julia Gillard's search for savings. It's more likely we're being softened up for a lot more budget deficits than for a horror budget in two weeks' time.

Even so, it's clear there will be more cuts in spending and tax concessions. And though they're hardly likely to be draconian, you can be sure they'll draw howls of protest from those affected, egged on by shock jocks and opposition pollies on the make.

The trouble is the cost of true necessities such as food, clothing ... power tends to be a reasonable fixed amount, whatever your income. 

What's more, it's a safe bet they'll be aimed mainly at the better-off. So before we're engulfed by another round of upper middle class self-pity, I thought I'd get in early and tell you a little about the lives of people who really do have difficulty making ends meet.

Gittins

Illustration: Simon Letch

According to a survey conducted by the Bureau of Statistics in 2010, almost one in five Australian adults experienced ''financial stress'' that year, where this means not being able to pay their bills, rent or mortgage on time or make minimum repayments on their credit cards, or they had to sell or pawn something because they needed cash.

A newly published report by Dr Nicola Brackertz, of Swinburne University, for the Salvation Army (my co-religionists), tells us a lot about the who, how and why of people suffering genuine financial stress. She surveyed 225 of the clients of the Salvos' free financial counselling service, Moneycare, operating for 20 years.

The first thing to note is that a third of respondents were living alone and another 28 per cent were sole parents. Only 14 per cent were couples with dependent children.

Two-thirds were women. Almost 80 per cent had a government pension or benefit as their main source of income. Only 15 per cent had wages as their main income.

Almost 40 per cent of respondents were renting privately and 22 per cent were renting public or community housing. Only 21 per cent were paying a mortgage and just 5 per cent owned their homes outright.

Put all this together and it tells me we're dealing with people right at the bottom of the heap. Most of the respondents would be unemployed, on the disability support pension or sole parents (many of whom have been relegated to the dole by a caring government).

Since the great majority of age pensioners own their homes, we're dealing in the main with only those age pensioners living alone and renting. It all goes to show how close people on the dole live to the poverty line, the more so if they have to rent privately.

With rents as they are, it's no surprise people in privately rented accommodation on a very low income are highly likely to experience financial stress. The surprise is the disproportionate number of respondents living in public housing.

The rent these people pay is generally set at 25 per cent of their income, no matter how low that income is. This sounds pretty generous; the standard measure of housing stress is rent or mortgage payments exceeding 30 per cent of income.

The trouble is the cost of true necessities such as food, clothing and power tends to be a reasonably fixed amount, whatever your income. So if your income is very low, you may not be left with enough for spending 25 per cent of the total on rent to be easily manageable. By the same token, if your income is quite high, a lifestyle choice to devote a lot more than 30 per cent of it to housing doesn't leave you feeling the pinch.

If you're as comfortably off as I am, it's a surprise to discover how small were the total debts that got the respondents into trouble with their creditors. Although a third had debts of more than $20,000, the typical (median) debt level was $5000 to $10,000.

Almost half had three or more sources of debt, with the most common being utility bills, credit cards, phone bills and personal loans. Well over half the respondents had been experiencing financial difficulties for two years or more.

Why did the respondents get into financial trouble? In their own words, ''the leading causes were insufficient income caused by retrenchment, unemployment or underemployment and an insufficient level of government allowances and pensions'', the report says.

''Health reasons, including disability and mental illness, often prevented respondents from earning sufficient income.'' It's easy for you and me to tell ourselves these people are just bad money-managers. But American research I've been reading says they're no better or worse managers than the rest of us. Their real problem is that life at the bottom is so much more unforgiving.

When your income's so low you need all of it just to get by, there's no scope to build a buffer of savings to cover you when quarterly utility bills arrive or some unexpected expense arrives. And when you can't afford car insurance or home contents insurance, big unexpected expenses are more likely to arrive.

When some service is cut off because you haven't paid the bill, you can't get it back on until you've paid the arrears and a reconnection fee. When you borrow to tide yourself over, you pay much higher interest rates than the rest of us - including to ''payday lenders'' and pawnbrokers.

If none of this applies to you, count your blessings (as we used to sing in Sunday school).

Ross Gittins is economics editor.