What you'd have to live on if you were poor

Speaking of the cost of living, how much do you need to live on? Surveys show most people's answer is: just a bit more than I'm getting at present. Trouble is, they keep saying that no matter how much their income rises.

One way to convince yourself you're not doing all that well is to compare what you earn with people of your acquaintance who're earning a lot more than you.

A better assessment would be to compare your finances with those of people a lot closer to the bottom – if only you knew any.

Not to worry. On Wednesday, Professor Peter Saunders and Megan Bedford, of the Social Policy Research Centre at the University of NSW, will publish new "budget standards" for low-paid and unemployed Australians.

The study was funded by the Australian Research Council, with a quarter of the cost covered by donations from Catholic Social Services Australia, the United Voice union and the Australian Council of Social Service.

In a painstaking exercise, the researchers have put together, and costed, the baskets of goods and services different-sized families at these income levels would need to allow each individual – adult or child – to lead a fully healthy life.

So it's not a poverty line and it does take account of prevailing community standards, but it's the minimum amount required to satisfy basic needs.

"There is no allowance for even the most modest or occasional 'luxuries' and wastage was kept to an absolute minimum. The budgets are thus extremely tight," the researchers say.

For instance, low-income families are assumed to have a car, but it's a second-hand, five-year-old Toyota Corolla, kept for five years. Unemployed people have no car.

Because it's a healthy standard, its only allowance for alcohol is a couple of glasses a week, with no allowance for smoking.

Let's see how you fancy living on these budget standards (I've rounded the figures to the nearest $10 for ease of comprehension). Each of the low-paid categories assumes one person working full-time on the national minimum wage.

A single adult would need to spend $600 a week. A couple with no children would need $830. Add a child of six and that rises to $970. Add a second child, of 10, and it's up to $1170. A sole parent working part-time, with a child, would need to spend $830 a week.

Let's take a couple with two children. Their biggest expense would be rent, $460 a week for a three-bedroom unit in an outer suburb. Then $200 for food, $140 for transport, $140 for household goods and services, $80 for recreation (swimming lessons; bit of sport for the kids), $60 for education, $40 for personal care, $30 for clothing and footwear and $20 a week for out-of-pocket healthcare.

The budget standards for unemployed families are, perforce, a lot tighter.

Whereas the low-paid were assumed to shop at Woolworths and Kmart, unemployed people in the focus groups used to check the realism of the standards said they couldn't afford such stores and went to Aldi and discount stores. They chase specials and collect discount vouchers, make things last longer and waste nothing.

Even with this frugality, an unemployed single adult needs $430 a week. A couple without children needs $660, but that rises by $110 to $770 with one kid, then by a further $170 to $940 with a second kid. An unemployed sole parent with one child needs $680 a week.

It's true that economies of scale mean a couple needs only 1.5 times as much money as a single. But additional kids cost more, partly because older kids cost more, but also because you need to rent a bigger unit.

The good news is that a single adult on the minimum wage earns about $60 a week more than they need to maintain the minimum healthy standard of living, costing $600 a week. A sole parent working part-time, with one child, gets wages and welfare benefits of $45 a week more than their minimum living costs of $830 a week.

After that, however, the news is bad. A low-paid couple with no children earns $40 a week less than the $830 they need. After allowing for family benefits, a low-paid couple (one in full-time work and one doing some part-time work) with one child is almost $10 a week shy of their $970 healthy standard, while a couple with two children is short by $90 of the $1170 a week they need.

One of the great stains on our fair-go nation's conscience is the long-running attempt by governments of both colours to starve the unemployed until they find a (usually non-existent) job.

The study finds that the dole, plus any other welfare benefits for which the jobless are eligible, falls almost $100 a week short of the much tighter minimum healthy living standard for the single jobless.

A childless couple on the dole falls short by almost $110 a week and a couple with two kids is shy about $130 a week.

In our boundless generosity, however, we go easy on an unemployed couple with one kid (short by a mere $60 a week) and a jobless sole parent with one kid, short by a piddling $50 a week.

If only you and I weren't having such a struggle to maintain our own living standards, we could perhaps ask the pollies to be a tad more munificent.

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Why the economy's slow growth may last

The biggest economic story last week wasn't all the wishful thinking about raising the goods and services tax, it was Reserve Bank governor Glenn Stevens' warning that the economy's "potential" rate of growth may be lower than we've assumed.

Predictably, those commentators who did see the significance of this news were too busy putting their own spin on it to make sure what Stevens' said was widely taken in. So let me have a go.

The macro managers' long-standing belief that the economy's "trend" rate of growth is 3 per cent a year or a fraction more has been challenged by the Bureau of Statistics' labour force estimates showing that, over the past year, the rate of unemployment has stabilised at 6 per cent.

Trouble is, the latest national accounts show the economy growing by only 2.3 per cent over the year to March. This is well below the trend rate that, almost by definition, is the rate at which the economy must grow to hold the unemployment rate steady.

How is this discrepancy explained? Stevens ran through the range of possibilities. Maybe employment hasn't been growing as strongly as the figures say at present. Maybe the economy has been growing more strongly than the figures say at present.

Or maybe part of the surprisingly strong growth in employment is explained by the unusually slow growth in wage rates, which would be saving some jobs and creating others.

The final possibility – and the one to which Stevens gives most weight – is that the trend rate of growth is lower than we've assumed, thus allowing unemployment to stabilise at a lower rate of economic growth than we've assumed.

Economists use the term "trend" in both a backward-looking and a forward-looking sense. If you calculate our average actual rate of growth over the past 10 or 20 years, this must have been our "potential" growth during that period.

If nothing in the economy has changed over that time, it should also be our average, trend rate of growth in the coming five or 10 years.

However, things do change – the population ages, for instance – so economists have to make guesses about what our potential growth rate will be in the future.

Our potential growth rate is the maximum rate at which the economy can grow on average over the medium term without a causing a serious inflation problem. It's set by the economy's supply side.

It represents the average rate at which the economy's capacity to produce goods and services is growing. And this is usually thought of as being determined by the rate of growth in the working population plus the rate of improvement in the productivity of labour.

(Whether in any particular year the economy is growing at a rate below, at or above its potential growth rate is determined by the strength of demand at the time. However, the economy can grow faster than its potential "speed limit" only for as long as it has idle production capacity to use up.)

But this is where those commentators who cottoned on to the significance of Stevens' views jumped to their own conclusions about what was causing the suspected slowdown in potential growth. They assumed it must be caused by a slowdown in labour productivity improvement.

Why? Because this fits well with the economists' (including Stevens') long-running campaign to persuade us to undertake more micro-economic​ reform so as to raise productivity and, hence, material living standards.

What they missed in their missionary zeal was Stevens' clear indication that he thought the culprit was slower-than-expected population growth.

The econocrats' figuring suggest a potential growth rate of 3 per cent would be explained by population growth of 1.7 per cent to 1.8 per cent a year, plus growth in labour productivity of 1.2 per cent to 1.3 per cent a year.

So their expected rate of productivity improvement is already pretty low, while the end of the mining construction boom and slow growth generally have seen population growth slow to 1.5 per cent a year or less as the net intake of workers on temporary 457 visas falls and Kiwis go home to a faster-growing economy.

The other thing the missionaries missed was Stevens point that, to the extent the lower trend rate is caused by lower population growth, it shouldn't involve any slower rate of improvement in our material living standards, as measured by growth per person.

Missionary micro-economic reformers won't win lasting converts by misrepresenting our present position, nor the outlook for growth. Their pessimism about future productivity improvement isn't supported by our more recent performance. It's little more than a guess.

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