In last Thursday’s post
, we established that in terms of buying power in New Zealand dollars, Australians were able to spend about $13,000 a year more than New Zealanders in 2005. However, just over half of that went either into capital investment or on government spending on things like defence and R & D. That means it didn’t flow through directly to individual households.
So in terms of actual consumption by households, the gap between New Zealand and Australia was just under $6,000 per person a year. That’s 22% more spending by the average Australian compared to the average New Zealander.
To turn that into terms that are even easier to relate to, that comes to an extra $113 a week for each person. In this post, I’ll have a look at what Australians did with their extra $113 a week.
As you’ll see, it didn’t primarily go on the sort of consumer products that one might have expected. In fact, a lot of it went into health and education. This raises some different, and in some ways more troubling, issues for New Zealand as we contemplate what we’re ‘missing out on’ and how to achieve Australian levels of prosperity.
First, a few points to note about this analysis:
- It looks at what’s called ‘Actual Individual Consumption’, which puts together what households spend directly on themselves with what the government spends on their own behalf on things like health and education;
- It is expressed in buying power in New Zealand dollars — this involves turning Australian currency into NZ dollars but also adjusting for the different price levels in the two countries (the price levels for Actual Individual Consumption are estimated to be approximately the same overall, but they are somewhat different for specific spending areas); and
- It is based on the OECD’s most recent Purchasing Power Parity Benchmark results so the data is all from 2005.
On that basis, then, let’s have a look at where the proceeds of Australia’s greater prosperity were going.
As you can see from the graph above, they didn’t really go into food, drink, restaurants, hotels, clothing and footwear. Between them, these only accounted for $6 or 5% of the gap. Specifically:
- Australians spent nearly $3 a week less in buying power terms on food and non-alcoholic beverages than AustraliansNew Zealanders;
- They spent almost the same amount on alcohol and tobacco (in nominal terms, Australians did actually spend slightly more, but that’s because alcohol and tobacco is slightly more expensive there on average);
- Australians spend about $4 a week (12%) more on restaurants and hotels in buying power terms; and
- They spend nearly $5 a week more on clothing and footwear, which is a not-inconsiderable 25% more than New Zealanders (it worth noting that in nominal terms they spent only $NZ1 a week more — in other words, most of this gain comes from clothing and footwear being on average 17% less expensive in Australia).
There are a few nice advantages there, but they don’t really amount to a vast difference between the two countries. Let’s therefore look at another four categories:
Areas like household goods, recreation and transport account for $16 a week, a somewhat larger, though still modest, portion of the gap (14%). Specifically:
- Australians spent nearly $7.50 a week more on household furnishings, equipment and maintenance, which is a significant 26% difference from New Zealanders’ spending;
- They spent $1 a week more on communication; and
- Australians spent around $3.50 a week more extra on each of recreation and culture and transport (in both cases, relatively modest differences of 6% more than New Zealanders).
Now let’s turn to two somewhat difficult-to-interpret categories that between them account for just over a quarter of the gap:
Miscellaneous goods and services accounted for nearly $19 of the gap. This category comprises: personal care; prostitution; personal effects not elsewhere classified; social protection; insurance; financial services not elsewhere classified; and other services not elsewhere classified. Clearly, it will be important to get a better understanding of how these various components contribute to that $19 difference.
Net purchases abroad is for both countries a negative item. This category is an adjustment item to remove the consumption in the other categories that was contributed by non-residents making purchases in the domestic market, and to add in the purchases of goods and services that resident households made while travelling abroad. Apparently, for both Australia and New Zealand the former was larger than the latter, but this more the case in New Zealand (to the scale of $12 a week). It will be a matter of interest to discover whether this primarily reflects more tourist purchases in New Zealand or more purchases by Australians travelling overseas.
Combined, all of the ten categories outlined so far accounted for less than half of the gap. Where then is the majority of it coming from? It is from these three categories:
Accommodation, health and education between them account for $61 or 54% of the gap between what New Zealanders spent each week and what Australians spent.
It is worth reiterating two points here. Firstly, all of these categories compare the buying power of Australians to the buying power of New Zealanders, so (unless there is some flaw in the ‘purchasing power parity’ indexation) these differences do not reflect these areas of expenditure being more expensive in Australia than New Zealand.
Secondly, they reflect spending by both government and households in each of these categories — for instance, in the tertiary education area both government tuition subsidies and student tuition fees would be included. So the balance between public and private spending in the two countries makes no difference to these figures.
Looking at each of these three categories in turn:
- Australians spent a bit over $25 a week more on housing, water, electricity, gas and other fuels than New Zealanders — this is a difference of 27%. As noted above, this is not because this category of expenditure is more expensive in Australia (in fact it is 5% cheaper on average) — instead it reflects Australians using more energy and/or having more or better housing.
- They spent about $14 a week more on health — apparently health prices are higher in Australia than they are here, but that has been factored in, and with that taken into account Australians spent 26% more per person on health (without the adjustment, it’s 40% more).
- Australian spent just over $21 more on education than New Zealanders, which is a massive 55% difference in per person spending. Again, this does not reflect price differences (education price levels are about the same in both countries).
I would argue that these are unexpected and significant results. We have been talking a lot in this country about Australia being more prosperous than us, yet it turns out that for the most part Australians are not making use of their additional income for what we’d generally think of as ‘consumer purchases’.
Yes, they do spend a bit more than us on clothes and household furnishings and maybe overseas holidays. But as we saw last post, nearly half of the overall gap is being ploughed back into capital investment and now we see that about a third of the ‘consumption’ portion is going on what appears to be more and/or better health and education.
There is still quite a bit of further investigation needed in this project. For instance, what’s the balance between housing and energy, and does this imply higher rates of homeownership? And what’s the balance between public and private health and education, and between different areas within these categories (e.g. early childhood, school, tertiary)?
Nevertheless, I think we can draw some tentative conclusions.
The good news is that our relative lack of prosperity isn’t impacting that heavily on our consumer lifestyle yet, at least not compared to Australia.
But the bad news is that we’re investing less on our health, on our education and on our physical infrastructure.
And the medium and long-term impacts of that for our comparative wellbeing and prosperity are likely to be far more significant than if Australia was simply using its additional income to go shopping.