The Budget: 1974 versus now

Commsec has released some interesting analysis comparing the 1974 Budget to the latest Budget:

Was the 2014 Budget too tough on recipients of pensions, payments or benefits? To a large extent that is a judgement call. Most believe it is right and proper for the Government to provide assistance to the aged, families and unemployed. However it is the extent of assistance provided that can be roundly debated given that there is no “right” or universally agreed formula to determine payments.

However a look back at the Federal Budget handed down 40 years ago provides an interesting perspective. Clearly these were far different times when the cost of oil was soaring with inflation lifting at a 15 per cent annual rate and wages up 19 per cent on a year earlier. But it was also a time when the Budget was broadly balanced (on consistent figures to today, actually in surplus by 1.9 per cent of GDP). And the Government was smaller with outlays and receipts around 20 per cent of GDP, down from 24-25 per cent of GDP today.

Overall, what stands out is the difference in family benefit payments today compared with 40 years ago. Today lower income families can receive up to $172.20 a fortnight for each child aged less than 12 years whereas the child endowment in 1974 in current dollars is $7.48 a fortnight. Families are decidedly better supported today than 40 years ago, bringing into question the generosity of the payments being made.

Understandably it is far more difficult to do financial comparisons of aged pensioners and the unemployed between 1974 and 2014. A major complication in doing the comparisons is the sheer raft of benefits available today compared with 40 years ago. In simple terms it does appear that pensioners and the unemployed are better off today in financial terms. It is also important to note that the standard of living in Australia today is far higher than 40 years ago, when more basic goods and services took a larger share of our spending and incomes…

I draw different conclusions from the table above.

First, pensioners have been big winners from government assistance over the past 40 years. Not only have their payments increased by 65% in real (inflation-adjusted) terms, but the pension has grown at a faster rate than wages, increasing from 25.9% of the average wage in 1974 to 26.7% in 2014. Moreover, many people now on the Aged Pension would also have experienced massive growth in the value of their homes, which are obviously excluded from the assets test.

The unemployed, by contrast, have been big losers from government assistance, with their incomes increasing by only 10% in real terms between 1974 and 2014, and growing much slower than wages over that period. Younger unemployed have also seen their benefits slashed by 10.5% over the last 40 years in real terms.

While families today receive much more in budgetary assistance than was the case in 1974, their circumstances are arguably much worse.

In 1974, average wages grew by 19% versus inflation of 15%, making for 4% real wages growth. By comparison, in the year to March 2014, average wages grew by just 2.6% versus inflation of 2.9%, meaning that real wages actually fell by 0.3%!

And then there is housing. In 1974, a typical home could be purchased for just three times household incomes, versus more than six times median incomes today (see below charts).

Initial mortgage repayments on the median priced home also took up only around 25% of disposable income in 1974 versus just under 45% currently (see next chart).

And any mortgage that was taken out in 1974 was quickly inflated away courtesy of negative real mortgage rates, whereas mortgage rates are positive today, making our jumbo-sized mortgages much more difficult to repay (see next chart).

What the above data shows is that the early baby boomer cohort have been blessed. Not only did they receive cheap homes whose mortgages were quickly eroded via inflation and negative real interest rates, but they then got to enjoy seeing their homes skyrocket in value. And now as they enter retirement, they get to receive an Aged Pension whose value has gone up by 65% in real terms and has also gained against average wages growth, with their expensive homes also excluded from the assets test.

There is no fair comparison to be made between the 1974 Budget and today’s.

[email protected]