Opinion & Commentary
Poor Approach to the Economy: Claims that poverty is growing in Australia are built on shifting sands
Does Australia have an increasing poverty problem or not? The Centre for Independent Studies' Policy (Winter 2001) a year ago suggested that poverty estimates based on income surveys exaggerated poverty levels and were wrong in claiming that it was increasing in Australia.
Peter Saunders, commenting on Ann Harding's poverty measure for the Smith Family, said the claim that 13 per cent of Australians lived in poverty seemed unlikely and did not help to target those really poor people (perhaps 5 per cent of the population) who needed the community's help.
The income surveys on which dubious poverty estimates have been based underestimated low incomes for several reasons. The two main ones were that they did not report redundancy, long service leave and other termination payments and they did not include informal or 'black' income for fear it would be reported to the tax authorities.
Under-reporting of incomes was clear when expenditure surveys were compared with income surveys. Low-income earners persistently spent more than they earned in amounts that could not be explained by borrowing. Yet surveys were also known to under-report spending on tobacco, alcohol and gambling.
Other countries have found similar problems. In Australia, at least, the debate on poverty has led to data revisions that indicate income surveys have exaggerated the extent of poverty and erred in suggesting its rise.
The Australian Bureau of Statistics' Measuring Australia's Progress 2002, in reporting on a new standard of living indicator, says:
`'The lowest 10 per cent have been excluded from the measure because ... the extremely low incomes (close to nil and sometimes negative) recorded for some households in this group do not accurately reflect their living standards. The value of goods and services consumed by such households is often as high, or higher, than that of households in slightly higher income groups.'
The bureau says the data on the bottom 10 per cent are so unreliable that including them would give 'a misleading impression of the economic well-being of the most disadvantaged households'.
Australian Economic Indicators 2002 notes that ''the 1998-1999 Housing and Expenditure Survey income results understate the measurement of welfare income in the two lowest-income quintiles. It is estimated that the combined impact of the corrections will result in the mean income of the lowest quintile being revised upwards by about 11 per cent'. Beginning in 1994-1995, households interviewed were no longer advised 'to have on hand, for their income distribution survey interview, all relevant documents (tax returns, pay slips etc)'. The ensuing falling-off in accuracy could alone explain an apparent worsening of income distribution found by Harding in the 1990s. The missing instructions have, of course, been reinstated.
Overestimations of poverty are not unique to Australia. The Luxembourg Income Study suggests that other anglophone countries, as well as Australia, have much higher poverty levels than France, Germany and Sweden.
Christopher Sarlo (Measuring Poverty in Canada, 2001), after showing that income survey-based poverty estimates for Canada were unreliable, made a detailed estimate of 5 per cent of the population in poverty. That is the same as my poverty estimate for Australia after adjusting ABS survey incomes for excluded data.
Nicholas Eberstadt says that in the United States between 1973 and 2000, per capita income jumped by almost 60 per cent, social spending nearly tripled between 1973 and 1998 and unemployment fell sharply in the 1990s. The contention that a higher proportion of Americans lived in poverty in 2000 than in 1973 is untenable.
He continues: 'The jarring mismatch between income and consumption is highlighted annually in the Bureau of Labor Statistics' Consumer Expenditure Survey. For the bottom fifth of household expenditures sampled, expenditures typically exceed income by more than 100 per cent. In the latest survey, for every dollar of reported pre-tax income, the poorest fifth of American households reported spending $2.31!'
David Green ('Poverty Inflation' in Benefit Dependency, 1988) cast doubt on income survey-based poverty estimates in the UK. He refers to similar problems with Netherlands poverty estimates and a Eurostat (Statistical Office of the European Communities) study.
Replicating Sarlo's country-specific approach is the only way that the proportion of people living in poverty can be accurately determined. Without such country-specific data, expenditure data, though also imperfect, are better than income data.
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About the Author:
Helen Hughes is a senior fellow at the Centre for Independent Studies.
