The Australian economy experienced remarkable growth during most of the 1990s.  Yet social researchers are still claiming that poverty is extensive – and even that it is getting worse.  The latest example of this doom-mongering is the Smith Family’s report, Financial Disadvantage in Australia 1990 to 2000: The Persistence of Poverty in a Decade of Growth, which appeared with a fanfare of media publicity last November.

This report made two alarming claims: (1) nearly one in eight Australians lives in poverty; and (2) the number of Australians living in poverty increased during the 1990s.  Fortunately, however, the report itself contains enough information for us to see that neither of these claims stands up.

There are two ways of thinking about poverty: ‘absolute’ and ‘relative.’  A family lives in ‘absolute’ poverty when it struggles to make ends meet (e.g. it cannot find adequate food, shelter, clothing, etc.).   In contemporary Australia, everybody agrees that this kind of poverty is rare indeed.

When researchers today talk of ‘poverty’, they are more likely referring to it in its relative sense.  A family is ‘poor’ in relative terms if its standard of living is considerably lower than the social norm.   But how is the norm to be defined?

This is typically done in a rather arbitrary way by drawing a ‘poverty line’ which is commonly set at half the median (middle) income of the population.  If, for example, middle-income earners get $700 per week, then anyone on less than $350 is deemed to be poor.   Defined in this way, we find that just 8 per cent of Australians are ‘poor’, and that this proportion has hardly changed over the last ten years.

The Smith Family report, however, draws its poverty line at half the mean (average) income of all Australians.  The problem with this is that it makes the poverty line susceptible to any big changes at the top end of the income distribution.  This is because increases in top incomes will increase the average income, thereby pulling up the poverty line and increasing the number of people found below it.  More people get defined as ‘poor’ simply because a few people at the top earn more. This is clearly absurd.

In Australia in recent years, people on top incomes have been doing particularly well.  This means that inequalities have widened – but it does not mean that poverty has increased.  The poor do not get poorer simply because a few people get richer.

By defining poverty as less than half the mean income, however, this is precisely what the Smith Family ends up arguing.  Its claim that 1 in 8 people are ‘poor’, and that poverty has increased over the last decade, simply reflects the fact that a few people at the top have got better off.

In fact, during the last ten years, all income groups in Australia got better off – even those at the bottom improved their incomes by an average of $38 a week (after adjusting for inflation).  We know this because the report tells us so.  How an increase of $38 a week can be defined as a deterioration in living standards is one of the wonders of modern social science.

So how many Australians are today living in ‘relative poverty’?  It is certainly not one in 8.  Taking the poverty line as half the median income (the usual definition), it is one in 12 – but even that is almost certainly an over-estimate.

For a start, information on people’s incomes relies on what they tell us, and we know that many of those who report the lowest incomes actually receive more than they admit.  We know this because they consistently spend more than they claim to receive, and borrowing does not begin to explain the difference.

When estimating people’s living standards, we should also take account of the value of the free or subsidised services that they receive – things like Medicare and public schooling.  The Smith Family report ignores these, but if we include them as part of people’s income, the gap between ‘rich’ and ‘poor’ narrows considerably.

And we need to remember that ‘the poor’ are not the same group of people over time.  Many of those whose incomes fall below the poverty line this year will be well above it next year, and the number of people who are locked into long-term poverty is much lower than the number who find themselves hard-pressed at any one time.

Taking all of this into account, we should be extremely sceptical when we hear researchers talking about ‘one in eight’ Australians living in poverty.  Absolute poverty in this country is extremely rare, but even defined in relative terms, the problem is much, much smaller than these sorts of estimates suggest.

Of course we should not be complacent; but nor should we be alarmist.  Australia is a prosperous country, and although we do not all share equally in its riches, very few of us can in any serious sense of the word be said to be suffering in long-term poverty.

About the Author:
Peter Saunders is Director of Social Research Programmes, and Kayoko Tsumori is a Policy Analyst at The Centre for Independent Studies.