Research Discussion Paper – RDP 9004 Saving and Investment in the 1980s
August 1990
Abstract
This paper reviews the behaviour of saving and investment in Australia during the 1980s. The subject matter is divided into three broad areas: a description of trends in saving and investment (Section 2); a discussion of the basic determinants of private saving rates (Section 3) and a discussion of the role of saving-investment imbalances in the determination of the current account (Section 4).
A central finding of the paper is that gross private saving rates when adjusted for inflation have been quite stable over a period of at least three decades. This is in contrast to the somewhat misleading impression given by movements in the conventionally quoted household saving ratio, which has been in steady decline since the mid 1970s. The short-term behaviour of private saving appears to be qualitatively well explained by simple principles of consumption smoothing, whereby the saving ratio moves inversely with income. However, evidence from both time series and cross sectional data suggests that consumption is more closely correlated with income over longer time periods than would be predicted by conventional theoretical models.
In inflation adjusted terms, the private sector has typically been in deficit, investing more than it saves. Two main explanations are offered for these persistent deficits: first, the effect of Australia's relatively high population growth on the demand for capital and secondly the presence of certain tax distortions (such as those arising from the interaction of inflation with the tax system) which tend to encourage capital importing. It is likely that both factors are important in explaining private sector deficits.
Saving levels in the public sector have shown much larger swings than have occurred in the private sector. Public saving rates fell dramatically in the mid 1970s and did not recover until a decade later. Although the public sector financing requirement has been dramatically shifted into surplus in the second half of the 1980s, this result has been achieved at lower levels of public saving and investment than were typical prior to the mid 1970s.