RDP 9004: Saving and Investment in the 1980s 1. Introduction

Perceptions about Australia's saving performance have changed remarkably during the past decade. In his review of household saving and consumption in the 1970s, Williams (1979) argued that the main outstanding issue was to explain the persistence of household saving rates which appeared historically high. Corden (1979) added that on balance, economists considered those high saving rates a bad thing, contributing to a lack of demand and hence to unemployment. A decade later the concerns are very different. The household saving ratio has been steadily declining and the macroeconomic debate has placed a strong emphasis on the presumed link between insufficient saving and the accumulation of external debt. Policies to boost private saving have been actively canvassed. These concerns represent a major shift from a focus on high saving rates and their consequences in the 1970s, to a corresponding focus on the apparently low saving rates of the late 1980s.

It will be the contention of this paper that, at least in relation to private sector behaviour, both concerns appear to have been unwarranted. The paper argues that for various reasons the household saving ratio gives a misleading impression of the broad trends. Our preferred measure, gross private sector saving adjusted for inflation, has fluctuated in a fairly narrow band around 15 per cent of GDP at least since the early 1960s, and provides no evidence of a trend deterioration in private saving levels. At the same time, gross investment by the private sector has if anything tended to increase as a share of GDP. Concerns about the adequacy of total national saving may still be justified, but these should be focused on performance in the public sector, where rates of saving and investment in the 1980s have been significantly lower than historical averages.

The paper is structured so as to focus initially, in Section 2, on presentation of the main facts about saving and investment, and on issues concerning the measurement of saving. The remaining sections consider possible explanations for various aspects of saving and investment behaviour, and discuss the role of saving-investment imbalances in the determination of the current account. In the final Section the main policy issues raised in the paper are drawn together.