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Financial stress is a persistent challenge for many Australian households. It is also a growing problem following the onset of the COVID-19 pandemic. Around one in four Australian households were recently found to be struggling with cost of living pressure. The situation is likely to worsen as electricity bills start to incorporate rising electricity prices. Some groups are especially likely to face heightened stress, such as renters.

Being able to precisely identify which households are more likely to experience financial stress has value for policy design. At a fundamental level, financial stress should be more likely when households have insufficient financial resources to cover spending. More specifically, there is value in knowing which types of financial resources are most closely linked to financial stress. In addition, knowledge on average spending tendencies for groups such as renters can add to understanding of financial stress.

In my recent Australian Journal of Public Administration paper, I investigate the influence of four components of net wealth on financial stress. These components are accumulated resources of non-financial assets such as residential property, superannuation, other financial assets excluding superannuation, and total liabilities.

Policy can be aligned directly with enhanced knowledge on the links between financial resources and financial stress. There is a long history of means testing in Australia across multiple policy domains, most notably the asset and income tests for welfare payments, with income tests being binding more frequently. This motivates research to assess the appropriateness of current policy settings. Research on financial stress experiences for particular welfare groups can also inform enhancement of current policy approaches.

Broad and detailed household data

A broad and detailed data source is ideal for analysis of financial stress, given the diversity in characteristics and contexts across Australian households. The Household Expenditure Survey of the Australian Bureau of Statistics (ABS) is one excellent example. The 2015-16 version covered over 10,000 Australian households and had detail on many indicators of financial stress as well as detailed information on financial resources. This level of detail helps to uncover underlying factors of fundamental importance, such as asset components, which are likely to have persistent influences across time.

I focus on seven indicators of financial stress and a composite measure which adds up experiences through these seven indicators. These indicators are based on a shortage of money leading households to go without meals, feel unable to heat homes, not pay bills on time, be unable to afford insurance, pawn or sell something, seek financial assistance from community organisations, or seek assistance from friends or family. Of these indicators, the most common was not paying bills on time, which occurred in 10% of cases in the ABS survey.

I used multiple methods to analyse financial stress outcomes with the large and detailed ABS survey. In particular, regression approaches were useful to assess many household characteristics to determine if some groups appear to face additional financial stress. I also employed a matching method where households were weighted to give matching characteristics, before comparing the impact of having low levels of accumulated wealth to another group of households with higher levels of wealth.

Assets are more closely linked to financial stress than income

A strong association exists between assets and financial stress. There are pronounced impacts from being in the bottom 20% of households for net assets. The additional probability of these households facing financial stress was around three percentage points across multiple financial-stress dimensions. This is roughly a doubling of the probability in most cases. While impacts are most common for the bottom 20%, there is also evidence that up to 60% of households face elevated risks of some dimensions of financial stress. Each asset component is relevant in explaining financial stress, although superannuation balances are less relevant for younger respondents.

Total income has a much weaker empirical link with financial stress, when compared to assets. However, households with investment income are less likely to experience financial stress. This follows the point that assets are important since investment income is derived from assets. In contrast, having business income did not appear to be linked with different financial stress outcomes, on average.

There is also an observable link between liabilities and financial stress. Having higher liabilities is associated with additional financial stress experiences. This result is robust to accounting for a range of other financial and social characteristics of households. Existing household liabilities may directly cause stress or might make banks less likely to offer further loans.

Which groups are more likely to experience financial stress?

Among various welfare groups, recipients of unemployment benefits and student allowances appear to be more likely to experience financial stress. Recipients of disability or carer payments are also likely to experience many dimensions of financial stress. In contrast, some welfare groups do not appear to be more likely to face financial stress, when accounting for other characteristics such as financial resources. For example, I find no evidence of greater financial stress for age pensioners and recipients of family payments for most financial stress indicators, on average.

Renters are another group who are more likely to experience financial stress. This may relate to the ongoing commitments for rent payments, less certainty, and the lack of property rights to make beneficial housing investments that can lower subsequent costs such as through energy efficiency improvements. Households with some combinations of socio-demographic characteristics are especially likely to experience financial stress. For example, unemployed renters who are single parents experienced financial stress in the highest proportion of instances compared to 23 other household groups.

Policy implications

The stronger influence from assets, rather than income, motivates refining means testing and payments for many policies to focus more on assets. This could involve higher benefits for low-wealth households. If a neutral impact on government spending is required, it may be possible to commence tapering earlier for an asset test. This could make assets binding more often than income and be appropriate given that financial stress more closely relates to assets than income. However, susceptibility to financial stress for the bottom 60% of households based on net assets may motivate continued support for households across this range.

Raising benefits could be warranted for some types of welfare payment given the different financial stress outcomes across welfare groups. For instance, a targeted increase for unemployment, student, disability, and carer payments could help to address financial stress differences.

Further efforts to promote financial literacy could also help to reduce financial stress. This can occur via greater avoidance of large liabilities. Households could then avoid the direct stress from worrying about paying back excessive loans, and also have greater financial flexibility in adjusting to changed circumstances over time.

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