Financial Stress and Household Consumption: Exploring households’ commitment to contractual payments

Abstract

In a context of increasing attention to growing fixed payments, slim buffers, and unstable incomes in the household sector, this analysis considers the degree to which households prioritise contractual payments. The study uses Australian household expenditure data to examine which expenditure categories are prioritised when households enter into financial stress. The analysis finds that financially stressed households maintain basic expenditure and contractual payments by reducing expenditure on insurance along with more conventional discretionary spending. These findings suggest that insurance is effectively considered a luxury good. The findings thus point towards a sharp rise in risk exposure that accompanies the early stages of financial stress as households absorb shocks in order to maintain the stability of contractual payments. The findings have important implications for how we understand household sensitivity to shocks and the behaviour of households with regards to risk management, as well as the capacity of private insurance markets to stabilise the household sector. The findings also feed directly into broader questions about how the distribution of risk is evolving as household balance sheets expand.