Marginal Propensity to Save (MPS) Explained: Australian Guide 2025

Australia’s economic engine is driven by millions of individual decisions—spend or save? At the heart of this choice is a deceptively simple concept: the marginal propensity to save, or MPS. As 2025 brings fresh economic challenges and policy shifts, understanding MPS isn’t just for economists—it’s crucial for anyone looking to make smarter financial moves.

What Is Marginal Propensity to Save (MPS)?

Marginal propensity to save (MPS) is the portion of any additional income that a household or individual chooses to save rather than spend. If your income goes up by $100 and you save $20, your MPS is 0.2. It’s a key measure in economics because it influences how changes in income ripple through the broader economy.

• MPS = Change in Savings / Change in Income

• If you save $10 out of every extra $100 earned, your MPS is 0.1.

• The remainder—what you spend—is the marginal propensity to consume (MPC). MPS + MPC = 1.

Why does this matter? Because the higher the MPS, the less money circulates immediately through the economy via spending. This has direct implications for growth, inflation, and even the Reserve Bank of Australia’s (RBA) policy decisions.

2025: Why MPS Is in the Spotlight

This year, Australia is facing a unique economic landscape. The RBA’s ongoing efforts to balance inflation and stimulate growth mean that household saving habits are under the microscope. Here’s what’s changing in 2025 that puts MPS front and centre:

• Tax Cuts and Stage 3 Reforms: With the Stage 3 tax cuts rolling out in July 2024, most working Australians will see more take-home pay. The big question: will Aussies save or spend the extra dollars? Early indicators from the Australian Bureau of Statistics (ABS) show a mixed response, with younger households more likely to spend and older demographics increasing their savings buffers.

• High Interest Rates: As the RBA keeps rates at elevated levels to contain inflation, deposit accounts and term deposits are more attractive. This encourages higher savings—raising the national MPS, at least temporarily.

• Cost of Living Pressures: Persistent increases in rent, utilities, and groceries are causing many households to dip into savings or reduce their saving rates. For lower-income Australians, MPS tends to drop in tough times as nearly every extra dollar is spent on essentials.

These trends are shaping not only individual financial strategies but also the government’s fiscal policy and business investment plans.

How MPS Affects You: Real-World Examples and Policy Impacts

Let’s bring MPS down to earth with two real-world scenarios:

• Example 1: The Tax Cut Windfall Sarah, a Sydney-based professional, sees her monthly pay rise by $250 thanks to tax reforms. She decides to put $75 into a high-interest savings account and spends the rest. Her MPS is 0.3. If a million Australians behave like Sarah, that’s $75 million less in immediate spending but a stronger national savings pool—potentially funding future investment or cushioning against economic shocks.

• Example 2: The Cost-of-Living Squeeze Ben, a single parent in Brisbane, receives a $100 pay rise but spends it all on groceries and bills. His MPS is 0. In periods of high inflation, MPS often falls as people prioritise immediate needs over future savings.

On a national level, a rising MPS can:

• Slow down short-term economic growth (less consumer demand)

• Strengthen household balance sheets, making the country more resilient to shocks

• Influence government stimulus decisions—if people save tax cuts rather than spend them, fiscal policy may need to adjust

Policymakers track MPS closely. In the May 2025 Federal Budget, Treasury models assumed a modest uptick in MPS due to higher interest rates, signalling that future stimulus may need to be more targeted to encourage spending where it’s most needed.

Boosting Your Own Financial Resilience in a Changing MPS Landscape

For individuals and families, understanding your own MPS isn’t just academic—it’s a tool for better budgeting and wealth-building. Here’s how to put it into practice:

• Track Your Income Increases: Whether it’s a pay rise, bonus, or government payment, decide in advance how much you’ll save versus spend.

• Take Advantage of High Savings Rates: With deposit rates remaining above 4% in early 2025, even a small boost to your regular savings can compound quickly.

• Balance Needs and Wants: If rising living costs are squeezing your budget, focus on emergency savings first. Even a small MPS (saving $10 out of $100) builds financial resilience over time.

• Stay Flexible: Your MPS doesn’t have to be fixed. Adjust it as your circumstances change—saving more when times are good, and drawing down when needed.

Australian households have historically adapted their saving habits in response to economic signals. In 2025, the winners will be those who can respond nimbly to policy changes, interest rate movements, and shifting household budgets.