So why does the Treasury believe we'll spend our cash bonuses?

David Uren spells it out.

It relied on a new study by Jonathan Parker from the Kellogg School of Management and Christian Broda from the University of Chicago that has tracked the spending of 34,000 people who received last year's US cash bonuses.

"Cheques were mailed out over a nine-week period, so the study was able to compare spending patterns of people who had received the bonus with those who had not."

Read on. The Coalition hasn't.

UPDATE BELOW:

On human behaviour, Epley, Mak and Idson (2006) have found that the way a windfall gain is ‘framed’ (described) affects the MPC. For example, a windfall gain described as a ‘bonus’ as opposed to a ‘tax rebate’ induced people to spend more of the additional bonus income (see Table below for implied MPCs out of the authors’ experiments). Epley et al (2006) found evidence that people consider ‘bonus income’ to be a departure from a status quo, while those who consider the extra money as a ‘tax rebate’ consider it to be a return to a status quo. This influenced their expenditure intentions.

Table: Experimental MPCs
	Framed As
Experiment	‘Bonus’	‘Rebate’
Experiment 1a	0.87	0.25
Experiment 1b	0.77	0.41
Experiment 2	0.44	0.20
Experiment 3	0.63	0.15
Experiment 4a	0.44	0.10
Experiment 4b	0.31	0.07

Source: Epley et al (2006)

Note: Experiment 1a asked participants to recall the proportion of their 2001 US tax rebate consumed. Experiment 1b did the same, but augmented the analysis with a question about how consumers perceived the extra income. Experiment 2 provided participants with a USD$50 windfall to spend on what they wished. Experiment 3 also provided a USD$50 windfall, but asked participants to record expenditures when undertaken. Experiment 4a provided a USD$25 goods voucher to participants and presented a range of products that could be purchased with the voucher. Any portion of the voucher not used was redeemed for cash. Experiment 4b asked consumers how they perceived the voucher.

Reference

Epley N, D Mak and LC Idson (2006), ‘Bonus or Rebate?: The Impact of Income Framing on Spending and Saving’, Journal of Behavioral Decision Making, 19(3), pp 213—227.

David Uren, The Australian February 10, 2009

CONSUMERS are likely to spend most of their cash bonuses, according to the US research that guided the Rudd Government while it assembled the stimulus package.

The research shows households are more likely to spend a windfall lump sum than the regular smaller tax payments suggested by the Opposition.

Lump-sum payments are likely to have a significant effect on consumer spending over a six-month period.

The Coalition has criticised the Government's decision to distribute $12.7 billion in cash bonuses as part of its $42 billion stimulus package, saying most of it will be saved.

Treasury believes this is not supported by research into two lump-sum rebates distributed in the US last year and during the 2000-01 recession.

A new study by Jonathan Parker from the Kellogg School of Management and Christian Broda from the University of Chicago tracked the spending of 34,000 people who received last year's bonuses, which averaged $US950 ($1430).

Cheques were mailed out over a nine-week period, so the study was able to compare spending patterns of people who had received the bonus with those who had not.

They found a typical family increased spending on food, mass merchandise and drug products by 3.5 per cent when their rebate arrived compared with a family that had yet to receive its payment.

Treasury believes this study is more persuasive than figures showing an increase in total retail sales, because these do not show what would have happened if the rebate had not been paid.

The most widely cited study, published in the American Economic Journal, examined rebates averaging $US500 and paid in 2001. It also compared the spending of people who received the payments at different times and used a consumer spending survey covering 13,000 people.

It found that, over a three-month period, people increased spending on food by $US52 and other non-durable goods and services, including clothing, health care and public transport, by $US179. It estimated that 40 per cent of the rebate was spent in the first three months and two-thirds over a six-month period. Low-income households spent 76 per cent of their rebate in the first three months.

These findings contradict the long-standing theory developed by Nobel Prize-winning economist Milton Friedman that people would only lift spending based on permanent changes in income.

This argument has been made by Malcolm Turnbull in opposing the Government's package.

Independent senator Nick Xenaphon, whose vote will be crucial to the passage of the Government's stimulus package, is reported to be influenced by a psychological study showing people are more likely to spend repeated small amounts than large lump sums.

Treasury has also consulted the literature of economic psychology. A recent article in the Journal of Behavioral Decision Making found that decisions about whether lump sums were spent or saved were influenced by whether it was seen as a windfall bonus or as a rebate of tax the consumer had already paid.

It found that people save 59 per cent of a "rebate" -- money they regarded as theirs anyway -- but only 23 per cent of a "bonus". This explains why the Government is emphasising the bonus nature of its payment