Ireland’s Inequality of Market Income moves towards OECD average

One of the notable features of the distribution of income in Ireland in the decade after the crash of 2008 was the unusually high level of inequality of market income.  See previous post for some discussion of definitions.

Using estimates from the OECD, the gini coefficient for the distribution of market income reached almost 0.60 in the years after 2008 and was the highest in the OECD (and also the EU). However, since then the gini coefficient for market income has declined and the latest update from the OECD shows the estimate falling below 0.50 for the first time.

The distances between the ginis are indicative of the impact of transfers on income inequality (from market income to gross income) and of taxes (from gross income to disposable income).

The impact of transfers rose considerably in the crash, as 300,000 jobs were lost and many became reliant on unemployment-related and other transfers.  With the onset of the recovery, the impact of transfer reduced as the numbers working rose with a related fall in the numbers on unemployment supports.

In 2010, it was estimated that transfers reduced the gini coefficient by 0.21 points. By 2016 this had fallen to 0.16 with a further reduction to 0.13 in 2022 which is the lowest it has been put at.

On the other hand the impact of taxes on income inequality is estimated to have increased in the past 20 years from 0.05 points in 2004 to 0.08 at the latest estimate.

Here is where the estimate of the gini coefficient of market income for Ireland sits relative to the 41 other members of the OECD. 

It can be discerned how much of outlier an estimate close to 0.60 would be.  But the latest estimate for Ireland below 0.50 moves Ireland relative position towards the middle of the OECD ranking.  Ireland is now 13th of the 42 OECD member states and converging on the arithmetic average for the OECD of 0.47.

Ireland remains below the OECD average for the gini coefficient of disposable income with a 2022 estimate of 0.29 compared to an OECD average of 0.32.  This means the impact of transfers and taxes in Ireland remains high in EU terms, with their combined impact the fourth highest in the EU.

The impact of transfers on the gini coefficient in Ireland is now close to the OECD average, 0.13 in Ireland versus an arithmetic average of 0.12 across the OECD.  It is for the impact of taxes that Ireland continues to stand out.

In 2022, Ireland’s gini coefficient for disposable income was 0.075 points lower than that for gross income. No other country showed a reduction in inequality to the income taxes and social contributions as large as this.

Finally, given the impact of demographics, old-age dependency ratios and pensions here is the gini coefficient for market income for those who are most likely to be in receipt of it – the working age population from 18 to 65 years.

Ireland is eighth-highest in the OECD, though the gap to the OECD average is modest. Among EU member states, only France and Greece have higher estimates but is within a couple points of five more.

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CT disappoints–but only relative to elevated expectations

When Budget2024 was published back in October 2023, the forecast was for €24.5 billion of Corporation Tax to be collected in 2024.  The recent end-year Exchequer Returns show that receipts came in at €28.1 billion, giving an overperformance of €3.6 billion or 14.7 per cent. 

Note that everything here excludes any receipts linked to the CJEU ruling in the Apple State-Aid case.  The overperformance relative to the Budget2024 forecasts was greater than the total amount collected in 2011. Yet, still, the final outturn was somewhat disappointing.

This was because as 2024 progressed, a strong performance early in the year gave rise to expectations that this would continue into the second half of the year.  This was particularly true of June which serves as a useful bellwether to what might be collected later in the year and June 2024 was 38 per cent higher than the same month in 2023.

By the time of Budget 2025 last October, the expectation was that total CT for the 2024 would be €29.5 billion.  This was not an unreasonable expectation given what was known at the time.  However, the upward trajectory of the 12-month sum as shown above, which was very strong in the first half of 2024, stalled not long after the Budget.

And while the key month of November was strong, it was not by as much as the June figure might have indicated.  On a monthly basis June 2024 was 38 per cent higher than the June of the previous year.  Given the links between payments a similar increase might have been expected in November, but November 2024 was “just” 15 per cent higher than the same month of the previous year.

However, as we recently pointed to, even with this lower growth in November, a key reason for failing to reach the most recent 2024 CT forecast was because of a weak October.

The monthly October receipts are a pin-up to highlight the concentration and volatility of Ireland’s CT revenues, with large, and seemingly unpredictable, swings from year-to-year.  And it is possible, even likely, that a single firm may be responsible for the volatility shown.  If October 2024 had matched 2023, never mind the peak of 2022, then total CT receipts for 2024 year would have fairly close to the most recent Budget forecast. 

As it turned out, both November and December set records for monthly receipts, with December being particularly strong.  Here are the individual monthly receipts for November and December for the past 15 years.

There is really no reason to combine November and December, other than to show that the receipts across the two months reached almost €10 billion in 2024.  We should not become immune to the scale of these numbers.

The strong December receipts may be a pointer to strong receipts next May – these are months six and eleven for companies with a June year-end. The relationship isn’t as strong as that for the June and November receipts but still a record in December 2024 points to next May being strong as well.

To conclude here is the cumulative annual chart for recent years.  It is now up to 11 pretty much non-overlapping lines.  There are so many lines, value labels for all of them can’t be easily accommodated so only those for even-numbered years are shown.

And there is nothing to suggest that 2025 will break the pattern and give a line that drops below the previous year.

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Corporation Tax motors along - even if the state-aid payments muddy the waters

Corporation Tax revenues continue to motor though with some minor bumps in the road.  An issue in recent months is that the underlying changes have been clouded by the transfer of funds linked to the CJEU finding in the Apple State-Aid case.   For example, at first glance October’s receipts appear to have been very strong soaring ahead of the previous peak from 2022.

However, it has been suggested that around €3 billion of October’s CT receipts were transfers from the Apple escrow account and are one-off in nature. Taking these out presents a somewhat different picture:

Now it is clear that the underlying receipts in October this year were well down on their 2022 peak.  In and of itself this is not a major cause for concern.  There is no overall trend in October’s receipts with volatility the main feature. Even if lower than recent years, October 2024 was significantly higher than October 2020.

October would not typically have been considered a key month for CT receipts.  Large companies make the bulk of their payments in month 5 and month 11 of their financial year. October is month 11 for companies with a November year-end.

This is not a common financial year so the changes are linked to a small number of companies, probably one.  A manufacturer of COVID vaccines which has seen its profit drop substantially since 2022 would fit the bill.  This is a useful illustration of the concentration of Ireland’s CT revenues.

November is a key month for CT – being month 11 for companies with the much more typical December year-end.  We previously looked at what might be expected in November with the June receipts (month 5) and by and large receipts were broadly in line with the expectations set out there.

Again, though, there is the muddying of the underlying picture due to the Apple transfers. In total, November’s CT receipts were an incredible €13.7 billion.  Of those, it has been suggested that around €6 billion is due to the state-aid case. It would be helpful if more precise figures were provided but this does not seem to be case.

Anyway, here are the monthly receipts for November (less the state-aid money in 2024).

The picture is pretty clear: onward ever upward.  Back in July, we projected that €8.2 billion would be collected in November and, though we don’t have the precise figure, it looks like the outturn was maybe €0.5 billion or so below that.  Incredibly, we are at the stage where that would be considered a “small” error.

Even with the softening of October’s receipts and November seemingly coming in a little below what might have been expected, 2024 is on track to be another record year for CT.  With a month to go, the €26 billion collected so far (excluding the money linked to the Apple case), is already well up on what was seen in last couple of years.

Indeed, the near €8 billion collected in November alone is almost double the €4.2 billion that was collected in the entire year in 2013. 

A few months ago, it seemed 2024 was on track to get close to €30 billion.  This won’t be achieved. December is not typically a major month for CT, but the monthly receipts in recent years have been not far off €2 billion.

If December 2024, brings in €2 billion then 2024 will see CT revenues of €28 billion or thereabouts.  The amounts are enormous.

Perhaps we will get away without having to extend the scale of the vertical axis on the chart of the rolling 12-month sum of CT receipts. 

We might get away with it in December, but if the trends are anything to go by another revision to the scale will be necessary sometime in 2025.

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Decline in FTB purchases of existing dwellings

Recent months have seen a decline in the volume of purchases of existing dwellings by first-time buyers (FTBs).  The volume of FTB purchases of new units has continued to edge up but the fall for existing units has pulled the total down slightly, which can be seen below.

In the 12 months to the end of August, 17,066 stamp duty filings flagged as FTB market transactions were made with the Revenue Commissioners.  At the start of 2024, this 12-month total was running at 17,500, so it has fallen just over 400 as we the year has progressed.

On a 12-month basis, FTB purchases of existing dwellings were running at 12,250 this time last year. The latest figures from the CSO show that there were 11,408 FTB purchases of existing dwellings in the 12 months to August, a decline of 850 units or seven per cent.

FTB purchases of new dwellings were 5,658 in the 12 months to August, up over 400 on what it was at the start of the year. This is a new high in the CSO series though this monthly data is only available since 2010 and the current levels are well down on what would have been seen in the early 2000s.

While there has been a recent fall in total FTB purchases, at seven per cent, it is still pretty modest, and purchases of new dwellings continue to edge up. Since Census 2022 in April of that year, there have been a little over 41,000 FTB market purchases. With non-market transactions, self-builds and bequests the number of first-time owners will be somewhat higher again.

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Savings, savings, everywhere...

Collectively, we find ourselves in the historically unusual position of having a surplus of income over expenditure.  And what is even more unusual is that this is true for both the household and government sectors at the same time.

Historically, the country has had only three periods of significant surpluses on the current account of the balance of payments.    

The first was during World War II when rationing and trade restrictions curtailed spending. The current account returned to deficit when the war ended.  The second period of surpluses was during the early part of the 1990s when the start of the Celtic Tiger resulted in strong income growth. These surpluses were much smaller than the previous episode and disappeared when spending growth caught up and exceeded income growth by the early 2000s.  

The third example of sustained current account surpluses is now, driven by a combination of strong income growth, including corporation tax revenues, and also, for a time, restrictions on spending.  Latest estimates put the 2023 surplus at around 3 per cent of national income in 2023, close to where it was pre-COVID.  

To get some insight into the source of these surpluses we can look at the outturns from the CSO for Savings minus Investment, [S - I], of the household and government sectors.  [S – I] from the national accounts is equivalent to the balance on the current account of the balance of payments in the international accounts.  Here they are in nominal annual terms (four-quarter sums) for the household and government sectors since 2000.

As can be seen above for the last two years or so this has been positive for both sectors.  In the 12 months to the end of June, the government sector had an [S – I] of €10.8 billion while it was €6.8 billion for the household sector.

The trough of late 2007/early 2008 when the household sector was spending far more than its income (mainly due to buying new houses) can be compared to the current level. Both are around €16 billion – though in opposite directions.

When household stopped borrowing to buy all those houses, government borrowing increased significant in 2008 and 2009 as tax revenues, which were been spent as soon as they came in, were reliant on property-based taxes.  The deficit on the public finances was closed over the following decade with the green bars above ticking modestly into positive territory by the end of 2018.

Of course, there has been a lot of growth and a significant bout of inflation since 2008/09 so a nominal comparison isn’t very informative.  We can put the above nominal figures as a share of GNI* (with a linear interpolation used to get the four-quarter sums and Budget-day forecasts used for 2024).

This shows what we would expect. The hole that was opened up prior to 2008 was much deeper than the heights of recent years. But the current position is still significant: in combined terms the household and government sectors have an excess of income over expenditure (both current and capital) that is equivalent to around five per cent of national income. 

This is roughly where it was pre-COVID (2019) but the composition has somewhat changed.  Back then, the excess was driven almost entirely by the household sector whereas now there is a contribution from the government sector (with the government’s position benefitting from soaring Corporation Tax revenues).

Compared to the first half of 2019, nominal aggregate disposable income of the household sector was about 43 per cent higher in 2024.  Nominal consumption expenditure was around 41 per cent higher.  This gives a slightly higher savings rate in 2024 compared to 2019, 17 per cent versus 15 per cent.

The change since 2019 is that more of that saving is going to capital formation rather than going on the financial balance sheet.  In nominal terms, household investment is running at around €16 billion a year, compared to €6 billion in 2019.

A good share of this increase is just price effects.  The volume of new housing purchased by the household sector is up about 10 per cent on what it was in 2019 but prices of new housing units are up around 20 per cent.  The value of purchases of new housing by the household sector rose from €3.3 billion in 2019 to €4.4 billion in 2023.  That makes only a minor contribution to the increase shown above.

A much larger share of the increase in household investment is likely due to renovations and improvements of existing dwellings.  We can see this from the breakdown of investment provided in the quarterly national accounts – though in this instance we are looking at an economy-wide measure than one specific to the household sector.  The government and corporate sectors will undertake some improvements but the household sector will be the main driver of changes.

In nominal terms spending on renovations and improvements rose from under €3 billion in 2019 to close to €8 billion now.  Again, there will be a price effect but the QNAs also show a steep volume increase, with volume close to doubling since 2019 and at there highest ever levels.  The key activities here are renovations, extensions and retro-fitting.  This seems to be the one spot on which there is additional spending.  If more new housing was available spending there would likely increase as well.

To conclude, we’ll look at the finer detail of the household sector from the Institutional Sector Accounts. First, the current account:

The bottom line is that slightly higher savings rate compared to what it was in the equivalent period of 2019 (the first six months of the year).  The data are nominal and we note that the CPI during the first half of 2024 was three per cent higher than a year previously and up almost 20 per cent compared to what it was in 2019.

The largest relative changes are for interest flows with both incoming and outgoing interest up just over 100 per cent.  The fastest increase in wages received was from the government sector, plus nine per cent, compared to around seven per cent for other sectors.

We can see how the saving is used from the capital account.

All told, the household sector was a net lender of €7.8 billion in the first half of 2024.  The largest destination of these funds are household deposit accounts. 

Latest figures from the Central Bank show that household deposits with entities regulated by it are growing by around €700 million a month, and at almost €160 billion are up €50 billion on where they were at the end of 2019.

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