Saturday, October 3, 2020

The serene progression of household disposable income (and the chaos beneath it)

The CSO have published the Q2 update of the Institutional Sector Accounts.  It was worth the days’ delay for what are a pretty remarkable set of figures.  Here we will focus on the household sector and highlight some of the impacts of the COVID-19 crisis on the figures.

The Current Account

A key outcome for the household sector is Gross Disposable Income*: the amount of resources that are available for consumption or saving.  The annual change of this suggests little of note happened in Q2 with household GDI recording annual growth of five per cent, in line with the strong growth that has been seen in recent years.   

Household Sector Gross Disposable Income Annual Change 2013-2020

But household gross income is the swan moving serenely across the water while its legs are going like the clappers below the waterline.  Let’s go under to see what has really been happening to household income. It’s pretty dramatic.

* When discussing incomes from the national accounts it is worth noting that “gross” means before depreciation. Gross income is the amount of income that is available for consumption and investment.  Some investment must go to replace depleted or exhausted capital assets.  This doesn’t really leave us better off than we were before as all we have done is replenish the value of the assets used. It would generally be better to use income after depreciation, or net income, as the main metric but differences and inconsistencies in how depreciation is means that precedence is given to gross measures in most instances.*

Anyway, here’s our table for the household sector current account which this time shows the second quarter of each of the past four years.  A version of the table with H1 for the past for years is here.

Household Sector Accounts Q2 2017-2020

Naturally, lots of attention went to the bottom line – the unprecedented surge in saving.  In the second quarter of 2020, the gross saving of Irish households almost trebled compared to the same quarter of 2019, with the increase of €7.2 billion bringing them to €12.1 for the quarter.  Most of the increase has ended up swelling household deposit accounts.  Here’s the savings rate since 2004.

Household Savings Rate 2005-2020 2

Yes, that is a stunning increase but, given the crisis we are going through, the really remarkable figure is what we showed in the serene chart at the top – gross disposable income.  As we said, in Q2 2020 this was five per cent higher than it was in 2019. Lower consumption (-22.8%) was the main driver of the spike in the savings rate but an increase in income contributed as well.

Contribution to Disposable Income: Earnings

In the face of the COVID-19 crisis,

household income has held up remarkably well – in aggregate terms at least.  Beneath that stability there has been some pretty significant shifts in how that household disposable income was generated. 

In Q2, wages from the private sector were around €2.3 billion lower than in the same quarter last year. And this in itself was boosted with around €1.5 billion from the government’s wage subsidy scheme flowing through companies to their employees. 

Absent the wage subsidy scheme, wages from the private sector would have been 20 per cent lower than last year.  As it was they were down around 12 per cent.  This is a fall that is comparable to the crisis that followed the bursting of the credit bubble.

Household Sector Private Sector Wages Received Annual Change 2004-2020

And, again, that Q2 2020 data point could be –20 per cent if the effect of the government wage subsidy scheme was removed.  We can compare the change in employee compensation in the Sector Accounts to the change in employment in the Labour Force Survey.

Annual Changes in Employment and Earnings 2012-2020

These are not quite perfect comparators but are as good as we can do.  Per the Labour Force Survey total employment in Q2 2020 was almost 25 per cent lower than it was a year earlier.  Including the wage subsidy scheme, aggregate employee compensation was down just over eight per cent.  This is one reason why Income Tax receipts have held up reasonably well.  It suggests that the biggest employment hit was on part-time and lower paid employees.

Going back to the table we can see that the general government pay bill was up around four per cent or just over €200 million in Q2 2020 compared to Q2 2019.  This is inline with the recent increases in aggregate wages from the government sector which on an annual basis have gone from €19 billion in 2013 to €24 billion this year.

General Government COE Annual Change 2013-2020

With some modest changes in other factor flows (interest, dividends etc.) the Gross National Income of the household sector in Q2 2020 was down nearly eight per cent (€2.6 billion) compared to the same quarter of 2019. 

Household Sector Gross Income Annual Change 2002-2020

With wages forming the largest part of the household sector’s gross income it is not a surprise that the changes in gross income are similar to those for employee compensation.  Again, we are looking at a drop not seen since the crash of a 2008/09.

Contribution to Disposable Income: Taxes and Transfers

After gross income has been determined we work through taxes and transfers to get disposable income.  The drop in earnings in Q2 2020 feeds through to a drop in taxes and social contributions both of which were down around one-tenth compared the same quarter last year.  But the real action in this part of the table is with social benefits received, particularly those from the government sector.  First, the annual changes.

Household Sector Government Transfers Received Annual Change 2004-2020

Whoa! Transfers from government to the household sector were up more than 40 per cent in annual terms in Q2.  This was an unprecedented increase.  In Q2 2019, households received €5.8 billion in transfers from government; this year it was €8.5 billion.  The €2.7 billion increase in transfers was greater than the €2.6 billion drop in gross income.

Household Sector Government Transfers Received 4Q Sum 2004-2020

In annual terms, government transfers received by households had hovered around €23 billion from 2014 to 2018.  There would have been compositional changes with unemployment-related supports falling and other areas, such as pensions, rising.  The four quarters to Q2 2020 saw €27 billion of government social transfers paid, with further increases likely in Q3 and Q4.

Indeed, we can see that scale of the spending increase to support incomes that took place if we look at government subsidies on production and government social transfers. The main new subsidy in Q2 was the Temporary Wage Subsidy Scheme (TWSS) and the main new transfers was the Pandemic Unemployment Payment (PUP).

Government Sector Transfers and Subsidies Quarterly 2013-2020

Prior to the pandemic, quarterly subsidies on production averaged around €200 million a quarter (most of which likely went to ‘commercial’ semi-state companies).  In Q2 2020 the of production subsidies  jumped to €1.8 billion due to the TWSS.  As noted above, government social transfers to households were typically around €6 billion a quarter in the past few years but increased to €8.5 billion in Q2 (due to the PUP.

It should be noted that absent the PUP, government transfers would have increased anyway as workers laid off would have made claims for unemployment benefit.  The reason the flat-rate PUP was introduced was to avoid the need to individually assess hundreds of thousands of claims for number of dependents and level of PRSI contributions etc.  There was no way hundreds of thousands of such claims could be assessed quickly.  As it was the first PUP claims (which at €350 per week was set at the average amount per claimant for Jobseeker’s Benefit) were processed only days after the lockdown was announced.  The speed of response by the State also contributed to the maintenance of households incomes in Ireland.

Conclusion

Due to lower earnings Gross National Income for the household sector in Q2 2020 was down €2.6 billion compared to the same quarter in 2019.  However we have also seen that:

  • taxes and social contributions paid were down €1.2 billion
  • total transfers received were up €2.5 billion, and
  • net other transfers was up €0.4 billion.

So when summed through this meant that household disposable income was actually up €1.5 billion on the year.  As we said at the top, if you were just to look at the annual change in the gross disposable income of the household sector you would think little or nothing changed in Q2 2020.

The fiscal response to the crisis has been hugely impressive in offsetting the income shock of the crisis.  In a typical downturn, one would expect this income support to feed through to support for economic activity but as some sectors of the economy are shuttered by government decree overall economic activity remains weak and household savings surged.

The CSO are to be commended for the rapid production of the quarterly sector accounts.  There are only a few countries who have provided Q2 data to Eurostat.  But already we can see just how remarkable the performance of household disposable income in Ireland has been.

Annual Change in GDI Eurostat Preliminary Data Q2 2020

Eurostat’s preliminary estimate for Q2 is that gross disposable income for the household sector in the euro area was down 2.7 per cent compared the same quarter of 2019.  Of the nine countries with reported figures, seven are showing falls ranging from just –0.4 per cent in Germany and up to –8.8 per cent in Spain, with Sweden’s drop of –7.0 per cent also worth noting.

And standing at the top (at least for this group of countries) is Ireland.  Only The Netherlands, so far, is also showing an annual increase in the disposable income of its household sector, with the increase in Ireland being more than double that of The Netherlands.  Irish households also had the highest savings rate in the quarter for the nine countries shown.

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