Are Irish households reluctant spenders or supply constrained?

Developments in household savings have attracted some attention during the pandemic.  With spending opportunities curtailed due to public health restrictions household deposits, in aggregate, soared.

Here, though, we will look at pre-pandemic figures to assess the savings behaviour of the Irish household sector.  We will start with the Gross Savings Rate.  Essentially, this is household disposable income that is not used for current consumption.  When looking at this we see that Ireland doesn’t really stand out at all.

In 2019, the gross savings rate of the Irish household sector was just over 10 per cent and put Ireland as the median in the EU15.  Irish households had consumption expenditure of €104.6 billion from a total gross disposable income of €116.4 billion, leaving gross savings of €11.9 billion.  Total gross disposable income is gross disposable income with an adjustment for changes in pension entitlements.

However, that only gets us to the end of the current account.  To fully compare household sector spending against household sector income we must work though the transactions in the capital account, including gross fixed capital formation, i.e. investment spending.  The end of the capital account gets us to net lending/net borrowing which shows whether there is a surplus to be lent or a deficit to be funded after all spending (current + capital) has been accounted for. 

Relative to disposable income, the net lending of the Irish household sector in 2019 was the third-highest in the EU15. Capital transactions (including capital formation) absorbed €5.6 billion leaving €6.3 billion (5.4 per cent of total gross disposable income) unspent and available to go on the financial balance sheet of the household sector.  Only in Sweden and Germany was there household sectors with higher net lending rates than Ireland.

Not only did Ireland in 2019 have a level of household net lending that would be more appropriate for a mature economy it had a level that was higher than it had been in Ireland a few years previously.

In the aftermath of the 2008 crash, the Irish household sector became a significant net lender as the borrowing of the Celtic Tiger came to a halt and households sought to repair their balance sheets.  However, after 2012 this net lending declined and had fallen to around 3 per cent of total gross disposable income in 2016.

The economy continued its recovery in the years that followed and aggregate household income grew but spending (current plus capital) did not keep pace and the net lending rate was above 5 per cent in each of the three years prior to the pandemic.

Of course, the pandemic resulted in major upheavals.  One result was that savings increased in almost all EU14 countries (updated data for the UK is no longer provided to Eurostat).  Within this group the largest such increase took place in Ireland with the net lending of the Irish household sector going from 5.4 per cent of total gross disposable income in 2019 to 21.2 per cent in 2020.

We’re not concerned about the 2020 level which was artificially elevated by various features and responses to the pandemic but more with the pre-pandemic 2019 level where, as set out above, Irish households had the third-highest level of net lending as a share of total gross disposable income in the EU15.

If Irish households’ spending in 2019 as a share of income was comparable to what they were doing in 2016, expenditure (consumption plus investment) would have been around €4 billion higher. If Irish household expenditure matched the net lending outcome for Denmark in 2019, spending could have been around €7 billion higher and if it matched the Finnish outcome spending could have been around €12 billion higher (though €5 billion of net borrowing would have been required).

The chart of the gross savings rates across the EU15 for 2019 indicated that it was not consumption expenditure that led to the relatively higher net lending rate in Ireland.  Ireland’s household gross savings rate was the median for the EU15.

The issue arises in the capital account and is clearly seen if we look at the household gross investment rate: household gross fixed capital formation as a share of total gross disposable income.

And there we see Ireland right down towards the bottom.  In 2019 (i.e. pre-pandemic), Ireland had the second-lowest household gross investment rate in the EU15.  This contrasts with each year in the period from 1996 to 2008 when Ireland had the highest household investment rate in the EU15.  The household investment rate peaked at 29.2 per cent in 2006, around six times the current level.

From a national accounts perspective, what we mean by “investment” is linked to additions to the capital stock of fixed assets.  The most significant fixed asset for the household sector is of course residential property.  So, when we are talking about the gross fixed capital formation or “investment” of the household sector we are primarily talking about new dwellings purchased by households or extensions/upgrades to existing dwellings owned by households.

Investment in the context here is not putting money into financial assets such as shares nor it is the purchase of second-hand or existing dwellings as this is not capital formation but the change in ownership of an existing asset.

There is no doubt that purchases of new dwellings by households is muted.  And that would seem to be more due to supply constraints rather than a reluctance to spend.  One of the reasons Ireland has a lower household investment rate is that there are fewer new capital assets (i.e. new dwellings) for households to purchase.

It should be noted that a sector can also undertake investment if it buys existing assets from another sector.  So, if households were to buy existing dwellings from the government sector (such as local authorities) or from the corporate sector this would count as investment for the household sector. 

For the selling sector it would be included as disinvestment – a reduction in the capital stock of that sector – and in overall terms the capital stock of the economy would be unchanged.  However, in overall terms the net flows of existing dwellings between sectors have been relatively modest, though perhaps with a trend towards more net purchases by non-households.

In 2017 and 2018, there was a net flow of existing dwellings from non-households to households of around 2,000 per annum.  This reversed in 2019, though the net flow to non-households via transactions in that year was small (158 existing dwellings).

And it may be that the topline numbers for household investment miss something significant compositional changes within the household sector.  The vast majority of transactions in existing dwellings are intra-household – where one household sells to another household.  In 2019, there were 40,606 such transactions.

Figure from the Banking and Payments Federation show that first-time buyers drew down 22,500 mortgages in 2019 and that 14,500 of these were for existing dwellings.  Unless purchased from non-household entities these purchases would not count as investment for the household sector.

However, there is evidence of changes in use of existing dwellings within the household sector.  Figures from the RTB show a decline in the number of tenancies registered with them and an increase in the number of termination notices received by tenants because the landlord wishes to put the property up for sale.  There isn’t conclusive use (such as a register of residential properties of type of use) but it does seem as if properties are leaving the private rental sector and becoming owner-occupied.

This is investment by owner-occupiers and disinvestment by landlords but as both are in the household sector is does not appear in the topline numbers for the sector.  So while it does look like Ireland had an unnecessarily high household net lending rate before the pandemic it could be that some of our spending is being masked because it is first-time buyers purchasing existing dwellings that were previously in the private rental sector.

That doesn’t mean there isn’t a need for additional new dwellings for the household sector to purchase – there clearly is – but that headline numbers such as housing output or new dwelling purchases may not throw light on where the failures of our housing system are at their most acute.

There certainly is scope for Irish households to spend more – and energy prices are likely to be an automatic trigger of this.  Consumption will bounce back if public health restrictions remain lifted. 

This should see the household savings rate revert to 10 per cent of thereabouts.  If more new dwellings are made available for purchase by households this would increase the household investment rate. But it is possibly the private rental sector that has the most pressing need for capital formation and it does not seem as if that will come from the household sector.

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When will US GDP be revised up?

The publication in July 2016 of Ireland’s National Income and Expenditure (NIE) Accounts for 2015 generated somewhat of a storm.  These were of course the revisions that introduced us to the 26 per cent growth rate.  As is now well understood this was as a result of Apple transferring to Ireland a license to use its significant intangible assets (brand, designs, patents etc.) in markets outside the Americas.

For the past year we have been waiting for something similar to arise in the national accounts of the United States.  Now obviously, something that is similar in nominal size (in the scale of tens of billions) will have a far lower relative impact on the GDP of the US than it would for Ireland but the principles and drivers are the same.  It is all down to the location of intangible assets.

Outbound royalty payments from Ireland to pay for the use of these intangible assets sum to huge amounts.  The full-year total for 2021 is likely to exceed €100 billion.  Recently, however, the changing nature of these royalty payments has been important to consider.

Up to the end of 2019, most of the licenses which were responsible for the outbound royalty payments from Ireland were held in jurisdictions with no income taxes such as Bermuda (as with Google) or the Cayman Islands (as with Facebook).  This has changed over the past two years and now around four-fifths of the royalty payments from Ireland are directed to the United States. 

These Irish imports are US exports and contribute positively to US GDP.  For 2021, royalty imports from Ireland to the US are set to be about €80 billion higher compared to what they were in 2019.  Even in the scale of nominal US GDP ($23 trillion in 2021) this is a pretty significant sum.

However, the GDP impact will be less than the change in royalties.  This is because some of the royalty flows that went from Ireland to Bermuda and the Cayman Islands were, in turn, transferred on to the US in the form of payments for R&D activities.  These were a US export so would already be accounted for in US GDP.

As an example of this here are the accounts of Google’s holding company which was based in Bermuda.

We immediately note that the company had no turnover in 2020.  This is because Google ended its licensing arrangement via Bermuda.  For the previous year, we see that the company had a turnover of $26.5 billion.  The main source of this was the royalty payments made from Ireland.

On the outgoings side the company had $14 billion of administrative expenses.  A further breakdown provided in the accounts shows that the company incurred $10.4 billion of expenditure on research and development.

This $10.4 billion is the payment that has to be made back to the parent for the license to use Google’s platforms and technologies around the world.  Google and its subsidiary in Bermuda entered a cost-sharing agreement (CSA) whereby each party contributed to the overall group’s research and development costs based on the size of the market it had responsibility for.

In 2019, Google had a total R&D expense of $26 billion and it looks like the subsidiary in Bermuda paid for around 40 per cent of that.  The $10.4 billion paid went to the US and would likely have entered the US national accounts as an R&D service export.

As the income statement shows, the subsidiary in Bermuda had a profit of close to $14 billion in 2019.  This portion of the royalty flows from Ireland was not further transferred to the US and did not contribute to US GDP (but would be counted in US GNP as a factor income inflow).

With the royalties now flowing in full to the US this split no longer applies and all of the amount should be counted in US GDP – a outcome that better reflects the fact pattern and substance that generates Google’s profits.

We can see further evidence of this from Google’s overall accounts.  Here is the domestic/foreign split of Google’s profits for the last three years.

For 2019, Google reported that around 60 per cent of its profit was due to foreign (i.e. non-US) operations.  The $23.2 billion of foreign income for 2019 would have included the $13.7 billion of profit reported by the subsidiary in Bermuda.

For 2020, this profit was no longer reported in Bermuda and we see there was a commensurate fall in income from foreign operations.  As the royalty payments now go direct to the US, this profit is now included in domestic income and the share of Google’s profit that is attributed to US operations has increased.

In 2021, Google had a huge jump in profits to over $90 billion and $77 billion of that (85 per cent) was attributed to domestic operations.  This wasn’t because Google’s growth in 2021 was concentrated in the US.  Indeed, the share of Google revenue that came from customers in the US declined (from 47 per cent in 2020 to 46 per cent in 2021).

The reason most of the additional profit that Google made in 2021 was attributed to domestic operations is because the functions, assets and risks that are responsible for that profit are located in the US.  The innovation and development that delivers Google’s technologies and platforms is undertaken in the US.  And the value-added of those activities should be counted in US GDP, not Bermuda’s (or Ireland’s).

And we can see the same if we look at other US companies.  Here is the domestic/foreign split of Facebook’s profit.

For 2019, Facebook reported that almost 80 per cent of its profit was due to foreign operations.  Most of this was attributed to a Facebook subsidiary in the Cayman Islands that held the license to use Facebook’s platforms and technologies around the world. 

In mid-2020, Facebook changed its licensing arrangements and began to license its IP to its international headquarters in Ireland from the US rather than the Cayman Islands.  Thus, the royalties that Facebook continues to pay from Ireland now go direct to the US rather than to the Cayman Islands.

For 2021, Facebook reported that over 90 per cent of its profit was due to domestic activities.  And, as with Google, as the US is where the main functions, assets and risks that generate Facebook’s profit are located this is much more in line with the substance of the company which the profit division for 2019 did not represent.

Similar profit splits can be seen for other US MNCs.  Here is Amazon which reported that 94 per cent of its profit in 2021 was due to its operations, including R&D, in the US. Unlike Google and Facebook, however, this split has been evident for sometime and seems is not the result of a restructuring of its licensing arrangements.

For other US companies their split of profit between domestic and foreign operations remains incongruous.  Here is the split for Apple.

In recent years, the share of Apple’s profit that is attributed to foreign operations has been relatively steady at around two-thirds.  Unlike the companies above this is not in line with the substance of the company.  And we know that as a result of the 2015 restructuring a large share of Apple’s foreign income is reported in Ireland and included in Irish GDP.

Anyway, our interest here is US GDP not Ireland’s.  To what extent are the restructurings of Google, Facebook and others reflected in the national accounts of the US?  There is strong evidence of them in Irish figures compiled by the CSO – the opening chart in this post is an example of that – but it is not clear that the equivalent flows are reflected in US figures compiled by the BEA.

Unfortunately, we cannot directly compare CSO and BEA data.  While trade with the US might be a key components of Ireland’s national account the reverse of that is not necessarily true. It can also be the case that different definitions are used – including for geographic allocation. 

However, given the size of the companies and the nature of the restructurings undertaken it  should be possible to see the impact of them in the overall service export figures of the US.  The two we will look at are “research and development services” and “charges for the use of intellectual property”.

As Google and Facebook, and likely more besides, have ended their cost-sharing arrangements with companies in Bermuda and the Cayman Islands we would expect US exports of research and development services to decline (though it may have been that the BEA was reporting that these payments came from Ireland).  And as the companies are now licensing their intellectual property from the US we would expect to see an increase in US royalty exports (in line with the increased payments to the US evident in the Irish data.

So what do we see if we look at US exports of research and development services and charges for the use of intellectual property? 

The above shows them in overall terms and does not use a geographic split.  Google changed its structure from the start of 2020; Facebook did so from the middle of 2020.  But there doesn’t appear to be any evidence of these in the royalty or R&D exports figures published by the BEA.  Perhaps, it is other categories that should be looked at but looking through the BEA data does not reveal any that stand out.

The BEA figures for total royalty exports show pretty much no change in 2020, going from $115.5 billion in 2019 to $113.8 billion in 2020.  In contrast, the CSO figures show Irish royalty imports from the US going from €13.1 billion in 2019 to €53.0 billion in 2020. 

We can’t do a similar comparison for R&D services (Bermuda never included these flows in its balance of payments statistics) but a look at the geographic split shows few changes.  The slight fall in US R&D exports shown in the chart above is due to Switzerland which didn’t feature as part of the company examples set out above.

It is hard to know what is going on. Maybe the BEA had already fully accounted for the profits of Google, Facebook etc. and was overlooking the tomfoolery that was going on with Bermuda and the Cayman Islands.  But that seems unlikely.  Company accounts are the source data for many measures in the national accounts.  It was by following company accounts that led the CSO to publishing the 2015 NIE with its 26 per cent growth rate.

And even if relatively small in the context of US GDP the amounts involved are non-trivial.  Looking at the performance of Google and Facebook in 2020 suggests that something of the order of $40 billion may have to be accounted for with possible twice that amount for 2021.

Last year we estimated that US 2020 GDP could be revised up by 0.1 per cent as a result of the changing royalty flows.  That was with data that went to Q3; with full-year data it is possible that if a revision for 2020 is necessary it will be closer to 0.2 per cent.  US GDP growth for 2020 (and also for 2021) would be revised up.

It still only speculation to say this will happen.  But the shifts in the domestic/foreign split of the profits of Google, Facebook and likely more are pretty significant.  The BEA will publish its full-year balance of payments data at the end of March.  It will be interesting to see if the significant changes showing in both the CSO’s statistics for royalties and the companies’ figures for their profit splits show up.

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Underestimating housing consumption in the national accounts

It's not just household-level data such as the SILC where our approaches to the provision of social housing present measurement issues. In the national accounts, payments such as to HAP landlords are currently counted as a benefit-in-kind for households.  This is in contrast to the benefit-in-cash approach now applied in the SILC.

And, up to 2020, there was a further difference between the micro-data and macro-data approaches to measuring social housing.  In the national accounts an imputed social-transfer-in-kind was previously included for the 130,000 or so households who are local authorities tenants.  This has now been removed.

In the government accounts, on the revenue side, local authorities were treated as generating market output for sale.  For social housing this would be the rent contributions received from tenants plus an imputed amount to bring the value of the output in line with market values, which were based on rents in the private rental sector, using both unregulated and regulated rents.

On the expenditure side, this imputed output was used as a social-transfer-in-kind to households. There would also be expenditure incurred as compensation of employees, intermediate consumption and depreciation or fixed capital formation for the provision of local authority housing. 

This meant that the imputed value was on both sides of the accounts and netted out for the balance.  The  impact of local authority housing on the general government balance was the different between the rent contributions received from tenants and the other expenditure items incurred.

It also meant that the consumption of housing services by local authority tenants was based on the market value of the housing services they used as it is for private tenants (through actual rents paid) and for owner-occupiers(through imputed rents). 

The change introduced this year means that the consumption of housing services of local authority tenants is now treated as non-market output and the value of the consumption of that in the national accounts is based on the costs of providing it (mainly compensation of employees, intermediate consumption and depreciation) rather than an imputed market value. 

It should be recognised that most government-provided services (health, education, policing etc.) are included in national accounts on a cost rather than value basis.  The change to also do so with local authority housing had no net impact on the government’s accounts.  The imputed rents of local authority tenants were removed from both the revenue and expenditure  sides, as imputed market output for revenue and the social-transfer-in-kind for expenditure. 

Indicators like government spending to national income would have been reduced.  And so indeed would national income when the market output based on market value was replaced by non-market output based on costs. 

This change was introduced between the April 2021 Government Finance Statistics and the July 2021 Government Income and Expenditure Accounts.  The July publication included the following note:

Reclassification of local authority housing rent as non-market output

To date the provision of local authority housing was treated as a market output. This meant that the difference between the differential rent paid by the tenant and a market rent was calculated and included as P.11 (market output), with a corresponding imputed expenditure D.632 (social benefit in kind). However, Approved Housing Bodies (AHB) reclassified into the local government sector are considered as non-market producers, with no imputed rent calculation made.

On review, this approach was deemed not appropriate and thus a decision has been made to treat the local authority housing output as non-market. This ensures consistency with AHBs. This determination means that there is no longer an imputed D.632 expenditure related to local authority rent. Local authority rent payments are now recorded as P.131 (incidental sales and fees of non-market establishments). This methodology has been applied from 1995.

There can be lots of reasons for revisions between releases so attributing them solely to a methodological change may not always be correct.  Here are the figures for market and non-market output in the April and July releases.

For the three years shown (2018 to 2020), the market output of the general government sector was revised down by an average of €1.6 billion – and now takes a value of zero.  For the same years, non-market output was revised up by an average of €1.25 billion.  This suggests that around €350 million of housing consumption may have been “lost” as a result of the change in methodology.

In the greater scheme of things €350 million of consumption may not be that significant, though as a similar treatment is applied for housing by AHBs the underestimate may be slightly larger.  The underestimate is limited to the extent to which the costs of providing LA or AHB  housing is less than the market value of that housing.

In pre-COVID 2019, actual individual consumption was €133 billion, of which the consumption of housing services was €28.5 billion.  The consumption of housing services was made up of:

• Household Consumption Expenditure
  • Actual rentals for housing €5,393m
  • Imputed rentals for housing €16,459m
  • Maintenance and repair of the dwelling €289m
  • Water supply and miscellaneous services relating to the dwelling €357m
  • Electricity, gas and other fuels €3,091m
• Government Consumption Expenditure
  • Social transfers-in-kind via market producers €824m
  • Social transfers-in-kind via non-market production by Government €2,087m

A few hundred million extra in there isn’t going to make a huge difference but again maybe points to difficulties in measuring outcomes in relation to housing in Ireland.

There is no doubt that local authorities are not market establishments so deeming the goods and services they provide to be from non-market production has logic to it and imputing values is not an exact process.  However, for housing, a relatively close market comparator can be found, i.e. the private rental sector.  This can be used to give a market value for the output produced.  And up to this year that is what was done for local authority housing in Ireland.

For most EU countries, this isn’t an issue.  Almost all of the consumption of housing is the result of household expenditure.  Government spending does not go to provide housing, at least not directly.  The general government sectors don’t make payments to landlords or provide housing directly.

As the list above shows, in Ireland government consumption expenditure is responsible for around 10 per cent of total consumption of housing.  This figure is by far the largest in the EU.

For 21 of the EU27, the share of housing consumption due to government expenditure is less than one per cent (and is essentially zero for around half of those).  The closest country to Ireland is France and even then that is at a level that is less than half the outturn for Ireland. 

That is not to say there isn’t public or social housing in most of these countries. There is.  But it is happens in such a way that it is provided by entities that are outside the general government sector.  And they generate their revenues from rents paid by tenants rather than payments by government.  That’s not to say that either approach is right or wrong just that they are different.

The value of housing consumption may be underestimated in other countries to the extent that regulated or controlled rents are used in determining imputed rents for owner occupiers.  In Ireland, for around five per cent of households, the value of their housing consumption is based on the cost of providing those housing services rather than what the tenants might have to pay as private tenants. Again, neither is right or wrong. Just different.

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Including HAP in Disposable Income

The CSO have published the 2020 results for the Survey of Income and Living Conditions (SILC).  There were a number of methodological changes that mean there is a series break in 2020 compared to earlier estimates.  These are set out in a useful Information Note.

The note also confirms that the Housing Assistance Payment (HAP) payments to landlords, as well as payments to landlords under the Rental Accommodation Scheme (RAS) are considered part of household income:

From 2020, social transfers in SILC are defined as the total income received from DEASP social welfare transfers (e.g. jobseekers related payments, state pension (contributory and non-contributory), family or children related allowances), income received as education related allowances (e.g. Student Universal Support Ireland [SUSI] grants) and housing related supports which include rent supplement and Local Authority contributions to landlords of SILC respondents who are Housing Assistance Payment (HAP) or Rental Accommodation Scheme (RAS) tenants.

This isn’t necessarily a change that was introduced this year but it is now clear that the rent payments made by local authorities to lands in the HAP and RAS are included in the household income of the tenants.  It does not appear that the rent paid by Local Authorities to Approved Housing Bodies (AHBs) is included in the income of AHB tenants.  These rents paid to AHBs, as with those paid under the HAP or RAS (or the smaller Mortgage-To-Rent programme) are based on market rents.  Nor is a similar social transfer to households included in the income of tenants of Local Authorities even though they benefit from subsidised rents in the same way as RAS or AHB tenants.

The rent contribution that recipients of HAP make to their local authority is calculated on the same basis as the above but the tenants may be required to make an additional payment to the landlord if the agreed rent exceeds the relevant HAP limit for that area.  For the first half of 2019 it was estimated that 28 per cent of HAP tenants were making a top-up payment to their landlord.

That the rent contributions tenants make to their local authorities under these programmes is part of those households housing costs is incontrovertible (as well as any top-up payments that may be made to private landlords in HAP). What is less clear-cut is whether the payments local authorities make landlords on behalf of tenants should be included in the tenants’ income.

In terms scaled up to national level, around €1.5 billion of housing supports are included in income in the 2020 SILC.  This includes €600 million for HAP,  €130 million for RAS and €25 million for MTR. As these are not taxable they are then also fully included in disposable income.  These payments make up close to one per cent of the aggregate disposable income of around €90 billion that is represented in the SILC.

This may not seem like a significant amount but the payments will certainly be significant for those households involved.  There are around 17,000 households in the Rental Accommodation Scheme and 68,000 in the Housing Assistance Payment programme.

The issue is whether payments that households don’t directly receive should be included in their disposable income?  There is no doubt that the payments benefit the living conditions of the households but they are not income that the households can choose how to spent. 

As of the 30th June 2019, the average monthly landlord payment was €830 per month and the average rent contribution from the tenant was €47.50 per month.  The treatment in the SILC is that the €830 is counted as household income.  It is not clear in the notes but it certainly should be the case that the €830 also be included in the household’s housing costs and not the €47.50 differential rent. 

Different definitions abound but disposable income would seem like something a household's decisions should be able to have a bearing on how it is used - even if that can be spending on necessities or long-term commitments.  The household can, to a certain extent, choose how to do these. 

If a private tenant moves to a property that has a lower rent, then the use of their disposable income will change.  With a lower rent, the household’s income after housing costs are deducted will rise. 

If a household receiving HAP moves to an area that has lower HAP limits, then the inclusion of HAP as income, would see their income fall after the move.  The decision to move to an area with lower rents hasn't changed their spending (at least for the 72 per cent not making a top-up payment).  They continue to pay the appropriate differentiated rent. But in the SILC the move has changed their income. 

It seems a little incongruent that a spending/consumption decision would change income.  But then, the HAP aids consumption and does contribute to living standards so could be viewed as contributing to income.  But should the disposable income of a household with a medical car be increased every time they attend a GP?  No.  This is a benefit-in-kind rather than a cash transfer.

Why should HAP be counted as a cash transfer rather than a benefit-in-kind?  The State is paying for housing services.  Though that is with the intention of maintaining income after housing costs for beneficiaries.

However, it is not clear why the rent paid by a local authority paid to a private landlord should be counted in the household’s income but not the rent local authorities pay to AHBs.  Perhaps it could be justified on the basis that the household under HAP can choose they property the rents are to be paid for but in either case their income after housing costs will be determined by the differential rent not the rent paid to the landlord (whether that is a private landlord or an AHB).

Consider the contrived example of two households of similar composition, similar income and living in similar properties. Both are eligible for social housing. 

One of the households is an AHB tenant and the household’s income is under the at-risk-of-poverty threshold.  The household’s income after housing costs is calculated after the differential rent, and other costs, are deducted.  Logically, the household’s income after housing costs are deducted from it will also be below the AROP threshold

The second household is a HAP recipient and rents a similar property to the first household but does so from a private landlord.  The inclusion of the rent paid to the landlord in this household’s disposable income puts it above the at-risk-of-poverty threshold.

These households are similar in almost all respects. But one is considered below the at-risk-of-poverty threshold and one is above it.  The only difference is that one is a AHB tenant and one is a HAP recipient.  Assuming no top-up payment to the HAP landlord, both households have similar income remaining after housing costs are deducted. Their living standards are likely to be similar but their income in the SILC will differ significantly.

So, it could be that the headline at-risk-of-poverty rate is being under-estimated because a cash transfer for housing that households cannot spend is included in the income for HAP and RAS tenants.  Would it be better classed as a benefit-in-kind? That is how HAP and RAS are treated in the national accounts?  Or if an income transfer is to be included in household income should it be included for all social housing tenants and not just those in HAP or RAS?

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The level and distribution of income in Ireland in the 2020 SILC

Eurostat have 2020 figures for Ireland to the EU-SILC, the EU’s Statistics on Income and Living Conditions.  Ireland is one of the last countries to have provided figures to Eurostat and the national version won’t be published by the CSO for another few weeks.

Those figures won’t be much different to what is now available on Eurostat but will come with much more detailed background notes.  One such item to be explained is that all the 2020 figures Eurostat have for Ireland are marked with a “b” – for series break.  It is not yet clear what this is. It could be that was a change during 2020 with in-person interviews shelved as COVID hit.

And at the outset it is probably worth noting that although this is the 2020 SILC, the year represents when the data was collected rather than the period for which it applies to.  The CSO carry out the survey across the full year, and respondents are asked for details of their income in the 12 months prior to the survey.

Thus, if someone was interviewed in January 2020 for the 2020 SILC, the reference period for their income would almost wholly encompass 2019.  This would move one month forward for people interviewed in February and so on.  Indeed, when this data goes through the OECD’s methodology it will be assigned to 2019 when published on the OECD’s income inequality database.

Another difference worth noting is the equivalent scale used to compare households of different sizes.  The CSO apply a national equivalence scale with applies a weight of 1.00 to the first adult, 0.66 to all subsequent adults and 0.33 to all children under 14.  These are added together with the household’s income divided by the result to get income in terms of equivalent people.

Eurostat uses the OECD-modified scale which gives a weight of 1.00 to the first adult, but 0.5 to all subsequent adults and 0.3 to all children under 14.

This means that a household of 2 adults and 2 young children would have an equivalising factor of 2.32 with the CSO’s approach and a factor of 2.1 with Eurostat’s approach.  This changes the level of equivalised income within each dataset but should not have a hugely significant impact on growth rates or other relative comparisons.  So, the figures the CSO itself publishes in a few weeks could be slightly different but the overall trends will be the same.

The Level of Income

We will start with median equivalised income in nominal terms.

In and of itself the actual level is not that informative.  Eurostat’s figure for 2020 is €26,250 but income per equivalent person is not a concept we can readily relate to.  What matters are the growth rate and relative differences, both within the income distribution in Ireland and with other countries.

Eurostat’s figures show that for the SILC data collected in 2020, the change in median equivalised income was +2.8 per cent.  That matches the average nominal growth rate of the previous 15 years though the significant volatility in the outcomes that gave rise to that average is evident from the chart.

Relative to the rest of the EU15, Ireland had the fourth-highest median equivalised disposable income  - in nominal terms.  While some exchange rate conversions are made no adjustment is made for different price levels in the below chart.

The Distribution of Income

Three of the commonly used inequality measures that are applied to the SILC data are the gini coefficient, the quintile share ratio and the at-risk-of-poverty rate.  Here is the gini coefficient fir Ireland since 2004 with a higher figure representing higher inequality.

Ireland’s estimated gini co-efficient has been trending downward over the last few decades – but it should be noted that the changes are exaggerated by the truncated vertical axis used in the above chart.  The changes are small.  The Eurostat figure for the 2020 SILC is not significantly different from what it was the previous year, going from 0.283 to 0.287.

Within the EU15, Ireland’s gini coefficient for disposable income is in the middle of the pack.  Ireland stands out more for the change in the gini coefficient over the last 15 years.  This following chart shows how the average for each country from 2018 to 2020 differs from its average for 2004 to 2006. 

For most of the EU15, the gini was either unchanged or increasing over the period.  For those countries showing a reduction in their gini coefficient the fall in Ireland was the second largest, with only Portugal showing a larger fall.

The gini coefficient is a useful indicator but as an measure which condenses a population-wide distribution of income into a single number looking at other measures can also be useful.  The quintile share ratio compares the income share of the top 20 per cent of the income distribution to the income share of the bottom 20 per cent.

The pattern here corresponds to what is shown by the gini coefficient.  Over the last 15 years, Ireland’s quintile share ratio has fallen from around five in the mid-2000s to around four now.  This indicates that incomes at the bottom of the income distribution have grown faster than those at the top.

Ireland’s quintile share ratio is the sixth lowest in the EU15.

The at-risk-of-poverty rate focuses in the lower end of the income distribution and looks at how many people live in households with an equivalised income that is less than 60 per cent of the national median. 

With Eurostat putting Ireland’s median equivalised income at €26,250 in 2020, this gives an at-risk-of-poverty threshold of €15,750 for a single-person household.  If we multiple this by 2.1 we get the threshold for a 2 adult plus 2 young children household: €33,075.

Here is the share of people in Ireland who live in households with an equivalised income below the 60 per cent threshold.

This shows a similar pattern to the quintile share ratio and Ireland’s position in the EU15 is also the same (sixth lowest).

As it is a measure of inequality, the at-risk-of-poverty rate is not always a good indicator of changes in living standards at the lower end of the income distribution.  The post-2008 period in Ireland is a good illustration of this.  We know that there were very significant falls in income but this is not reflected in any noticeable increase in the at-risk-of-poverty rate in the period from 2009 to 2012.

This is because the at-risk-of-poverty rate is a relative measure.  As incomes in the economy fell, the threshold for been assessed as at-risk-of-poverty also fell.  One way to get an insight into absolute changes in living standards is to use a fixed threshold (with changes only made for inflation rather than the general trend of income in the economy).  Eurostat provide an anchored at-risk-of-poverty rate with the 2005 threshold as the anchor.

The at-risk-of-poverty rate was 20 per cent in 2005.  In the chart above, the 2005 threshold is rolled forward (adjusted for inflation) and the share of the population below that threshold is reported.  It is the changes rather than the levels that are informative here.  We can see that this anchored at-risk-of-poverty measure rose significantly after 2008.  It had been falling consistently since 2014, but was unchanged in 2020.

There’s much more to the SILC than income figures but that’s probably enough for now.

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