The CSO have released the Non-Financial Institutional Sector Accounts for 2009. These give an insight into the financial transaction with the corporate, government and household sectors of the economy. In this short analysis we will focus on the figures provided for the household sector.
The headline grabbing figure has been the large increase in the household savings rate. This has gone from essentially 0% in 2007 to 12.3% in 2009.
An increase in savings is not necessarily a bad thing, particularly if incomes are rising. However the Irish economy is going through a severe contraction and it is clear that incomes are falling. In fact, in 2009, net household income contracted by €8.2 billion from €98.3 billion to €90.1 billion.
This represents a fall in household income of 8.2%. This is a significant fall in household income. Most of this drop can be attributed to the drop in wages earned by household which fell by €6.4 billion, from €79.3 billion to €72.8 billion.
To find net household disposable income we must subtract taxes and social contributions paid by households and add social benefits paid to households. In 2009 taxes paid by households on their income and wealth fell by 14.8% from €15.4 billion to €13.1 billion. Social contributions fell by 9.7% from €17.5 billion to €15.8 billion.
Although aggregate household income fell by €8.2 billion in 2009 this €4.0 billion drop in taxes and social contributions insulated net household disposable income from much of the drop.
As the same time that taxes paid by households were falling, social transfers paid to households were rising, further increased net household disposable income. In 2009 social benefits paid to households rose by 7.5% from €24.5 billion to €26.4 billion. This further added €1.9 billion to net household disposable income.
To net effect of this reduction in taxation paid and increase in benefits received (and some other miscellaneous transfers) is that, although net household income saw a significant fall of 8.2%, the impact on net household disposable income was less severe and only experienced a drop of 2.3% falling from €91.7 billion to €89.6 billion. At the aggregate level the decrease in household disposable income has not been as severe as the fall in the overall economy. However, this may not last as increased taxes and reduced social benefits will see aggregate disposable income fall.
Net disposable household income as a proportion of net household income was around 90% for the period 2002 to 2007. In 2008 this rose to 93.3%, while in 2009, disposable income was 99.4% of net income.
Finally, we turn to expenditure. In 2009, household consumption expenditure fell by an alarming 11.3%, from €91.2 billion to €81.0 billion.
This represents a consumer withdrawal of more than €10 billion from the economy. With net disposable income down ‘only’ €2.1 billion, it is clear that the balance of the reduction in household consumption expenditure is being saved.
Consumers are observing what his happening in the economy (and to net household income) and, those who can, are engaging in precautionary savings on a large scale. At the aggregate level net household disposable income is being supported by the drop in taxes collected and the increase in benefits paid. With the precarious state of the public finances, households are taking the rational view that the drop seen in net household income will soon become evident in net household disposable income, as taxes rise and benefits are cut.
Of course, all these figures are aggregates. We cannot infer anything about individual cases from them. We do not know the distribution of the reduction in wages and taxes or the distribution in the increase in social benefits. It is only at the aggregate level that we can say that households have experienced a minor drop in disposable income and large increase in savings. It is evident there are many individual households who are far from this relatively benign scenario.
A table with the data used in this post for 2006-2009 is available below the fold.
Hi Seamus,
ReplyDeleteThere are a couple of things that I don't understand in the accounts - the whole first paragraph - GDP, compensation of employees etc.
Second is the position of debt and interest. Neither seems to be accounted for? In the years to 2008, debt was increasing consumption, both through rising revolving debt and through equity release. In the years since, that has reduced, but debt is being repaid and mortgage interest rates for variable rate holders have risen.
Do the effects of debt and interest not make a derived disposable income/consumption figure bunk?
Ta for any guidance you can provide!
Hi Yoganmahew,
ReplyDeleteIt took me a while to get around to this. Apologies. In the household sector the Gross Domestic Product figure measures the production of goods and services bu households and unincorporated self-employed individuals. It is output that is not attributed to firms or government.
Compensation of employees is the wages and salaries paid by households and unincorpoated self employed individuals.
On debt and interest. The table here covers the current account. Debt features in the capital account which I will consider in a subsequent post.
Interest is featured under the heading 'property income'. Interest form most of the heading 'less property income' and would. The impact of falling interest rates in both categories. Interest paid fell from €8.1 billion in 2008 to €4.0 billion in 2009. The heading 'plus property income' is a combination of interest, dividends and rents. Interest earned fell from €4.5 to €2.0 billion.
The impact of debt cannot be gauged solely from the current account. For example, the current account tells us that savings in 2007 were €32 million.
Of course, this was just the balance of people whose consumption was less than their disposable income and were savings against people whose consumption was greater than their disposable income and were dissaving (borrowing to fund their expenditure).
€32 million was the balance of these and it likely that household deposits increased by more than this in 2007. (In fact Central Bank data suggest that deposits from the household sector increased by €6 billion in 2007.)
Likewise in 2009 the household sector current account suggests savings of €11 billion but the majority of this went to pay down debt rather than increase deposits.