Thursday, June 9, 2011

Where does our spending power come from?

For those who can’t wait, the answer to this question is that 50% of it comes through the State.

In a previous post we looked at the rapid reduction in liabilities in the household sector which has seen the total amount of household loans fall from  €203 billion in Q4 2008 to €186 billion in Q4 2010.   Household liabilities fell by an average of €3 billion a quarter in 2010.

This post is based on an interest point that was raised in the comments (HT: Dreaded_Estate).  The question was:

What percentage of the economy do you think is being paid by the public and private sector?

There is a brief answer in the comments to the original post and we largely reproduce it here with some minor additions.

Unfortunately we cannot answer this question with 2010 data as the Non-Financial Institutional Sector Accounts won’t be published again by the CSO until October.  Instead we use 2009 data but the changes are unlikely to have been of major significance.  We examined the 2009 household accounts when they were released and the numbers here are from that post.

In 2009, households had a net disposable income of €89.6 billion.  Of this €81 billion was used for consumption.  The represents money that was saved and used to either build up deposits or pay down loans.

The accounts show that in 2009 total household wages were €72.8 billion. Separate figures from the Department of Finance show that the public sector pay bill was around €18 billion so about a quarter of wage income in Ireland comes from the public sector.   It is likely that around one-third of this would have been paid in income taxes and social contributions, thus public sector pay contributed around €12 billion of the €90 billion of household disposable income.

The State also provided €26.4 billion of tax-free social benefits which directly added to household disposable income.  There was also a public sector pensions bill of around €1.8 billion which would be partially taxed.  It is likely that the State provided around €40 billion of disposable income in either wages, pensions or direct payments to households.

It is also true that some self-employed and private wage income actually comes from the State through State contracts and other processes.  It is very difficult to estimate how much this might be.  In 2009 the government spend €9.3 billion on goods and services and both central and local government spent €6.3 billion on capital expenditure.  It is likely that a significant portion of this expenditure further added to household disposable income through one means or another.

All told, it is probably that a low estimate is that somewhere around €45 billion or 50% of 2009 net household disposable income came either directly or indirectly from the State. 

In relation to the original post on the payment of household loans it is impossible to say how much of the €6 billion reduction in 2009 or €12 billion reduction in 2010 was made from disposable income that came from the State but it is sure to be something above zero.

There is of course a circular flow element to the above analysis with a good share of the disposable income provided by the State returning through consumption taxes. Here is a breakdown of the 2009 total government expenditure.

Total Government Expenditure

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