Thursday, October 17, 2019

Housing Costs and At-Risk-Of-Poverty Rates

The most commonly used cut-off for determining households who are at-risk-of-poverty is households with an equivalised disposable income that is less than 60 per cent of the national median equivalised disposable income.  The EU’s Statistics on Income and Living Conditions (EU-SILC) give comparable outturns for this measures.

To start here is the headline at-risk-of-poverty rate using the 60% cut-off.

EU15 SILC AROP 2004-2018

Ireland and the UK are the only EU15 countries for which 2018 figures are still not available.  In any event Ireland has around the sixth-lowest at-risk-of-poverty rate in the EU15, with the rate itself having been remarkably stable over the past ten years or so.

An important determinant of the living standards of any household is the amount of their income they have to devote to cover housing costs.  As part of the EU-SILC, at-risk-of-poverty are also calculated for income after housing costs are deducted. 

The housing costs include any service charges, utilities, taxes and repairs paid by the occupant as well as rent for tenants and mortgage interest for owner occupiers.  The same income thresholds are used as for the headline rate.

Here are the at-risk-of-poverty rates after housing costs are deducted for the EU15.

EU15 SILC AROP after Housing Costs 2004-2018

Naturally, the rates are higher as a lower income (income after housing costs) is being assessed relative to the same threshold.  In this instance, Ireland’s relative position improves and has around the fourth lowest at-risk-of-poverty rate after housing costs are deducted from income.

One notable change is Denmark which goes from second-lowest for the headline rates to third-highest after housing costs have been deducted.  The reason for this is that at-risk-of-poverty households in Denmark face housing costs that are a higher share of their income than in other countries.

This can be shown by looking at the median of the housing cost burden as a share of disposable income for households that are at-risk-of-poverty.

EU15 SILC Median of the Housing Cost Burden for AROP HHs 2004-2018

If can be seen that the median household cost burden for Irish at-risk-of-poverty households is close on the lowest in the EU15.  Around half of at-risk-of-poverty households in Ireland face a housing cost that is more than 20 per cent of their disposable income.  Unsurprisingly, Denmark is high in this chart with half of at-risk-of-poverty households there facing a housing cost that is more than 50 per cent of their disposable income.

Tuesday, September 24, 2019

Corporation Tax, Stiglitz and Ireland as bad neighbour

Comments made last week by Prof. Joe Stiglitz attracted some attention.  Here is the main point:

In the area of taxes, Ireland has not behaved well, either globally or for their own citizens, or as an EU citizen.

It is not a good citizen to try to rob your neighbour. And what Ireland did is it tried to get revenue that would have gone to other European countries to be relocated into Ireland, to take a pittance out of that [in tax] and to do a deal where Apple is perfectly happy because they get their taxes reduced.

And who pays? The rest of Europe is paying. You don’t do that to your neighbours, to your partners in the EU. I view Ireland not only as a tax haven; it is not a good citizen of the EU.

This has been a song Prof. Stiglitz has been singing as a cover version for a while so he has the lyrics down pat.  One point that should trouble him is that other people have stopped singing it including the person who had the original hit.

Obviously we can trace this back to Commissioner Vestager’s statement when she announced the finding of state-aid in the Apple case in August 2016:

Finally, it may be that not all the unpaid taxes are due in Ireland.

Apple Sales International is based in Ireland, where it records all profits on sales of Apple products throughout Europe, in the Middle East, Africa and India. As I have already mentioned, this recording of profits in itself is not a matter for state aid rules. It results from Apple's choice of structure.

But, other countries, in the EU or elsewhere, can look at our investigation. If they conclude that Apple should have recorded its sales in those countries instead of Ireland, they could require Apple to pay more tax locally. That would reduce the amount to be paid back to Ireland.

This was a mistake by the Commissioner.  Such comments were not repeated when other state-aid finding on tax were announced and not long afterwards Commissioner Vestager rowed back on the above statements.

For example, here are a couple of exchanges she had with Members of the Oireachtas Finance Committee when she met with them in January 2017. [In some instances the questions and/or answers are truncated.]

Deputy Michael McGrath: Is the Commissioner repeating today that some of the tax the Commission believes is owed may not be necessarily owed to Ireland but to other member states if they calculate, based on their own tax systems, the taxes owed to them?

Ms Margrethe Vestager: It is not something we believe.

Deputy Pearse Doherty: [I]s it a case that most of the €13 billion could be claimed by other member states?

Ms Margrethe Vestager: My guess would be that a large majority of the unpaid taxes would be due in Ireland.

Deputy Paul Murphy: Is it Ms Vestager's opinion that the large majority of the €13 billion, plus interest, would be owed to the Irish State rather than to other countries?

Ms Margrethe Vestager: Yes.

Deputy Michael D'Arcy: The Commissioner is of the opinion that the majority of the €13 billion figure should be available to the Republic of Ireland. Is that correct?

Ms Margrethe Vestager: That would be our estimate, yes.

Could Apple owe more tax to other EU countries? Yes.  But that is a matter for those countries to decide.  In fact, if those countries have not been collecting the required amount of tax from Apple it would be those countries who have granted Apple state aid.

But there is no way for any country to unilaterally introduce a law or grant a ruling that reduces the tax due to another country on profits sourced in that country.  The division of profits between countries may be subject to dispute but there is no way for one country to unilaterally shift source profits out of one country and in to its own tax base. 

Companies can use structures where a greater share of their profits are located in one country versus what the case might be if they used a different structure. Again countries can challenge these structures.  France has done so in the case of Google and although Google will face an additional tax bill, the structure used by the company with sales booked in Dublin held up to legal scrutiny.

There is a way in which the €13 billion Irish tax bill estimated by the Commission could be reduced and that is if the profits are rightfully sourced where they arise – in the United States. As Commissioner Vestager has said:

“If the U.S. tax authority found that the monies paid due to the cost-sharing agreement were too few ... so that they should pay more in the cost-sharing agreement, that would transfer more money to the States and that may change the books and the accounts in the States.”

It is the view of the OECD that the bulk of the profits belong in the US.  The crucial aspect, as referenced by Commissioner Vestager, is the cost-sharing agreement which allows the profits to escape the US in the first place.  Without this there would not be headlines about the tax outcomes of US MNCs or charts about “biggest tax havens” etc. Why do we only ever see charts like that for US companies?

It is because it is the US approach to cost-sharing agreements that is central to these outcomes not the practices in the labelled countries.  [Aside: It is also the case that the licenses created by these cost-sharing agreements is the principal component of the intangible assets that are currently being moved to Ireland by US MNCs.] 

The IRS have taken a number of US MNCs to court over the terms they have included in these cost-sharing agreements (initial buy-ins, ongoing payments etc.) and have lost every single time. This is because of the way the provisions are set out in the US tax code.  If Prof. Stiglitz thinks that the taxation of MNCs such as Apple is wrong he would do well to look a little closer to home for the solution.

Of course, as a result of the Tax Cuts and Jobs Act passed by the US Congress in December 2017, Apple has indicated that it will pay $37 billion of US tax on the profits it was able to get offshore via the cost-sharing agreement.  These profits include those subject to the state aid case.  In its 2018 Annual Report, Apple said:

As of September 30, 2017, the Company had a U.S. deferred tax liability of $36.4 billion for deferred foreign income. During 2018, the Company replaced $36.1 billion of its U.S. deferred tax liability with a deemed repatriation tax payable of $37.3 billion , which was based on the Company’s cumulative post-1986 deferred foreign income. The deemed repatriation tax payable is a provisional estimate that may change as the Company continues to analyze the impact of additional implementation guidance. The Company plans to pay the tax in installments in accordance with the Act.

These payments will have no bearings on the principles used by the Commission in the state aid case.  This is the US taxing the worldwide profits of one its companies so this profit could be sourced in another country. The Commission is arguing that 60 per cent of Apple’s profit was sourced in Ireland.

However, if Apple does end up paying €13 billion to Ireland, then this will likely by subtracted off the tax bill to be paid to the US.  Foreign taxes are creditable when US companies pay US tax on their non-US profits.  The state aid case will not result in Apple paying more tax; but could result in the company paying much less to the US.

Robert Stack, former Assistant Secretary at the US Treasury said the following to a Congressional Committee about what would happen if the state aid decisions are upheld by the courts:

“Now if we were to determine that those payments are in fact taxes and we were to determine that they are creditable under our rules, now when that money comes home from those companies in addition to the credit they got for the tax they originally paid in those jurisdictions they get an extra credit. And that credit to this taxpayer you asked me about means in effect the US Treasury got less money and in effect made a direct transfer to the European jurisdiction that is getting the ruling from the Commission.

So if these turn out to be creditable taxes it is the US taxpayer that are footing the bill for these EU investigations.”

This was also covered by a WSJ piece last week and is also the view of the company itself who in their most recent quarterly SEC filing state that:

The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the U.S. Tax Cuts and Jobs Act. 

In time, it could be that Prof. Stiglitz will try to sing a new tune.  This is because the Apple state-aid case is not about whether Apple owes additional tax in other EU countries.  That is for them to determine.  The state aid case is not about the amount of tax Apple pays.  The US taxes companies on their worldwide income so all the profit is subject to tax (though up until the TCJA some payments could be deferred).  The state aid case is about whether Apple pays €13 billion of tax to Ireland or the US.

If the state-aid decision is upheld Prof. Stiglitz could do an about turn and argue that Ireland is being a bad neighbour to his country and robbing tax revenue from his fellow citizens. And he has a better chance of being right if he can get the lyrics of that one down. But which country will be at fault if that happens? His own.

Taxing Wages and the OECD Average

Last year we queried how it was that the OECD placed Ireland in the “low tax” group for it measure of the net personal income tax rate (income tax plus employee social insurance contributions) on an employee earning the average wage.

As the previous post highlighted it was because the OECD used an average wage that was too low.  As a result of this, when the OECD published their Taxing Wages 2019 update the average wage used for Ireland was changed.

In Taxing Wages 2018, the average wage used for Ireland for 2016 was €35,430.  In Taxing Wages 2019, this is now €44,720 (with the average estimated to have risen to €46,675 by 2018).  The previous post explains why the revised figure is more appropriate (in line with other countries supervisory and management workers are now included and part-time workers are excluded).

The post suggested that using a more appropriate figure would likely put Ireland close to the OECD average for the tax rate on the average wage.  So what is the outcome?

What country is that pretty much matching the OECD average? Yes, Ireland. The group of countries with tax rates using this measure of less than 20 per cent has been reduced by one.

This year’s Taxing Wages also included a nice chapter on median earnings.  Here are charts of the marginal and average tax rates on median earnings.

These show Ireland to have the third-highest marginal tax rate on median wages but the tenth lowest (of 36) average tax rate on median wages.

And to conclude here two charts of the tax rates (personal income tax plus employee social insurance contributions) at 67 percent and 167 per cent of the average wage (These are estimated to be €31,300 and €78,000 for Ireland in 2018).

Thus we can conclude that, relative to the other OECD countries, the latest OECD data indicate that Ireland has below average tax rates on below average wages, average tax rates on average wages and above average tax rates on above average wages.

Friday, August 2, 2019

Some insight into Apple’s use of capital allowances

We have previously looked at Apple’s revised tax structure put in place from the start of 2015 which, of course, was linked to the extraordinary growth in Irish GDP in that year.  Recent changes to Irish company law offer us further insight into this.  Previously, unlimited companies did not have to have their financial accounts published.  There is now a requirement for unlimited companies to publish accounts via filings with the Companies Registration Office (CRO).

This week the accounts for Apple Operations International for 2018 were published.  Actually, the accounts were the consolidated accounts of AOI and its subsidiaries which number close to 75 so some caution should be exercised about attributing elements in the accounts to particular countries, including the tax figures reported.

Apple’s other main Irish subsidiaries, including Apple Distribution International (ADI) and those central to the state aid investigation, Apple Sales International (ASI) and  Apple Operations Europe (AOE) also had their accounts posted this week by the CRO but using section 357 of the Companies Act have been able to provide the consolidated accounts of the group they are in headed by AOI so the same document is posted for all companies with no information on what happens at the level of each company within the group.  This somewhat limits the details that can ascertained from the accounts and seems to undermine the transparency that the recent changes to company law were intended to bring.

Regardless, there are still a couple of things worth looking at in the consolidated accounts of the AOI group and one of those comes from the balance sheet.  Here is asset side of the balance sheet.  One would think a decent scanner would be among the assets.

Anyway, the figure we are interested in is for deferred tax assets and we are directed to note #5.  First here is what the Summary of Significant Accounting Practices has to say about the treatment of deferred tax:
Deferred tax is recognised in respect of all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements of the Group except where the deferred tax arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.
Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amount and tax basis of investments in foreign operations where the Group is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to receive the asset and settle the liability simultaneously.

Hopefully the next bit makes more sense.  The note on the provision for income tax indicates that most of the tax charge is deferred tax, i.e. tax charged during the period but not actually paid.

For 2017, $4.2 billion of the $6.0 billion tax provision was for deferred tax and in 2018 it was $4.7 billion out of €6.7 billion with most of this described as “origination and reversal of temporary differences”.

The income statement shows that tax charges result from income before taxes of $43.4 billion in 2017 and $46.7 billion in 2018.  These give rise to effective income tax rates of 13.9% and 14.3% for the two years respectively.

However, the amount of tax actually paid is closer to the current income tax element of the tax provision.  The cash flow statement shows that net cash paid for income taxes was €2.0 billion in 2017 and $1.4 billion in 2018 which correspond to an effective rate of around 4% across the two years.  On this it should be noted that a variation on the following note is included several times in the accounts:
The corporate income taxes in the consolidated statements of operations, balance sheets and statement of cash flows do not include significant US-level corporate taxes borne by Apple Inc., the ultimate parent of the group.
US-level taxes are paid by Apple Inc. on investment income of the Group at the rate of 24.5% (35.0% in 2017) net of applicable foreign tax credits. In addition, under changes in US tax legislation that took effect in December 2017, Apple Inc. is subject to tax on previously deferred foreign income (at a rate of 15.5% on cash and certain other net assets and 8.0% on the remaining income), net of applicable foreign tax credits.  The new legislation also subjects certain current foreign earnings of the Group to a new minimum tax.
OK, so these accounts may not fully reflect the overall tax outcome but we are interested what it might show for Ireland.  From the table above we can see that a significant portion of the tax charge is considered a deferred tax.  A deferred tax can a tax charge that will be paid at some stage in the future, therefore the charge appears as a deferred liability on the balance sheet.  Alternative a deferred tax can be a tax charge that will not be paid in the future but instead is offset against an existing deferred tax asset on the balance sheet.

We know from the balance sheet that we are dealing with the utilisation of a deferred tax asset. A further table in note 5 in the accounts shows some detail on the the evolution of the Group’s deferred tax assets in 2017 and 2018.

The total for the end of each financial year, unsurprisingly, matches the figures from the balance sheet but it is the figures for intra-group transactions that we will focus on.

As the earlier post outlined, an Apple subsidiary purchased the license to sell Apple products outside the Americas and became an Irish resident company at the start of 2015.  This license is hugely valuable and the now Irish-resident subsidiary that bought it incurred a huge capital allow to buy the asset.  This expense can be offset against income via capital allowances over a period of time using the provisions of section 291A of The Consolidated Tax Acts.

The above table shows that in September 2016 the AOI group (which includes the subsidiary that can claim the capital allowances) had $22.6 billion of deferred tax benefits from intra-group transactions.  It is only an assumption, but assuming that most of these deferred tax assets arise in Ireland the associated level of income that could be offset by a deferred tax asset of that amount is around $180 billion (the amount of the deferred tax asset multiplied by eight due to the 12.5 per cent rate of Corporation Tax).

In both 2017 and 2018, there was a reduction of around $4.4 billion in those deferred tax assets. If this is linked to capital allowances claimed under s291A it  would be associated with income of around $35 billion.  Given exchange rates this corresponds to a euro amount of around €28 billion or so.  Some support to the such a link is offered as this ties in with changes in income and capital allowances we have since 2015 for companies with negative or nil net trading income.

At the rate of use shown above, it could expected that the capital allowances will be exhausted by the end of 2021, though additional capital expenditure related to the asset may also be eligible for claiming as a capital allowance. It is possible that when the original capital allowances are exhausted something close to the full amount of income will be exposed to Ireland’s 12.5 per cent Corporation Tax – but that assumes that a third tax structure is not implemented by Apple in the mean time.

Finally, it worth looking at the balance sheet to see the figure for the intangible assets against which these capital allowances are being claimed.  The text is hard to read but there is no massive figure for intangible assets.  They are included by the CSO in the capital stock of fixed assets for the country but not included by the company in its consolidated balance sheet.

If the national accounts also did not recognise them it would go some way to fixing some of the problems with the figures for Ireland’s national income.  GDP would still be a mess but GNP and GNI would be much improved (and it could save us €200 million on our EU contribution).

Tuesday, June 25, 2019

Does Ireland really have the lowest per capita consumption of housing in the EU15?

Last week Eurostat published their first estimate of Actual Individual Consumption for 2018.  What is unusual about AIC from an Irish perspective is that it is one of the few national accounting aggregates that Ireland comes below the EU average in per capita terms.  Here is the volume of AIC per capita in the EU15 countries relative to the aggregate level of the EU15.

There is Ireland down towards the bottom with a level equal to 88 per cent of the outcome for the EU15 as a whole.   By this measure Irish per capital consumption of goods and services is below that of Italy. 

A further thing worth noting about Ireland’s AIC is how little it has improved relative to the rest of the EU15 during the recovery.  The drop after the crash in 2008 is not surprising but, as shown in the chart below, Ireland’s real AIC per capita was 89 per cent of the EU15 level in 2012 and was actually lower in 2018 when it was measured to be 88 per cent of the EU15 level.  And this is pretty much where it was back in the late 1990s.

If the recovery is as strong as almost all measures seem to suggest why is it not showing up in real AIC per capita?  Here are the components of consumption for a selection of years (again all figures are relative to the EU15 level which is set to 100).

For most of the components Ireland has improved relative to the EU15 level since 2012 including household furnishings (70% to 83%), transport (94% to 102%), communication (91% to 94%), recreation (60% to 72%) and restaurants and hotels (incl. pubs) (134% to 145%).

Of the components going in the other direction, housing shows the largest fall going to 92 per cent of the EU15 level in 2012 to 78 per cent in 2018.  And what happens to this component is important as housing is actually the largest component of AIC.

Here are the nominal and real values for each component in aggregate and per capita terms using Eurostat’s price level indices for Ireland in 2018. 

The final column gives the share of each component in the aggregate and shows that, at 17.5 per cent of the total, consumption of housing services is the largest component of AIC. This was 21 per cent in 2012.  These changes suggest it is worth looking at Ireland’s consumption of housing services. 

In the context of real AIC per capita, it can be seen that the housing component rose from 78 per cent of the EU15 level in the mid-1990s to around 95 per cent of the EU15 level just before the crash and the recent relative fall has seen it return to 78 per cent of the EU15 level.  Let’s look at some ways to try and explain this.

First, here it is in aggregate terms using constant (2010) prices.

Perhaps surprisingly this shows that our aggregate consumption of housing services has fallen in the past few years and in 2017 was six per cent lower than the level from 2011.  In per capita terms, the reduction is larger due to the growing population.  Compared to 2011, our per capita consumption of housing services is around 10 per cent lower. 

Why has our measured level of consumption of housing services fallen?  It is hard to know.  There has been very limited additions to the housing stock since 2010 but it has not fallen.  Here are the gross and net (after depreciation) stocks of dwellings since 2010.

When looking at the consumption of housing we see that, in real terms, there has been a drop in imputed rentals (which are imputed for owner-occupied and vacant dwellings).  This has only been partially offset by a rise in actual rentals for dwellings with tenants.

Again, we are left with the question as to why imputed rentals have fallen by ten per cent in real terms since 2011.  Yes, some additional units may have become occupied by tenants but, at best, that offsets only one-third of the fall in imputed rentals.

A consequence of this fall is that Ireland now has the lowest real per capita consumption of housing services in the EU15.

There we are, right down at the bottom, only getting ahead of Portugal on alphabetical order.  Housing consumption per capita in Italy is almost 40 per cent higher than in Ireland which goes a long way towards explain the relative position of each in the very first table above.

Here are a couple of outtakes from the SILC that seem to belie our low level of measured housing consumption (with the relative positions of Ireland and Italy worth looking at).

So we have more rooms, less overcrowding and more under-occupied housing then the rest of the EU15.  Yes, there is a difference in coverage.  These figures are from a survey done at household level rather than the aggregate approach based on the capital stock of dwellings taken for the national accounting statistics.

And it is not necessarily the case that houses represent more housing than other types of dwelling but we have more people living in houses than in any other country in the EU15.

And further we have one of the lowest shares in the EU15 of people experiencing severe housing deprivation (again note position of Italy):

OK, again, these might be measuring different things but it still is somewhat incongruous with our position of having the lowest per capita real consumption of the housing services in the EU15.

There could be lots of things going on (vacancy rates, prices, start point bias etc.) but given that Actual Individual Consumption is potentially a useful national accounts measure, not least because it is not distorted by the activities of MNCs, it would be good to have confidence in it.  At present, it says that Italy’s per capita consumption of housing is 40 per higher than Ireland’s which doesn’t instill such confidence.

Friday, April 19, 2019

What do we do with €112 billion of annual savings?

Last week the CSO published the Q4 update of the (non-financial) Institutional Sector Accounts.  These are a great source of information on what is happening in the economy but are terribly difficult to navigate.

Here is a summary of the aggregated current account (Q1 to Q4 2018) by sector. Click to enlarge.

The starting point is the first estimate of nominal GDP for 2018 which is €318.5 billion.  Looking across by sector we can see where this is generated and the clear domination of the non-financial corporate sector in Ireland’s GDP figure (which in turn is dominated by foreign-owned MNCs). The final column gives the flows with the rest of the world. Figures in parenthesis are amounts paid by the relevant sector.

Deducting wages paid and adjusting for taxes paid and subsidies received on products and production gets us to Gross Operating Surplus/Mixed Income.  For the household sector, mixed income is a combination of the earnings of independent traders (the self-employed) and the rent that owner-occupied are imputed to pay themselves (this income is deducted as consumption later down the table so the bottom line is unchanged).  As with GDP, the main generator of GOS in the economy is the NFC sector.

Adding wages received, adjusting for taxes received and subsidies paid on products and production, and accounting for property income paid and received (mainly interest and dividends among others) gets is to Gross National Income.

The move from Gross National Income to Gross Disposable Income is done by adjusting for taxes and transfers.  Most of this are inter-sector flows with payments by one sector being receipts of another.  For example, income taxes paid by households and companies go to the government sector (some minor cross-border flows notwithstanding). 
GDI is a couple of billion lower than GNI because of some cross-border transfer flows.  The rest of the world received about €5 billion more under "Other Current Transfers" from Ireland than Ireland receives from abroad under this heading - €9.5 billion out versus €4.5 billion in. 

Some of this has to do with Ireland’s foreign-aid budget and other transfers.  A large part of it is made up of Ireland’s contribution to the EU budget but it should be noted that earlier in the table the €1.6 billion of "Subsides Paid" from the rest of the word mainly come from the EU and these make up the bulk of the €1.5 billion of "Subsidies Received" by the household sector (agriculture).

Anyway, by this point we have a total economy Gross Disposable Income of €248 billion, of which we use “only" €136 billion on consumption.  That leaves us with Gross Savings of €112 billion and the breakdown by sector can be seen in the bottom row. 

To see what we did with this we turn to the capital account.  Again click to enlarge.

The first panel of the table gives the change in net worth by taking into account capital taxes and transfers and consumption of fixed capital (depreciation on existing assets).

The second panel shows what happened to gross savings and it can be seen that we did €82.8 billion of gross capital formation on produced capital assets and had net purchases of €22.5 billion of non-produced assets (such as marketing assets and customer lists).  That left the economy in a net lending position of €6.6 billion for 2018 (with this €6.6 billion being borrowed by the rest of the world).

The continued deleveraging of the household sector is evident in its net lending position of €5.5 billion.  This will have been, in part, used to repay debt and the household sector has significantly reduced its outstanding debt over the past decade.  The government sector had close to a balanced position in 2018 so, unlike the household sector, did not have a surplus to reduce its debt.

The big figures are again in the NFC sector with €83 billion of Gross Savings fully offset by €62 billion of investment in produced capital assets (gross capital formation) and €22 billion of net acquisitions of non-produced assets giving a net borrowing position of €1 billion.
This relatively modest outcome at an aggregate level probably belies significant changes within the sector.  It is highly unlikely that the companies with the €83 billion of Gross Savings were the companies that invested €84 billion in assets.  The companies with the savings would have used that to reduce their debts (built up when acquiring assets, including intangible assets, in earlier years) while those acquiring assets in 2018 would have funded that by new borrowing of their own.  So while the accounts might show €112 billion of Gross Savings most of it is the result of MNC activities and is not ours to spend.

It is probably a little more than a coincidence that the numbers in the NFC sector were so close in 2018 giving a net outcome of "just" minus €1 billion.  And, it should be noted, that these are just the first estimates.  Things could be very different when the National Income and Expenditure results are published during the summer.  We saw this for the 2015 results though such changes are largely limited to the NFC sector.

The previous compositional issue is also true for the household sector, though on a smaller scale.  While the household sector had net lending of €5.5 billion, repayments against existing debt would have been much larger than this, possibly twice as large.  Those in the household sector who undertook investment (which is mainly on houses) could have funded this with new borrowing.  The balance of repayments on existing debt and new borrowing for investment gives the overall net lending position of €5.5 billion.

This is a Gross Saving that is ours to spend.  Eventually the deleveraging will stop.  Whether that leads to an increase in consumption or investment is hard to tell.  The vulnerable position of the government sector probably means that some caution in the household sector is warranted but whether this caution will persist remains to be seen.

Wednesday, March 6, 2019

Housing Costs in the SILC

Eurostat’s Statistics on Income and Living Conditions (EU-SILC) have lots of household-level data.  Here we will look at outcomes related to housing costs and look for the impact of the ongoing difficulties with housing in Ireland in the data. 

We’ll start with what Eurostat call “total housing costs” as a share of disposable income.

EU15 SILC Housing Costs to Disposable Income 2004-2017

In 2017, Ireland had the lowest “total housing costs” as a share of disposable income in the EU15.  In Ireland, the average share of housing costs was 16.1 per cent of disposable income in 2017 and this has been falling slightly in recent years, i.e. household disposable income is growing faster than housing costs – on average across all households. 

The picture isn’t much different if we look at the median instead of the average with Ireland again being towards the bottom.

EU15 SILC Median of the Housing Cost Burden 2004-2017

In 2017, in Ireland the median housing cost burden was 11.3 per cent of disposable income.  Half of households had a housing cost burden as a share of disposable income that was less than this.

Of course, we would like to know what is included in “total housing costs” used as the numerator in the above charts.  The details are provided here.  For all tenure types it includes the following if they are paid by the occupant:

  • Structural insurance,
  • Mandatory services and charges (sewage removal, refuse removal, etc.),
  • Regular maintenance and repairs,
  • Taxes, and
  • The cost of utilities (water, electricity, gas and heating).

For all tenure types housing costs are considered gross of any housing benefits (i.e. housing benefits should not be deducted from the total housing cost), then for each tenure type it also includes:

OWNERS: Mortgage interest payments, net of any tax relief

TENANTS at market price: Rent payments

TENANTS at reduced price: Rent payments

The most notable thing is that principal repayments on mortgages are not included as part of “total housing cost”.  In part, this reflects the element of choice involved.  If two borrowers take out identical mortgages except one is over 15 years and one is over 25 years it is not appropriate to consider that the household with the shorter term has higher housing costs – they have a higher savings rate.  Of course, the degree to which households have control over the pace of capital reduction on their mortgage may not make it a matter of choice at all.

There will also be differences across countries where borrowers in some countries tend not to make ongoing capital repayments which may be a factor in explaining why countries such as  The Netherlands, Sweden and Denmark are so high in the previous charts.  Capital repayments also increase the equity the household has in the property so aren’t a consumption expense.

Thus, it could be argued that this measure of “total housing costs” doesn’t give a full picture of housing costs but rather is the answer to a question that seeks to find something that is consistent across households and countries and not subject to change due to choices or preferences.  The size and length of mortgage payments will still be picked up through the interest component of “total housing costs”.

It would be useful if “total housing costs” as a share of disposable income was provided by tenure status but it does not seem to be available.  It is, however, provided in Purchasing Power Standard (PPS) units for “owners” and “tenants”.

EU15 SILC Owners Total Housing Costs in PPS 2004-2017

EU15 SILC Tenants Total Housing Costs in PPS 2004-2017

It would be useful if owners were broken down by those with a mortgage or loan and those with none, and if tenants were broken down by those paying the market price and those paying a reduced price.  This is particularly true for Ireland where there are more tenants paying rent at a reduced price then at the market price.

The chart for tenants above shows housing costs rising in recent years. This was around two per cent a year up to 2016 but accelerated to 4.5 per cent in 2017.  This will likely be dampened by the presence of tenants paying a reduced price (such as to local authorities and housing bodies) in the cohort so we could expect the increase for those paying at the market rate to be higher.

Eurostat also provide the share of rent in disposable income for tenants.  Again, it is for all tenants so both those paying a reduced price and the market price will be included.  As a share of the average disposable income of renters, Ireland has the third-lowest average rents in the EU15.  However, Ireland had been the lowest up to 2017 but lost this position due to the increase in rents highlighted above.

EU15 SILC Share of Rent in Disposable Income 2004-2017

Eurostat measure the housing cost overburden rate as being the share of population living in households where total housing costs (as defined above) exceeds 40 per cent of household disposable income.  In 2017, Ireland had the second lowest housing cost overburden rate in the EU15, with only Finland having a (slightly) lower rate.

EU15 SILC Housing Cost Overburden Rate 2004-2017

Ireland might have the next-to-lowest level for all households but as with most of these measures there is plenty going on under the surface.  Here is the 2017 breakdown of the housing cost overburden rate by tenure status.

EU15 SILC Housing Cost Overburden Rate by Tenure Status 2017 Table

Ireland’s overall rate might be 4.5 per cent but for tenants with rent at the market price the housing cost overburden rate is 21.5 per cent putting Ireland sixth-lowest in this category in the EU15.  Thus, just under one-fifth of tenants paying market rates had “total housing costs” in excess of 40 per cent of their disposable income.  As shown in the chart below tenants paying market price has always being the tenure status with the highest housing cost overburden rate in Ireland.

SILC Housing Cost Overburden Rate by Tenure Status in Ireland 2004 to 2017

It may also be surprising how little this is changed over period shown, though there is now a noticeable upward trend since 2013.  It has gone from 16.6 per cent  in 2013 to 21.5 per cent in 2017.

The picture is much the same if we reduce the threshold.  The next chart looks at the share of the population by tenure status where “total housing costs” exceed a lower threshold of 25 per cent of disposable income.  Again, tenants paying the market rate fare worst but here the increase is only visible after 2015 and at 60 per cent in 2017 is the highest in the series.

SILC Housing Cost Burden greater than 25pc of Disposable Income in Ireland 2004 to 2017

And, just for completeness here is a chart of the housing cost overburden rate (40 per cent of income threshold) for tenants renting at the market price across the EU15.  Ireland, has generally had one of the lower housing costs overburden rates for tenants paying market rates since 2004, but, though still near the bottom, Ireland’s relative position has been moving upwards in recent years.

EU15 SILC Tenants Housing Cost Burden more than 40pc of Disposable Income 2004-2017

Next, is the housing cost overburden rate for households that are at-risk-of-poverty, i.e. those with an equivalised disposable income of less than 60 per cent of the median.  Again, this is another instance where Ireland is near best-in-class in the EU15, with only Finland again having a slightly lower rate.

EU15 SILC Housing Cost Overburden Rate AROP Households 2004-2017

Ireland’s position in the above chart indicates that Irish households who are at-risk-of-poverty have to devote a lower share of their disposable income to housing costs than in other countries.  For example, in Denmark around 80 per cent of households who are at-risk-of-poverty have housing costs that are greater than 40 per cent of their disposable income.  And, the more income that has to go on housing costs the less there is for other items of consumption.

To explore this further, Eurostat also calculate an at-risk-of-poverty rate that deducts “total housing costs” from household disposable income.  This uses the standard at-risk-of-poverty threshold, i.e. 60 per cent of the national median equivalised disposable income, but compares it to household income after housing costs have been subtracted from it which can give an indication of what is available to spend on items other than housing.

EU15 SILC AROP after Housing Costs 2004-2017 2

Using this approach Ireland had the fourth-lowest at-risk-of-poverty rate in the EU15 in 2017.  Housing costs include rents at the market price but this has not resulted in any noticeable increase in this measure and, in fact, has declined slightly in the past few years.

As “total housing costs” used to calculate the above shares and rates excludes capital repayments on mortgages it may be that the calculations and ratios do not give a full insight into housing costs.  To this end, participants in the SILC are asked to assess the “financial burden” of their housing costs on the scale of give their view of whether it is:

  • a heavy financial burden,
  • a financial burden, or
  • not a financial burden.

Eurostat’s notes tell us that here a broader approach is to be taken to housing costs when this more subjective view of housing costs is being assessed:

With regard to the calculation of the financial burden of the total housing cost, the following methodological issues should be taken into consideration:

  • The objective is to assess the respondent feeling about the extent to which housing costs are a financial burden to the household.
  • Total mortgage repayment including instalment and interest is to be taken into account for owners and actual rent for renters. In addition, service charges (sewage removal, refuse removal, regular maintenance, repairs and other charges) are to be considered.

Here is the share of people living in households who consider the impact of their housing costs (including capital repayments on mortgages) to be a heavy financial burden.

EU15 SILC Financial Burden of the Total Housing Cost 2004-2017

This is likely closer to what we expect for Ireland. The share of people living in households who assessed that they were experiencing a heavy financial burden due to housing costs increased after 2007 and reached 43.3 per cent by 2013. It has since fallen back and was down to 28.4 per cent in 2017, though still the seventh highest in the EU15 – Ireland’s relative position was fourth highest in 2013.  However, as this is a subjective measure such cross-country comparisons may not be entirely valid.  Still, the individual trend for Ireland is revealing and the 2017 level is close to the levels seen from 2004 to 2007.

Monday, March 4, 2019

Reducing the legacy debts of the credit bubble

The information provided in the annual accounts of the banks allows us to observe developments in the remaining stock of debt from the loans that were issued during the credit bubble.  For example, here are Bank of Ireland’s mortgages (PDH and BTL) by year of origination with the data going back to 2011, the first year such information was provided.

BOI Mortgages Outstanding 2018

Between the end of 2011 and the end of 2018 BOI’s stock of mortgages decreased by 15 per cent – from €27.9 billion to €23.7 billion.  However, this headline figure masks what is happening within the loan book and new loans issued each year replace those which are repaid.  The reduction in loans originating in 2011 or earlier is much greater.

At the end of 2011, BOI had €20.0 billion of mortgages that originated between 2004 and 2008, the peak years of the credit bubble.  By the end of 2018, the amount of mortgages issued in that five-year period had reduced to €11.1 billion.  This is a reduction of €9 billion or 45 per cent over the seven years. 

And that is only since 2011.  If the figures were available for earlier years they would show that well over half of the mortgage debt issued by BOI between 2004 and 2008 no longer exists.

Of course, this may overstate the reduction in debt for individual households as many may have remortgaged because, for example, they moved house.  At the end 2011, BOI had 115,000 mortgage accounts that were issued between 2004 and 2008. By the end of 2018 this number had fallen to 85,500.

We can use the number of accounts to get an average outstanding balance for each year.

BOI Mortgages Average Balance 2018

This shows that from the end of 2011 to the end of 2018, the average balance on the remaining mortgages issued between 2004 and 2008 fell by between 24 and 30 per cent.  This is not a like-for-like comparison each year as the average is calculated using only the number of mortgages which remain on the bank's balance sheet; mortgages which are repaid in full or replaced due to remortgages are not included. 

The figures above, though, probably give a good indication of what is happened to mortgages that are being reduced with regular monthly repayments.  For example, at the end of 2011, the 24,000 mortgages BOI has which it had issued in 2007 had an average balance of just over €200,000.  By the end of 2018, the number of these mortgages had fallen to 19,000 and the average balance of those remaining was €148,000 – a reduction of 26 per cent (and that is since the end of 2011 not the point of origination).

Whichever way we look at it – remaining stock or average balance – it can be seen that the legacy debts of the credit bubble have been significantly reduced.  They will have a long tail but, for BOI mortgages at least, we are probably passed the half life.

Wednesday, February 27, 2019

Do we need another SSIA scheme?

IBEC have joined a number of recent calls for the introduction of an SSIA-type scheme for Irish households.  The various proposals are usually accompanied by claims that such a scheme should be counter-cyclical and can help prevent the economy “overheating”.  Given that the previous scheme ran from May 2001 to April 2007 corresponded to the build up of unsustainable levels of economic activity it may be hard to find support for such claims.  And it may be that such a scheme simply ends up being a transfer to those who can save.

To assess the impact, if any, of the previous SSIA scheme and whether we need one now let’s look at some outcomes for the household sector.  First, the gross savings rate.  This is essentially the share of gross disposable income that is not used for consumption (i.e. current expenditure).

Household Sector Gross Savings Rate 2001-2018

This offers some support for the thesis that such schemes can take money out of the economy.  The gross savings rate rose from around six per cent in 2001/02 to around ten per cent by 2005.  But then the savings fell in 2006/07 when overheating pressures reached their peak.  It is possible that the timing of contributions and maturities of the SSIAs played a role in these outcomes.

It is also worth noting that even without an SSIA-type scheme we have seen a significant rise in the gross savings rate in recent years.  During 2018, the savings rate averaged almost 12 per cent.  This compares to an average of around eight percent for the period 2003 to 2006.  And here is where we stand relative to most of the EU15 (Greece and Luxembourg are excluded):

EU15 Household Sector Gross Saving Rate

Ireland’s current gross savings rate is pretty much in the middle.  It is not clear that it needs to be higher.  And do we need to incentivise something that is already happening?

Of course, the current account only gives a partial impact of a sectors impact on the economy – we need to look at the capital account as well.  The bottom line for a sector is the amount of net lending/borrowing it does.  This is the final outcome after all earnings, taxes, transfers and spending have been accounted for by adding capital flows to the current flows that are used to get the savings rate.  And it is on the bottom line that we see where the action was:

Household Sector Net Lending-Borrowing 2001-2018

The 2001 to 2007 SSIA scheme might have been taking some money out in the current account but once we add in what was happening in the capital account we can see that the household sector was a net borrower and that this increased during the period.  It is very likely that some of the income that was considered “saving” in the current account only arose because of the significant borrowing shown above in the capital account. 

In 2001, for every €100 of disposable income that the household sector had it, had total spending (current plus capital) of around €110. By 2006, household spending was more than €120 for every €100 of income (with some of this fueled by maturing SSIAs).  The borrowing came to a shuddering halt in 2008 and for the past decade total spending has been around €95 for every €100 of income.  The Irish household sector has been a net lender and, in aggregate terms, this has averaged around €5 billion a year for the past decade or so.

This impact of this borrowing and lending can clearly be seen in the household sector balance sheet:

Household Sector Loans and Deposits 2002-2018 CB Data

There was a huge run-up in household sector loan liabilities up to 2008, reaching a peak of €204 billion.  Since then, the net lending has led to deleveraging with a loan liabilities reducing to €138 billion by the third quarter of 2018.  At the same time, household deposits have been increasing and during 2018 actually exceeded household loans for the first time since 2002. 

It has been a remarkable improvement in the aggregate balance sheet of the Irish household sector.  That this deleveraging, which ought to have been a drag on growth, coincided with a resurgent economy is even more remarkable.

And here is Ireland’s household sector net lending/borrowing relative to the rest of the EU15 (with only Luxembourg excluded in this instance).

EU15 Household Net Lending-Borrowing

As of 2018, the Irish household sector has the third highest net lending rate in the EU15.  Maybe we could look for a change in the composition of that lending.  This could happen as the debts of the credit bubble are paid off and households may switch to something like increased pension saving.

But, it is doubtful that it needs to be higher.  It might be that, given the risks we face, that we need other sectors to be doing a bit of saving (the government sector maybe); after a decade of deleveraging the household sector can probably afford to cut loose a bit. 

Tuesday, January 15, 2019

Why the “working poor” makes for an inappropriate policy target

The publication by the CSO of the results from the Survey on Income and Living Conditions (SILC) always generates plenty of reaction.  One focus following the release of the 2017 results has been the “working poor” such as the headline of this piece.

The CSO provide income and poverty rates by principle economic status and the 2017 outcomes are summarised here:

CSO SILC Income and Poverty by PES 2017

As can be seen for the “at work” category the at-risk-of-poverty rate (equivalised disposable income below 60 per cent of the national median) is given as 5.4 per cent.  When we add in measures of deprivation, we find that 1.4 per cent of those with a principle economic status of “at work” live in households deemed to be in consistent poverty.  Given how low these levels are relative to other categories, the “at work” group seem a peculiar group to focus on.

Here we provide five reasons why targeting the at-work at-risk-of-poverty rate may be inappropriate.

  1. Ireland already has the second-lowest AROP rate for employees in the EU15.
  2. The measure is as much a function of household type, especially the presence of children, as it is labour market outcomes.
  3. When it comes to labour market outcomes the most important factor is the amount of work with low AROP rates for households with high or very-high levels of work intensity.
  4. The link between low pay at the level of the individual and low income at the level of the household is weak.
  5. One-third of the “working poor” are self-employed who are excluded from most policy proposals.

1 Comparison across the EU15

Eurostat provide figures that allow us to compare the at-risk-of-poverty rates across the EU for people who are employed and one feature of this is how well Ireland does.  Here are the AROP rate for employees since 2009:

EU15 SILC Employees AROP 2009-2017

The 2017 figure for Ireland has not been provided to Eurostat yet but it seems likely that Ireland will have close to the second-lowest in-work at-risk-of-poverty rate for employees in the EU15.

2 The role of household type

The determination of whether of being at-risk-of-poverty is based on equivalised household income rather than than earnings of the employee on their own.  For example, you could have two employees both earning €30,000 – one could be deemed to be at-risk-of-poverty and one may not. How can that be if there are both earning the same amount? Type of households or, more particularly, children. 

If there are more people in the household then the available income has to be spread over more people thus reducing the equivalised, or per (weighted) person, income of the household. 

Here are the figures from Eurostat for the at-risk-of-poverty rates for people at work but living in two different types of households in Ireland:

  • Household with two or more adults with dependent children
  • Households with two or more adults without dependent children

SILC Eurostat In Work At-Risk-Of-Poverty Rate 2004-2017

It can be seen that, bar the peak crisis years of 2009 to 2011, the at-risk-of-poverty rates of workers in the households with children is about twice that of households without children.  It is not the labour market that drives in-work at-risk-of-poverty rates; it is household type.

3 The amount of work

This amount of work can be measured by household work-intensity: the amount of available time that someone is working.  If the working-age adults in a household have a high or very-high work intensity there is close to no chance of that household being at-risk-of poverty.

SILC Eurostat Work Intensity At-Risk-Of-Poverty Rate 2004-2017

In-work, at-risk-of poverty rates are highest for those households with low work intensity.  These are households where members of working age worked between 20 per cent and 45 per cent of their total potential during the previous 12 months.  Households composed only of children, of students aged less then 25 and/or people aged 60 or more are completely excluded from the work-intensity indicator calculation.

Again, relative to the rest of the EU15, Irish households with low work intensity have at-risk-of-poverty rates well below those of other countries.

EU15 SILC AROP Low Work Intensity Households 2003-2017

Over 60 per cent of Irish households who are classed as in-work and at-risk-of-poverty have either low or medium levels of work intensity.  It is not earnings that drives the in-work, at-risk-of-poverty rates; it is the amount of work.

Something, such as a refundable tax credit may have very little impact on at-risk-of-poverty households with children.  The at-risk-of-poverty threshold for a 2 adult plus 2 children household in 2017 was €29,000.  Even allowing for Child Benefit such a household close to that threshold which gets its income from work will have used almost all the available tax credits.  Making them refundable will make little difference to them.

The majority of households who are deemed be in-work and at-risk-of-poverty have low or medium work intensity.  Refundable tax credits in this instance would be a reflection of a low amount of work rather than low earnings.

4 Low pay and household income

The link between low pay and at-risk-of-poverty rates is weak.  Ireland has workers who are low paid but they are not in low-income households.

Low Pay and the Distribution of Income

The chart would suggest that something around six per cent of low-pay employees (below a threshold of €12.20 a hour in the analysis shown) are in households who are at-risk-of-poverty. Or, in other words, 94 per cent of low-pay employees are in households who are not at-risk-of-poverty.  Indeed, over half of low-pay employees are in households in the top half of the income distribution.  There are almost as many low-pay employees in households in the top decile as there are in the bottom decile.

Policies, such as refundable tax credits, that target the low paid seem likely to make overall inequality and at-risk-of-poverty rates worse as very little of the benefit would accrue to those at the bottom of the income distribution.  It is likely that part-time second earners would appreciate it but in most cases these already come from middle- to high-income households.

It is also not clear how a refundable tax credit would work in the case of the self-employed. It was noted at the press briefing for the SILC publication that around one-third of those deemed to be in-work and at-risk-of-poverty are self-employed. Refundable personal and PAYE tax credits would mean that one-third of the target group is excluded. And a large share of the resources used would go to people outside the target group – the low-paid in high-income households.

Saying that the “working poor” should not be a policy target doesn’t mean we should have policies that try to increase incomes. We should. But using the in-work at-risk-of-poverty rate as a benchmark for either the justification of certain policies or in judging the success of polices may not be appropriate.

We conclude with a comparison we have made before:

Ireland Sweden AROP by Work Intensity

For all levels of household work intensity Ireland has at-risk-of-poverty rates that are lower than Sweden’s, and significantly so in some cases, e.g. medium and low. Yet, the overall at-risk-of-poverty rates of the countries are very similar.