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.