Wednesday, October 6, 2021

Household savings and the changes in aggregate income during the pandemic

The CSO have published the Q2 2021 update of the Non-Financial Institutional Sector Accounts. Here we will focus on the household sector (which in the quarterly ISAs also includes non-profit institutions serving households). 

A lot of attention has obviously gone on the spikes we have seen in the household saving rate during the pandemic.  In the first half of 2018 and 2019 the household savings rate was around 12 per cent.  For the equivalent periods of 2020 and 2021 it was around 30 per cent.  This is shown in the bottom line of the table below with shows the outcomes for the first six months of the past four years.

Household Sector Current Account H1 2018-2021

While a fall in consumption opportunities undoubtedly played a role in the rise in household savings the impact of changes income has been as important.  A couple of lines up from Gross Savings is the line giving Gross Disposable Income. In the national accounts methodology used here, “gross” means before depreciation of fixed assets.

Gross Disposable Income is a measure of national income after taxes and transfers.  Looking across this for the four years shows no signs of a pandemic the public health response to which saw large swathes of the economy shut down by government decree. 

Indeed, the figure for the first half of 2021 is around €8 billion higher than for the equivalent period of 2019.  This allied to the €4 billion reduction in consumption is what gives rise to the €12 billion increase in savings.

A key reason for the lack of a pandemic effect in aggregate household income is that the government stepped in to support incomes.  One element of this is visible in the household sector current account with the row for social benefits (other than benefits in kind) received from the government sector.  These were €11.8 billion in H1 2019 but were €17.2 billion in the first half of 2021, primarily driven by the Pandemic Unemployment Payment.

There is some evidence of the pandemic shock in compensation of employees received which H1 2020 showing annual falls for wages received from non-financial corporates and other households.  However, these drops are modest relative to the scale of the sectors that were shut down. 

A key reason for this is that the wages paid by companies were supported by subsidy schemes.  In the household accounts, the money is paid from firms to households but the firms first received it from the government sector.

Figures for the non-financial corporate sector show that the sector received €350 million of other subsidies on production in the first half of 2019 (a lot of which would be public service obligation subsidies to commercial semi-states and other companies) to receiving €2.7 billion in the first half of 2021. 

The increase was due to the various pandemic-related wage subsidy schemes that have been introduced.  In the absence of these there would have been a much more pronounced fall in the wages received by the household sector from non-financial corporates.

The top line above is Gross Domestic Product.  For the household sector this is the value added of the self employed, including agriculture and the rents from the provision of housing services.  These rents include those from buy-to-lets but are mainly the imputed rents of owner-occupiers for the housing services that they provide to themselves.  The GDP of the household sector

The imputed rent of owner-occupiers counts as income but as they also consume the associated housing services the imputed rent is netted out through final consumption expenditure and has no impact of the savings rate. 

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