Tuesday, July 12, 2022

Distributional National Accounts for the Household Sector

Eurostat have published distributional national accounts for the household sector.  There is a small number of countries with national estimates with centralised estimates using a common methodology applied by Eurostat are available for all Member States.

Ireland is one of the countries with national estimates and these are available for 2015 and 2016.  The aggregates come from the national accounts with the distribution based on the relevant SILC and the 2015 Household Budget Survey. 

The following table presents the 2016 estimates showing the distribution by income quintiles (fifths of the distribution, bottom 20 per cent, next 20 per cent and so on).  The ratio of the share of the top 20 per cent to the share of the bottom 20 per cent is shown in the final column (S80/S20) to give some insight into the inequality of the distribution.

Household Sector Distributional Accounts 2016

The accounts follow the typical layout of the sector accounts going from output to income to disposable income to consumption and concluding with savings.  In this instances, social transfers-in-kind (goods and services used by households but paid for by another sector, usually the government) are accounted for.  This gives Adjusted Gross Disposable Income on the income side and Actual Individual Consumption on the consumption side.

The starting point is Gross Operating Surplus which for the household sector is the value added from the provision of housing services.  Some of this will be actual rents charged by household landlords to other landlords but most of it will be the imputed rents of owner-occupier households.  This “income” nets out as consumption under CP04: Housing.  Adding the first two items gives the value added, or GDP, of the household sector.

Next is by far the most significant item on the income side: compensation of employees received.  This is wages and salaries and also any social insurance contributions made by employers for their employees.  Like self-employed income this has an unequal distribution but is not skewed to the same extent.  In 2016, the top quintile received almost ten times more employee compensation than the bottom quintile.

The next item, Gross Mixed Income, is primarily the gains (or losses) from self employment.  This has a highly unequal distribution with almost 25 times such income going to the top 20 per cent (of the income distribution) compared to the bottom 20 per cent - €31.5 billion versus €3.3 billion.

This distribution does not stand out if we look at the equivalent quintile share ratios for the other countries which have provided national estimates to Eurostat.  As these are experimental statistics some caution is probably warranted.

Eurostat Household Sector Distributional Accounts S80S20 Ratios 2016

Ireland’s quintile share ratio for employee compensation is lower than those for the Netherlands and Sweden.

Property income received (mainly interest and dividends) is also heavily skewed with the top quintile in Ireland receiving over 25 times more than the bottom quintile.  Net property income for the bottom quintile is essentially zero while it was around €2 billion for the top quintile in 2016.  As noted above, building rents, most notably for dwellings, are not included in property income as they are counted as the provision of services and come under operating surplus.

The output and income figures resulted in a Gross National Income for the household sector in Ireland of around €110 billion in 2016.  Of that, around ten times more was attributed to the top quintile relative to the bottom quintile.

To get to Gross Disposable Income taxes and social transfers must be accounted for.  In 2016, the household sector paid €21.5 billion in taxes on income and wealth (in practice this is almost all income taxes).  Of this, almost half was paid by the top 20 per cent.  There were almost €18 billion of social contributions paid.  This includes PRSI (both the employee contributions and the employer contributions in respect of employees) and contributions to occupational and private pension schemes.  Around €6 billion of the social contributions paid went to such schemes.  Social contributions are also skewed towards the top of the distribution but the difference between the fourth and top quintiles is noticeably smaller.

Social benefits received are mainly transfer payments from the government but will also include pension income from occupational and private pension schemes.  Around €4 billion of the social benefits paid to households in 2016 came from such schemes.

After these we get to the national accounts measure of Gross Disposable Income (gross in this context means that it is before the consumption of fixed capital, i.e. depreciation, is accounted for).  Ireland had a quintile share ratio of 4.0 for gross disposable income in 2016.  Of the other countries with national estimates only Czechia had a lower estimate.

As noted above, these figures also factor in social transfers-in-kind.  These are goods and services provided to households but paid for by non-profit entities or the government.  The government provision can be purchases from market producers (such as medicines) or via non-market production of the government sector itself (such as health services).

Many of the quintile share ratios for this item are less than one as the bottom quintile receives more than the top quintile.  For Ireland, in 2016, it is estimated that the bottom decile received €6.1 billion of social transfers-in-kind with €3.7 billion going to the top quintile.  This gives a quintile share ratio of 0.6 which is the lowest for the countries shows.

Adding social transfer-in-kind to Gross Disposable Income gives Adjusted Gross Disposable Income.  As a result of the distribution of social transfers-in-kind, Ireland moves below Czechia and has the lowest quintile share ratio for Adjusted Gross Disposable Income in the set of countries shown.  This is illustrated by the graphic published by Eurostat with the results.

Eurostat Distributional National Accounts - Income and Consumption

In the left-hand panel, Ireland has the highest share of Adjusted Gross Disposable Income going to the bottom quintile (but this is only for the seven countries with national estimates).

Finally, we can look at consumption and savings.  At this point an adjustment is made for the change in pension entitlements and this is the difference between the contributions to occupational and private pension schemes and the benefits received by households from such schemes.  As set out above, the difference between these was around €2 billion in 2016.  This is considered part of the savings of the household sector so is added back in here.

The consumption figure used in the presentation is Actual Final Consumption (which is equivalent to Actual Individual Consumption).  It excludes collective consumption such as policing and street lighting etc. 

In 2016, Irish households had €113.5 billion of Actual Individual Consumption with the top quintile have 2.3 times the amount of the bottom quintile.  Although Ireland had the lowest quintile share ratio for Adjusted Gross Disposable Income it has the highest quintile share ratio for Actual Individual Consumption.  Using the quintile share ratio indicates that Ireland had the most unequal distribution of consumption for the countries shown.  This can be seen in the right-hand panel of the graphic with Ireland having the smallest share of AIC going to the bottom quintile.

As it is not income that is is driving this result we must look elsewhere for an explanation.  Savings may provide it.  Italy hasn’t produced distributional estimates for consumption so is excluded.

Eurostat Household Sector Distributional Accounts Savings Rates 2016

There certainly is a bit going on here, especially for the bottom and top quintiles.  For all the countries shown there are very large differences between the savings rates of the bottom and top income quintiles.  All bar Ireland that is.  Indeed for most countries the bottom quintile is shown to be dissaving (by having a negative savings rate).  This excess of consumption over income in the bottom decile is particularly true for the Netherlands, Slovenia and Sweden. 

Ireland has a positive savings rate for the bottom quintile and the highest among the countries shown.  And at the other end, Ireland has the lowest savings rate for the top quintile.  This means that the change in the quintile share ratio when going from income to consumption is relatively modest in Ireland, going from 2.6 to 2.3 whereas for other countries the difference is much larger.  In The Netherlands, for example, the quintile share ratio goes from 3.6 for income to 1.8 for consumption.

The only quintile in Ireland that has a negative savings rate is the second quintile.  This could be due to a higher concentration of retirees in this quintile who may have savings to draw on to fund their consumption.  But it does see Ireland going from having the highest savings rate for the bottom quintile to the lowest one for the second quintile.

Such minor anomalies aside, at a broad level, the Irish estimates seem reasonably sound.  There may be differences in definitions or exclusions from the data that are behind some of the very large variations in the savings rates shown for other countries. In relative terms, Ireland may not be as good for the distribution of income, or as bad for the distribution of consumption, as these figures suggest.

Over time it is likely that more emphasis will be put on the publication of distributional national accounts estimates like these and any such wrinkles may be ironed out.  For now, it seems the case that the opening table gives a fairly good account of what is happening across the income quintiles of the household sector in Ireland’s national accounts.  And that’s a pretty good start.

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