Collectively, we find ourselves in the historically unusual position of having a surplus of income over expenditure. And what is even more unusual is that this is true for both the household and government sectors at the same time.
Historically, the country has had only three periods of significant surpluses on the current account of the balance of payments.
The first was during World War II when rationing and trade restrictions curtailed spending. The current account returned to deficit when the war ended. The second period of surpluses was during the early part of the 1990s when the start of the Celtic Tiger resulted in strong income growth. These surpluses were much smaller than the previous episode and disappeared when spending growth caught up and exceeded income growth by the early 2000s.
The third example of sustained current account surpluses is now, driven by a combination of strong income growth, including corporation tax revenues, and also, for a time, restrictions on spending. Latest estimates put the 2023 surplus at around 7 per cent of national income in 2023. It could go above 10 per cent in 2024 (Apple state aid case and CT etc.).
To get some insight into the source of these surpluses we can look at the outturns from the CSO for Savings minus Investment, [S - I], of the household and government sectors. [S – I] from the national accounts is equivalent to the balance on the current account of the balance of payments in the international accounts. Here they are in nominal annual terms (four-quarter sums) for the household and government sectors since 2000.
As can be seen above for the last two years or so this has been positive for both sectors. In the 12 months to the end of June, the government sector had an [S – I] of €10.8 billion while it was €6.8 billion for the household sector.
When household stopped borrowing to buy all those houses, government borrowing increased significant in 2008 and 2009 as tax revenues, which were been spent as soon as they came in, were reliant on property-based taxes. The deficit on the public finances was closed over the following decade with the green bars above ticking modestly into positive territory by the end of 2018.
Of course, there has been a lot of growth and a significant bout of inflation since 2008/09 so a nominal comparison isn’t very informative. We can put the above nominal figures as a share of GNI* (with a linear interpolation used to get the four-quarter sums and Budget-day forecasts used for 2024).
This shows what we would expect. The hole that was opened up prior to 2008 was much deeper than the heights of recent years. But the current position is still significant: in combined terms the household and government sectors have an excess of income over expenditure (both current and capital) that is equivalent to around five per cent of national income.
This is roughly where it was pre-COVID (2019) but the composition has somewhat changed. Back then, the excess was driven almost entirely by the household sector whereas now there is a contribution from the government sector (with the government’s position benefitting from soaring Corporation Tax revenues).
Compared to the first half of 2019, nominal aggregate disposable income of the household sector was about 43 per cent higher in 2024. Nominal consumption expenditure was around 41 per cent higher. This gives a slightly higher savings rate in 2024 compared to 2019, 17 per cent versus 15 per cent.
The change since 2019 is that more of that saving is going to capital formation rather than going on the financial balance sheet. In nominal terms, household investment is running at around €16 billion a year, compared to €6 billion in 2019.
A good share of this increase is just price effects. The volume of new housing purchased by the household sector is up about 10 per cent on what it was in 2019 but prices of new housing units are up around 20 per cent. The value of purchases of new housing by the household sector rose from €3.3 billion in 2019 to €4.4 billion in 2023. That makes only a minor contribution to the increase shown above.
A much larger share of the increase in household investment is likely due to renovations and improvements of existing dwellings. We can see this from the breakdown of investment provided in the quarterly national accounts – though in this instance we are looking at an economy-wide measure than one specific to the household sector. The government and corporate sectors will undertake some improvements but the household sector will be the main driver of changes.
In nominal terms spending on renovations and improvements rose from under €3 billion in 2019 to close to €8 billion now. Again, there will be a price effect but the QNAs also show a steep volume increase, with volume close to doubling since 2019 and at there highest ever levels. The key activities here are renovations, extensions and retro-fitting. This seems to be the one spot on which there is additional spending. If more new housing was available spending there would likely increase as well.
To conclude, we’ll look at the finer detail of the household sector from the Institutional Sector Accounts. First, the current account:
The bottom line is that slightly higher savings rate compared to what it was in the equivalent period of 2019 (the first six months of the year). The data are nominal and we note that the CPI during the first half of 2024 was three per cent higher than a year previously and up almost 20 per cent compared to what it was in 2019.
The largest relative changes are for interest flows with both incoming and outgoing interest up just over 100 per cent. The fastest increase in wages received was from the government sector, plus nine per cent, compared to around seven per cent for other sectors.
We can see how the saving is used from the capital account.
All told, the household sector was a net lender of €7.8 billion in the first half of 2024. The largest destination of these funds are household deposit accounts.
Latest figures from the Central Bank show that household deposits with entities regulated by it are growing by around €700 million a month, and at almost €160 billion are up €50 billion on where they were at the end of 2019.