Savings, savings, everywhere...

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 3 per cent of national income in 2023, close to where it was pre-COVID.  

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.

The trough of late 2007/early 2008 when the household sector was spending far more than its income (mainly due to buying new houses) can be compared to the current level. Both are around €16 billion – though in opposite directions.

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.

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The Household Sector in the first half of 2023

A few weeks ago, the CSO published the Q2 2023 update of the non-financial institutional sector accounts. We will use those to check in on the status of the household sector for the first six months of this year (H1) and how it compares to last year and to 2008.

First, the current account.  In the prevailing environment, it is important to note that the figures in the table below are in nominal terms, i.e. not inflation adjusted.  We will look at some of the aggregates in constant prices towards the end of the post.

The start point of the current account here is Gross Domestic Product. For the household sector this is the value added produced, a large share of which is due to the imputed rents attributed to owner-occupier households with the remainder arising from the activities of the self-employed.

From there the account proceeds through a series of inflows and outflows until the bottom line is reached, Gross Savings, which is disposable income not used for consumption.

Most of the items in the table show an increase for H1 2023 over H1 2022.  One of the most significant is the continued growth of compensation of employees received.  This is up 7.3 per cent (remember in nominal terms) and stood at €64.6 billion for the first six months of the year.  Non-financial corporations are the most important source of COE and their pay outlays are up 8.0 per cent in year-on-year terms.

The largest relative changes are for the interest flows. Both interest paid and interest received are up almost 60 per cent in 2023. Taxes on income and social contributions, particularly those paid to the government sector, rose in line with the rise in income.  Social benefits received rose slightly for H1 2023 but remain lower than they were in 2020 and 2021 as COVID-19 supports were withdrawn.

All told, the national accounts estimate of household disposable income for H1 2023 was €73.8 billion.  With consumption expenditure of €64.8 billion and a €1.8 billion adjustment for the excess of contributions to private pensions over benefits received from them, the gross saving of the household sector is put at €10.6 billion for the first six months of the year. 

This is lower than each of the previous three years and gives a savings rate of 14.5 per cent for H1 2023, which remains slightly higher than the 12.1 per cent recorded for H1 2019 in pre-COVID times.

To see how that saving might be used we can turn to the capital account.

Again, the figures are in nominal terms.  The key figures in the capital account are the amount Gross Savings taken from the current account and the amount of Gross Capital Formation (investment in new capital assets) undertaken by households.  These are the main items that give rise to the net borrowing/lending of the household sector.  There are some other minor flows for capital taxes paid, investment grants received and other capital transfers.

With gross savings of €10.6 billion and with the household sector “only” undertaking €4.5 billion of gross capital formation, the household sector had €6.6 billion available for net lending. This goes on the financial balance sheet.

The CSO don’t do quarterly updates of their financial institutional sector accounts but the Central Bank do with estimates for Q1 2023 the latest available.  These show the household sector adding a further €2.7 billion to their burgeoning deposit balances. Between currency and deposits, the Central Bank estimate that the household sector had €198 billion on hand in Q1 2023, up from €154 billion in Q1 2020.  Households also used savings to make the contributions to private pensions referenced above.

On the liability side there was very little movement in Q1.  Repayments on existing loans were pretty much equivalent to drawdowns of new loans, with a net increase in loan liabilities of just €36 million in Q1.  Though it should be noted that repayments have exceeded drawdowns for the past 15 years or so.

All told, the Central Bank estimate that the household sector had €507 billion of financial assets at the end of Q1 2023, with an offsetting amount of liabilities of €143 billion.

Some Constant Price Series

The CSO also some of the main aggregates using constant prices. These series are also seasonally adjusted.  Here are the series for Disposable Income and Consumption Expenditure.

It can readily be seen that the income increase shown in the table for the current account in nominal terms is eliminated with the adjustment to constant prices. In real terms, aggregate household disposable income has been declining in recent quarters.  Real consumption has continued to rise and is not far off its pre-COVID trend.  In aggregate terms, both series are well ahead of the previous peaks reached in 2008.

To conclude, we make one additional adjustment to the CSO constant price series – put them in per capita terms.

As the population is growing fairly rapidly this shows that the decline in per capita income is more pronounced than that shown by the aggregate figures, and that per capita real consumption has essentially been flat for the past year or so.

It is also interesting to make comparisons back to the previous local maxima for each series from 2008.  Both the disposable income and consumption series are actually little different to their peaks in early 2008 – the latest readings put both series about 2 per cent above those 2008 peaks.

This might suggest a “lost 15 years”.  However, the environment on which each were achieved are wholly different.  We can see this by looking at the ‘Saving minus Investment’ of the household and government sectors.  This is each sector’s contribution to the current account of the Balance of Payments and is the Net Lending/(Borrowing) of a sector excluding capital taxes, investment grants and capital transfers.  For this we return to nominal figures and annualise them by looking at their four-quarter moving sum.

The difference between 2008 and 2023 is huge. In 2008, the household sector was in deficit to the tune of €20 billion.  Via the circular flow, this borrowing was contributing to household income.  When the crash came the borrowing was taken over by the government as tax revenues collapsed and spending on income supports increased.  Without this borrowing, income (and consumption) would have been much lower.

For 2023, there is a combined surplus of €20 billion.  There is a €40 billion difference between the positions of 2008 and that of 2023.  Now both the household and government sectors have an excess of disposable income over their consumption and capital formation expenditure.  In terms of GNI*, it is equivalent to going from borrowing 12 per cent of national income to lending 8 per cent of national income.  Simply comparing the income and consumption outcomes misses the scale of the turnaround in the borrowing/(lending) position of the economy.

We are in an income position to spend more – Corporation Tax concerns aside! But do we have the resource capacity to produce the things that we would like to buy, such as new housing units?

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

A couple of years ago we asked “does Ireland have the lowest per capita consumption of housing in the EU15?”  As the title to this post suggests, that question can now be put in terms of the entire EU and now just the old EU15.

Here is the full data on the consumption of housing services (including water, electricity, gas and other fuels) in Eurostat’s data on Actual Individual Consumption (AIC).  Obviously there is too much here to be useful but it gives all the elements used to give the ranking in the final column.

The start point is the consumption of housing services in national currency from each country’s national accounts.  Using the exchange rate, population and a relative price index this is transformed into real expenditure per capita on which the volume index is based.

Here is Ireland’s consumption of housing services relative to the overall figure for the EU27.

Back in 2008 Ireland was pretty much at the level of the EU27 and ranked 12th of the 27 countries.  Since then Ireland’s relative consumption has fallen and the first estimates for 2022 put Ireland’s consumption of housing services at 70 per cent of the level of the EU27 and now ranked last (joint with Estonia) across the EU.

In terms of the data, the answer to the question at the top is, yes, Ireland has the lowest per capita consumption of housing services in the EU.  Why is this?

Here is the aggregate consumption of housing services in constant prices.

In line with the significant construction of new housing this rises up to 2009 and has been essentially unchanged since then.  Ireland and Luxembourg are the only EU countries that have not had growth in the per capita consumption of housing since 2008.

In 2008, Ireland’s per capita consumption of housing was almost twice that of Bulgaria. In the years since, Bulgaria has seen per capita growth of almost 130 per cent and is now around 25 per cent higher than Ireland.

That there hasn’t been growth over the last 15 years in the per capita consumption of housing services is a surprise. We haven’t built many new dwellings and the population has grown faster than the stock of housing. Census figures show that between 2011 and 2022 the housing stock grew by around six percent. Over the same period the population grew by 12 percent.

Ireland is below the level of the EU27 for many of the categories in Actual Individual Consumption.  This is in contrast to 2006 when Ireland was above the level of EU27 for almost all categories.  Some convergence might have been expected but the fall in Ireland’s relative position goes beyond that.

Ireland is significantly below the level of the EU27 for food, alcohol and tobacco but then is also one of the highest for consumption in restaurants and hotels (including pubs).  There are a number of categories where Ireland is close to but below the level of the EU27 including health, transport and communication. Ireland is higher for education as might be expected from our relatively younger population and higher participation in third-level.

For the public/private split of AIC, it can be seen that Ireland is at the level of the EU27 for government spending on individual consumption expenditure (and has been rising slightly relative to that over the past decade).

However, for the household component of real AIC per capita, Ireland is well below the level of the EU27.  Back in 2006, Ireland was 127 per cent of the level of the EU27; now this is just 84 per cent (though with a far, far higher household savings rate!)

Yes, there have been falls in a number of categories but by far the most significant is the one highlighted at the start of the post: consumption of housing services.

Communication has gone from 146 per cent of the level of the EU27 in 2006 to just 88 per cent now, but communication makes up only two per cent of AIC.  Housing on the other hand makes up 16 per cent of AIC. It is the largest of the above categories. 

15 years ago, Ireland was middle of the road for the consumption of housing services in the EU.  The convergence referred to earlier can be seen here. But rather than holding station in the middle Ireland can now be seen poking out at the bottom.

Ireland certainly has issues with housing. And the data says we have the lowest per capita consumption of housing in the EU. But is that really how we see it?

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What to do with €30 billion of savings?

To paraphrase a former Taoiseach, as a community we are living away within our means. This can be represented using the recently published Q4 2022 update of the Institutional Sector Accounts.  Here we show gross savings minus gross capital formation [S-I] for the government and household sectors – this is equivalent to a sector’s contribution to the current account of the balance of payments. Here they are on a four-quarter sum basis:

There was an expectation that household savings would decline as the pandemic eased but savings remain significantly above pre-pandemic levels.  For the government sector there has been an improvement due to the reduction of Covid-related income and business supports and the government’s position has been further boosted by soaring Corporation Tax receipts.

Although, the quarterly figures are only preliminary, summing over the four quarters of 2022 shows the household sector to have had a surplus of savings over investment of €20.5 billion with the government showing a surplus of €9.5 billion on the same measure.  Combined they sum to €30 billion.

The evolution of the line in the above chart, as well as the composition between household and government sectors is as good a starting point as any to discuss the performance of the economy since the year 2000.  But reaching an unprecedented position of +€30 billion is as worthy of examination as the developments that led to the deterioration to –€20 billion during the credit bubble.

Ireland’s Savings in Comparative Terms

But where do we stand relative to other countries? Here is a set of EU countries selected as those which have the necessary data available from Eurostat. The data are scaled by Net National Income which mitigates, but doesn’t completely eliminate, the need to adjust the figures for Ireland. Apart from the calculations done to get the [S-I] figures, no adjustment is made to the Eurostat data.

We see that Ireland is also high in comparative terms with other countries, though for the household sector there is a relatively small difference to Germany, Czechia, Sweden, The Netherlands and France.  With most EU countries running government deficits it is Ireland’s government surplus that leads to most of the gap. Still, for the household sector one can query whether we are at a sufficiently mature stage to be savings on a par with households in Sweden, The Netherlands and Germany.

The post is titled “what to do with €30 billion of savings” but we do know what has been done with it.  Households have put most of their surplus on deposit and the government has started contributing to a National Surplus Reserve Fund. 

The increase in household sector deposits has been noted for sometime.  Irish households have been deleveraging for around 15 years now. Post-2008 this was mainly via a reduction in debts. This has now switched to being an increase in deposits.

In the financial accounts of the Central Bank of Ireland, the household sector had just over €150 billion of currency and deposit assets at the end of 2019.  By the end of 2021 this had increased to €185 billion with a further rise to €195 billion by the third quarter of 2022.

This increase in household sector deposits in Ireland has been one of the fastest in the EU14.

However, the level does not stand out, whether using a ratio of deposits to income or using a balance sheet measures such as a ratio of deposits to loans.

While there certainly is some interest in what households do with the near €200 billion of currency and deposits assets they now have (and knowing more about the distribution of those would be a useful step in that regard), a more pertinent issue is probably what happens to savings behaviour going forward. Will household saving continue at an elevated level? Should the government be running a budget surplus?

Macroeconomic Constraints: Real and Financial

The economy faces constraints but these are more real (resources) than financial (income).  The unemployment rate is below five percent while pressures in housing are well documented. But the domestic economy is running a very large balance of payments surplus – perhaps only second to Norway in European terms. Norway is benefitting from higher energy prices; Ireland from booming Corporation Tax revenues.

But in Ireland, it seems it is the household sector that is saving the largesse not the government sector.  Norway (population 5 million) added €100 billion to its sovereign wealth fund last year.

In response to the surge in inflation, the government introduced a large set of compensatory measures.  Some of these were targeted where they were needed but many were universal and seem only to have added to the burgeoning deposits of certain households.

If these measures are not repeated in 2023 then we may see some reduction in household savings. If not offset by spending elsewhere, this would see the government surplus rise (also aided by first quarter Corporation Tax receipts which have been particularly strong).

But what level of budget surplus is politically sustainable?  Should the government be increasing taxes aimed at households with elevated savings rates to recapture the benefits of the soaring Corporation Tax receipts or to ensure that those savings aren’t released into an economy already operating at close to capacity?  The need for increased housing supply is undeniable but should activity in other sectors be squeezed to try and create room for more construction activity? No solutions are offered here as we are merely pointing to the trade-offs faced.

The unusual position of the economy can be illustrated with a chart of the unemployment rate (representing an internal resource imbalance) and the current account of the balance of payments (representing an external income imbalance).  The two macroeconomic loops the Irish economy has experienced in the last 50 years are also highlighted (1975 to 1998 and 2003 to 2019).

The imbalances experienced by the Irish economy have typically been in the top left quadrant: high unemployment and a large balance of payments deficit.  The economy is now in the opposite position: low unemployment and a large balance of payments surplus. 

The economy certainly has the income capacity to increases spending but it does not seem as if there is the resource capacity to do so.  Higher spending may push up domestic inflationary pressures which heretofore has largely been driven by external factors. 

There is also the sustainability of the income.  In the textbook descriptions, taxation is viewed as a withdrawal from the circular flow of income that would not be considered, at least directly, to lead to an increase in national income. 

Ireland’s Corporation Tax revenues do not fit with the textbook analysis.  Four-fifths is paid by foreign-owned companies and the bulk of that arises from (U.S.) companies that have a presence in Ireland to service international markets.  Corporation Tax is an injection to national income and that injection is reaching ever higher levels.  In the 12 months to the end of March, Corporation Tax receipts reached €24 billion.

Conclusion

Ireland is in a position of wanting to do things (such as build houses) and having the income to finance this activity but not the resource capacity to undertake it. With the unemployment rate close to four percent an increase in spending would likely lead to a rise in inflation.

We could view building houses as something we want to do all the time – which we should – and not just when Corporation Tax receipts are booming. To that end we could increase taxes to provide a sustainable revenue source to fund public capital spending on housing.  This could also create the resource space in the economy to accommodate that activity.

However, that is an economic argument not a political one.  Tax increases while the government is running surpluses are unlikely to get much traction.  But political myopia to the trade-offs we face does not mean that they do not exist. We should have something to show for the ongoing boost to national income: but that something should not be a surge in domestic inflation.

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Do the Collisons have more wealth than half the population?

Around a month ago, Oxfam issued its annual missive on wealth inequality.  Each year it is designed to generate headlines and this year Oxfam Ireland did so by targeting the Collison brothers, John and Patrick.  The headline of the press release was:

 

A number of media outlets gave prominence to the claim (such as here, here, here, here, here, here, and here).  From Oxfam’s perspective this is achieving their objective and they certainly have no reason to change their approach.

The estimates of the wealth of individuals are taken from the Forbes Billionaires list. For the end of 2022, Forbes estimated that the net wealth of each of the Collison brothers was $9.5 billion.  This corresponds to the €15 billion figure in the headline.

There are a variety of sources that give estimates of the population-wide distribution of net wealth in Ireland.  In their recent reports Oxfam have used the estimates from the Credit Suisse Global Wealth Report. 

For 2021, the aggregate net wealth of Ireland’s adult population of 3.66 million adults aged over 20 is put at $920 billion (Table 2.2, page 110).  The wealth share of the bottom 50 percent is estimated to be 1.2 percent (Table 4.5, page 140).  Fairly straightforward arithmetic tells us that $11 billion is the estimated net wealth of the bottom 50 percent.  It also seems straightforward that the headline is correct.

But let’s look at the wealth estimates in a little more detail. First, by decile:

We can see that while the total for the bottom 50 percent is as Oxfam have stated, the result in very much dependent on the negative wealth share of the first decile.  Indeed, we get the somewhat contradictory outcome that although the Collison’s estimated net wealth is greater than the bottom 50 percent, it is significantly less than the net wealth of the those in the fifth decile alone (those between 40 percent and 50 percent of the wealth distribution).  For the aggregate total for the bottom 50 percent this wealth of the fifth decile is offset by the negative net wealth of the first decile.

While we might typically characterise the bottom 10 percent of the wealth distribution as the “poorest” this may not necessarily be the best descriptor.  Those with a negative net wealth have liabilities that exceed their assets.  It is likely that this is the result of borrowing used to acquire assets or borrowing that will help acquire assets in the future. 

Someone who has taken out loans to help them through third-level education may have a negative net wealth.  Someone who has taken out a loan to help start a business may have a negative net wealth.  A homeowner with a mortgage may have a negative net wealth if the value of the property drops below the amount owed on the mortgage.  In time, we would expect many in such circumstances to move up the wealth distribution.

Indeed, this would have happened to many homeowners who found themselves in negative equity following the 2008 crash.  And it appears that the estimation techniques used in the Credit Suisse reports have not fully factored in the reduction in negative equity of Irish homeowners.

For 2013, the Credit Suisse report puts the wealth share of the bottom 10 percent in Ireland at –3.5 percent. This was close to the nadir for house prices, but as shown above for 2021, the wealth share of the bottom 10 percent is only estimated to have improved to –2.8 percent in the Credit Suisse reports.

An alternative source of wealth distribution data for Ireland is the Household Finance and Consumption Survey (HFCS) undertaken by the CSO.  This actually is where the –3.5 percent net wealth share for the bottom decile in Ireland for 2013 comes from.  But the latest HFSC (for 2020) shows that the wealth share of the bottom 10 percent had increased to –0.6 percent.  In the 2018 HFCS, the CSO discussed the reasons for this:

In 2018, 8.0% of households in the first net wealth decile were owner occupied, compared to almost 80% in 2013. This large change is due to the increase in residential property prices over this time and the consequent movement of people out of negative equity. In 2013, 31.9% of all HMRs owned with a mortgage were in negative equity, whereas the 2018 rate is 4.1%. In 2013, just over three in four (75.8%) households in the bottom wealth decile were in negative equity, compared to 5.8% in 2018.

For 2020, the CSO estimate that the wealth share of the bottom 50 percent was +7.8 percent. Using this would give a very different result compared to the +1.2 percent used to give Oxfam its headline.  Per estimates from the CSO, the net wealth of the bottom 50 percent of the wealth distribution in Ireland is many multiple times the net wealth of the Collison brothers.

In the press release, Oxfam use the soundbite that “the rich are getting richer while the poor are getting even poorer” and also exhorts that “the very existence of billionaires while out-of-control inequality rises, is damning proof of policy failure.”

The wealth figures for the Collison brothers is based on the assumption that they each retain a 10 percent stake in the online payments firm they founded, Stripe.  In a 2020 funding round, investors provided $600 million to Stripe and in return received 0.63 percent of the company.  This gives a value of $95 billion for the overall company and the $9.5 billion figure used for respective net wealth of the Collison brothers.  Recent estimates suggest the value of the company has declined to around $60 billion – still a huge sum.

That the Collisons have set up a business that is valued at tens of billions has made no one poorer.  Indeed, Stripe has yet to even make a profit. People have collected more in payments from the company (such as wages etc.) than the company has generated in revenue.  Reporting on a recent note to investors Bloomberg said:

The payments giant forecast adjusted earnings before interest, taxes, depreciation and amortization of $100 million this year, according to people familiar with the matter. That compares with a loss of about $80 million in 2022, when Stripe processed $800 billion, the people said, asking not to be identified discussing internal financial information.

Although loss-making in 2020, Stripe was valued at close to $100 billion by investors because of the expectation it would make profits in the future.  No one is poorer now due to profits that Stripe might make in the future.  And even if the profit is $100 million in 2023, it shows that these expectations still have a long way to go. It will be a success if the Collisons can achieve it.

The role of expectations is significant in the wealth valuations of those who top various rich lists.  A prominent name on such lists is Jeff Bezos.  Bezos maintains an ownership of around 10 percent in Amazon, the online retailing company he founded.  Amazon’s market capitalisation hit $1 trillion for the first time in early 2020.  This pushed Bezos to top of the rich lists. 

But as with the Collisons much of this was based on expectations.  In the 20 years to the end of 2019, Amazon had earned a cumulative net profit of $30 billion. Not per annum, in total.  Jeff Bezos will have received some of this $30 billion in dividends over the years but it would have been an insignificant contributor, in relative terms of course, to the factors that pushed his net wealth to near $200 billion in 2021.

The key factor was further increases in Amazon’s share price.  By the middle of 2021, Amazon’s market capitalisation was $1.9 trillion.  Bezos’s 10 percent stake gets us the $200 billion headlines.  Of course, there has been a bit of a change in expectations in the interim and now Amazon’s market capitalisation is around $950 billion – a reduction of $1 trillion.  This reduction is greater than Credit Suisse’s estimate of the net wealth of the entire Irish population ($920 billion).

If Jeff Bezos’s wealth has fallen by $100 billion (10% of $1 trillion) who has benefitted from it? If the rich are getting poorer are the poorer getting richer?  Of course, it is nonsense to look for such transfers.  Jeff Bezo’s wealth has fallen because the expectation of the profits Amazon might make in the future has fallen.

It is typical to talk of “wealth accumulation” when referring to those at the top of the wealth distribution.  But while it is certain that neither Jeff Bezos or the Collison brothers are stuck for money it is not the case that they have accumulated the vast fortunes that have pushed them to the top of the global and Irish rich lists (can we still include them in Irish rich lists if they no longer live here?).  Their wealth is driven by the valuations other people put on the companies they have founded.

So, do the Collisons have more wealth than half the population? Errmm, No.  While supporting figures can be found in the Credit Suisse Wealth Report, estimates from the CSO tell us the claim is well wide of the mark.  And is the Collisons founding of a company that is valued at $60 billion “a damning proof of policy failure”? Again, no. But their doing it is a cheap way for others to get headlines.

This is not say there aren’t issues with inequality, there certainly are and Oxfam is absolutely correct to draw attention to world’s poorest.  But, as noted elsewhere,  the living conditions of the world’s poorest are not affected by whether the stock market valuation of Amazon is $1,900 billion or $900 billion, or whether a funding round for Stripe values it at $60 billion or $95 billion. While good for headlines in the media, the rich list valuations should not be the object of our outrage.

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What did we do with €166 billion of Gross National Savings?

The last post used the sector accounts to give the steps that led to there being €166 billion of gross national savings in 2021. Here we will look at bit closer at what this €166 billion was used for.

A large chunk of it was already accounted for by one item included in the previous post – €105 billion of gross capital formation.  This left an excess of just over €60 billion of gross savings over investment. 

Accounting for net capital transfers and the proceeds from acquisitions less disposals of non-produced assets meant that the total amount available for net lending was €64.4 billion.  The sectoral split shows that almost all sectors were net lenders in 2021 with the only significant net borrowing being the €7 billion deficit recorded for the government sector.

So, that leads us to ask what did we do with that €64 billion? The answer is in the financial transactions account, though the numbers here are pretty big.  Unfortunately we are not provided with the same sector split in this account (foreign-owned etc.) that is available elsewhere.  Still the main sectors do provide some insight.

Across all sectors, total transactions in financial assets led to an increase in these assets of €644 billion while there were transactions giving a €583 billion increase in financial liabilities.  The gap between them is net financial transactions and this was €60.9 billion in 2021. 

This is not exactly equal to the €64.4 billion of net lending that was available in the capital account but given the scale of the figures it is not a surprise that they do not fully match.  What may be a surprise in 2021 is that the largest contributor to the statistical discrepancy between the two is the household sector.

That aside, the figures for the household sector are the most straightforward.  Households added almost €14 billion to their deposits in 2021.  They also put nearly €4 billion in insurance and pension schemes. 

The figures indicate the household bought nearly €6 billion of equities in 2021. Digging a little deeper into that item shows that around two-thirds of that was made up of purchases of unlisted shares.  Transactions in unlisted shares was something that piqued our interest a few years ago but the scale here is significantly smaller.

The government column shows that there were excess liabilities taken on relative to the deficit that needed to be financed.  With €20 billion borrowed versus a deficit of €7 billion this meant that €13 billion was added to the government’s financial assets, mainly deposits, which are held with the Central Bank.

The Central Bank itself is included as part of the financial corporate sector.  The numbers here are enormous (in large part due to IFSC activities) but the net figures are pretty small.  The figures for the non-financial corporate sector are also large and again it is hard to identify discernible patterns in the components but financial transactions did result in an improvement of around €44 billion in the financial position of the sector.

So what did we do with €166 billion of gross national savings?  Spending on capital formation by all sectors added around €105 billion to the capital stock and left just over €60 billion for net lending. The household sector added €22 billion to its financial position, the corporate sectors sectors €46 billion, the while the government sector had to borrow €7 billion.  The next step will be look at the impact these had on the national balance sheet.

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The Household Sector in 2022: Continued Savings

The CSO have published the Q2 2022 update of the institutional sector accounts.  They continue to show a strong performance for the household sector – at least in aggregate terms.  A previous discussion of estimates for distributional sector accounts is here.

It should also be noted that the figures are presented in nominal terms, i.e., not inflation adjusted. Here is the current account showing income, consumption and savings for the first half of the past five years.  Percentage changes relative to 2019 (pre-COVID) are also shown.

The bottom line is that the household savings rate remains elevated.  The savings rate was 13 per cent for the first half of 2019; it was 24 per cent for the equivalent period of 2022.  This is the result of strong income growth (aggregate compensation of employees is up over 20 per cent since 2019) and modest consumption expenditure growth (up five per cent over the same period).

In the first six months of 2019, households received €50.0 billion of employee compensation.  This increased to €60.6 billion in the first half of 2022.  There was an increase in pay from all sectors but the largest, and fastest increase was from non-financial corporates.  Companies to the first half of 2019, businesses paid out €7.4 billion more on their employees, an increase of 23.1 per cent.

The increase in income has resulted in an increase in income taxes paid.  These are up 36 per cent compared to 2019.  Social insurance contributions are also up with contributions to private pension schemes up nearly 40 per cent (from €3.5 billion in the first half of 2019 to €4.8 billion this year).

The last few years has seen significant changes in social benefits received from the government sector.  These were €11.8 billion in the first half of 2019 and rose to €15.1 billion in 2020 (due the lockdowns and the Pandemic Unemployment Payment).  They rose to €15.9 billion in 2021 before falling back to €13.3 billion in the first half of this year.

All told, there was a near 20 per cent rise in the gross disposable income of the household sector in the first half of 2022 compared to the same period of 2019.  As noted, the increase in consumption expenditure has been more muted with only a five per cent rise over the same period.

The household sector had €7.4 billion of gross savings in the first half of 2019.  Although 2022 saw a slightly lower level than both 2020 and 2021, at €16.1 billion it remains significantly higher than pre-COVID levels with the savings rate continuing to exceed 20 per cent.

The capital account (below) shows that these savings are not being used for capital formation (investment spending) though the household sector did have just over €1 billion of net capital formation in the first half of 2022.  This compares to negative net capital formation in the equivalent periods of the preceding three years (as depreciation – consumption of fixed capital – exceeded gross capital formation).

One notable item in the capital account is the €3 billion of investment grants received in 2022.  This is linked to the Mica Redress Scheme which was approved by Government earlier in the year.

The household sector remained a significant net lender in 2022.  Other figures suggest that most of this is going on increased deposits (though the €3 billion from the Mica Scheme will go on the financial balance sheet as an “other receivable”.  There will also have been a reduction in loans liabilities.  What is needed is an increase in capital formation – new houses.

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The Continuing Improvement of the National Balance Sheet

Ireland’s national balance sheet has gross amounts and a volatility that is not seen in the figures for most other countries.  The gross amounts are due to the impact of MNCs and the IFSC but do largely net out.  The volatility is partly due to the roller-coaster house prices have taken in recent decades.  When worked through this is what emerges for net worth per capita.

Housing plays a role but does not fully account for the changes shown.  The per capita value of the stock of dwellings (excluding site value) went from €35k in 2001 to €67k in 2006 and then fell to €43k in 2010 before rising back to €60k in 2020.

There are some items not included in the figures published by the CSO.  Not only is the site value for dwellings excluded but the value of all land is excluded.  The CSO does not provide figures for the stock of non-produced, non-financial assets.

The inclusion of such figures would certainly change the level in the chart and also perhaps some of the changes.  Land is the most significant non-produced, non financial asset but there are others.  This useful note from the CSO sets them out.

Most non-produced, non financial assets such as land and natural resources can’t be traded across borders.  All that can change is their ownership.  But there can be trade in non-produced assets like brand names, trademarks, logos, domain names and other marketing assets.  The IP onshoring to Ireland in recent years has included significant amounts of these.

In 2018, net acquisitions of non-produced assets exceeded €50 billion.  These acquisitions will have reduced financial net worth through either the reduction of financial assets to pay for them or, more likely, an increase in financial liabilities if debt is used to buy them.  In per capita terms, the amount is around €10,000 per person so goes someway to explaining the reduction in total economy net worth per capita shown for 2018 in the first chart.

There is a growing list of countries who provide figures for non-produced assets to Eurostat but it remains a minority.  Czechia and France provide the most comprehensive figures but all Germany, Estonia, Croatia, The Netherlands, Austria, Slovakia, Finland and Sweden now provide figures for the value of land. 

For produced assets Ireland has a fairly comprehensive figures for fixed assets (some suppression issues aside) but no figures for inventories or valuables.  Most countries provide figures for inventories to Eurostat but only a small minority do so for valuables.

The following table shows the gross amounts that give rise to the per capita figures in the first chart.

The financial figures can be counted in trillions.  At the end of 2020, financial assets on the national balance sheet summed to €9.0 trillion with liabilities of €9.7 billion.  This negative net financial worth was offset by the €1.1 trillion of non-financial assets included in the figures.  That gives the total economy net worth of €464.7 billion which translates to €93,400 in per capita terms.

As set out above the inclusion of other non-financial assets such as non-produced assets like land, natural resources and brands and other things like inventories or valuables would increase the net worth figure.  In most cases this would just be a change in level and the trend in net worth per capita would be largely the same.  As discussed above the inclusion of the non-produced assets purchased from abroad would impact both changes and levels.

The figures that are provided for produced fixed assets have a breakdown by type of asset.

The total stock of fixed assets has increased significantly in recent years but the largest contributors to this increase are the suppressed categories of IP and transport equipment.  When last broken out individually, for 2014, their combined value was €117 billion.  For 2020 the equivalent figure is €630 billion.  Turmoil in the aircraft leasing sector may have an impact of the 2022 figure.

We can do a sectoral breakdown of financial net worth:

This highlights that while the gross amounts for the financial sector are enormous, running into the trillions, the net amounts are relatively modest.  Non-financial corporations have built up a large negative net worth position in recent years.  This is linked to acquisition of assets such as IP and aircraft.

The government sector also has a significant negative position but did not lead to an equivalent increase in fixed assets as much of the debt was used to cover current spending. 

There has been a remarkable improvement in the net worth position of the household sector in recent years.  In the last two years shown in the above table the financial position of the household sector improved by €70 billion. 

Figures from the Central Bank suggest there was a further improvement of almost €50 billion in the financial position of the household sector in 2021.  This was achieved through a continued rise in deposits (+€16.2 billion) and also a large increase in life assurance and pension entitlements from private schemes (combined + €22.5 billion).  The contribution of debt reduction was relatively modest (€1.5 billion).

When housing assets are included (and the Central Bank include site value) the net position of the household sector is said to have improved by €140 billion in 2021, or €28,000 per capita.

The opening chart shows net worth per capita peaking in 2006 at €104,500.  The trend, and recent data from the Central Bank, suggest a new peak will be set in 2021. Hopefully it won’t go over a cliff this time.

To conclude, here are comparable figures for the EU15.  As discussed above some countries have more comprehensive figures available but there are presented here in a like-for-like basis.

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The Household Sector in 2021

The CSO have published the Q4 2021 Non-Financial Institutional Sector Accounts.  These give preliminary full-year figures for 2021 though revisions are likely as fuller National Income and Expenditure results become available later in the year.  However, the biggest of these are likely to be in the corporate sectors so here we will focus on the household sector.

First, the current account. 

As with 2020, the COVID-19 pandemic had a big impact on the figures for 2021.  This is perhaps most visible on the bottom line – the household gross savings rate.  The gross savings of the household sector jumped from the near €12 billion it had been in 2018 and 2019 to €31.5 billion in 2020 and this continued into 2021 when the household sector finished with €27.2 billion available for wealth generation.  The rest of the table shows how this amount arose.

The starting figure here is Gross Domestic Product which for the household sector is a combination of the mixed income of the self employed (mixed because it arises from a combination of their labour effort and the capital they employ) and gross operating surplus (which for the household sector arises from owning housing assets with the imputed rent of owner-occupiers being the most significant amount). 

It will be later in the year before the split of this is provided but it could be that of the €36 billion total there will be €20-22 billion of rents (actual plus imputed) and €14-16 billion of self-employed earnings. The subsidies on production received are mainly those that go to agriculture.

Compensation of employees increased by 8.2 per cent in 2021, reaching €109.1 billion.  Of this, around one-quarter (€26.0 billion) was paid by the general government sector, while around two-thirds (€69.7 billion) arose from the non-financial corporate sector.  This will be mainly private sector enterprises but will also include publicly-owned NFCs such as the ESB.

The increase in income taxes was even greater rising by 18.3 per cent and exceeding €30 billion for the first time.  Social contributions also increased.  Of those, €16 billion were paid to the government sector.  This includes PRSI (both employees’ and employers’ PRSI with these included in the earlier item compensation of employees) and the pension contributions of public sector workers.

Social benefits paid to the household sector increased in 2020 – as part of the public health measures introduced in response to the pandemic – and most of this was continued in 2021, with social benefits paid by the government sector coming in at €30 billion in 2021.

All told, the household sector had an estimated €128 billion of disposable income in 2021.  Due to caution and closures nominal consumption remained below 2019 levels with household final consumption expenditure put at €102.5 billion for 2021.  This will include the imputed spending of the owner-occupier rents included as income earlier in the table.

With the addition of net pensions savings (the difference between private pension contributions and benefits from private pensions), this gives the gross savings amount of €27.2 billion.  We can turn to the capital account to see what the household sector did with this.

And the answer is not a lot.  Once capital transactions are accounted for the bottom line of the capital account shows that there was still €21.1 billion left for the household sector to use.  This unspent amount will go on the financial balance sheet.  It could be kept in cash(!), put on deposit, used to repay loans or to purchase other financial assets.

As set out in a previous post, the Irish household sector has a low investment rate, where the reference is to investment in capital goods.  As the table shows, the gross capital formation of the household sector has been in or around €6 billion for each of the last four years.  The main investment item of the household sector is housing – either improvements or extensions to existing dwellings or the acquisition of new dwellings.

The purchase of a second-hand dwelling from another household is not capital formation as it is just a change of ownership of existing capital (even if it switches from being a rental to owner-occupier property).  It could be capital formation for the household sector if it is purchased from a non-household entity (such as a local authority or investment fund). But most household capital formation is extensions or new builds.

The anemic level of capital formation by the household sector is illustrated by looking at the line for net capital formation.  This is capital formation after depreciation (consumption of fixed capital).  In the format of the table above this would be expected to be a negative number, i.e. a spending item, however this doesn’t hold for the latest figures for 2019 and 2020.  In those years, household capital formation wasn’t even enough to cover depreciation and it wouldn’t take a huge revision for there to have been a similar outcome in 2021.

So what did we do with the €21 billion that wasn’t used for consumption or investment spending?  It will be later in the year before the CSO update the financial accounts in the ISAs but we can get the insight we need from the quarterly accounts published by the Central Bank, with latest figures covering Q3 2021.  There are two key items for the household sector: on the asset side it is currency and deposits and on the liability side it is loans.

For the first three quarters of 2021, the Central Bank data shows a €15 billion rise in the deposits of the household sector.  Loan liabilities were essentially unchanged over the period.  The latest figures show the household sector to have €180 billion of currency and deposits and €128 billion of loans which is an incredible reversal of the position of just 15 years earlier. But maybe now we need a little more spending.

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Underestimating housing consumption in the national accounts

It's not just household-level data such as the SILC where our approaches to the provision of social housing present measurement issues. In the national accounts, payments such as to HAP landlords are currently counted as a benefit-in-kind for households.  This is in contrast to the benefit-in-cash approach now applied in the SILC.

And, up to 2020, there was a further difference between the micro-data and macro-data approaches to measuring social housing.  In the national accounts an imputed social-transfer-in-kind was previously included for the 130,000 or so households who are local authorities tenants.  This has now been removed.

In the government accounts, on the revenue side, local authorities were treated as generating market output for sale.  For social housing this would be the rent contributions received from tenants plus an imputed amount to bring the value of the output in line with market values, which were based on rents in the private rental sector, using both unregulated and regulated rents.

On the expenditure side, this imputed output was used as a social-transfer-in-kind to households. There would also be expenditure incurred as compensation of employees, intermediate consumption and depreciation or fixed capital formation for the provision of local authority housing. 

This meant that the imputed value was on both sides of the accounts and netted out for the balance.  The  impact of local authority housing on the general government balance was the different between the rent contributions received from tenants and the other expenditure items incurred.

It also meant that the consumption of housing services by local authority tenants was based on the market value of the housing services they used as it is for private tenants (through actual rents paid) and for owner-occupiers(through imputed rents). 

The change introduced this year means that the consumption of housing services of local authority tenants is now treated as non-market output and the value of the consumption of that in the national accounts is based on the costs of providing it (mainly compensation of employees, intermediate consumption and depreciation) rather than an imputed market value. 

It should be recognised that most government-provided services (health, education, policing etc.) are included in national accounts on a cost rather than value basis.  The change to also do so with local authority housing had no net impact on the government’s accounts.  The imputed rents of local authority tenants were removed from both the revenue and expenditure  sides, as imputed market output for revenue and the social-transfer-in-kind for expenditure. 

Indicators like government spending to national income would have been reduced.  And so indeed would national income when the market output based on market value was replaced by non-market output based on costs. 

This change was introduced between the April 2021 Government Finance Statistics and the July 2021 Government Income and Expenditure Accounts.  The July publication included the following note:

Reclassification of local authority housing rent as non-market output

To date the provision of local authority housing was treated as a market output. This meant that the difference between the differential rent paid by the tenant and a market rent was calculated and included as P.11 (market output), with a corresponding imputed expenditure D.632 (social benefit in kind). However, Approved Housing Bodies (AHB) reclassified into the local government sector are considered as non-market producers, with no imputed rent calculation made.

On review, this approach was deemed not appropriate and thus a decision has been made to treat the local authority housing output as non-market. This ensures consistency with AHBs. This determination means that there is no longer an imputed D.632 expenditure related to local authority rent. Local authority rent payments are now recorded as P.131 (incidental sales and fees of non-market establishments). This methodology has been applied from 1995.

There can be lots of reasons for revisions between releases so attributing them solely to a methodological change may not always be correct.  Here are the figures for market and non-market output in the April and July releases.

For the three years shown (2018 to 2020), the market output of the general government sector was revised down by an average of €1.6 billion – and now takes a value of zero.  For the same years, non-market output was revised up by an average of €1.25 billion.  This suggests that around €350 million of housing consumption may have been “lost” as a result of the change in methodology.

In the greater scheme of things €350 million of consumption may not be that significant, though as a similar treatment is applied for housing by AHBs the underestimate may be slightly larger.  The underestimate is limited to the extent to which the costs of providing LA or AHB  housing is less than the market value of that housing.

In pre-COVID 2019, actual individual consumption was €133 billion, of which the consumption of housing services was €28.5 billion.  The consumption of housing services was made up of:

• Household Consumption Expenditure
  • Actual rentals for housing €5,393m
  • Imputed rentals for housing €16,459m
  • Maintenance and repair of the dwelling €289m
  • Water supply and miscellaneous services relating to the dwelling €357m
  • Electricity, gas and other fuels €3,091m
• Government Consumption Expenditure
  • Social transfers-in-kind via market producers €824m
  • Social transfers-in-kind via non-market production by Government €2,087m

A few hundred million extra in there isn’t going to make a huge difference but again maybe points to difficulties in measuring outcomes in relation to housing in Ireland.

There is no doubt that local authorities are not market establishments so deeming the goods and services they provide to be from non-market production has logic to it and imputing values is not an exact process.  However, for housing, a relatively close market comparator can be found, i.e. the private rental sector.  This can be used to give a market value for the output produced.  And up to this year that is what was done for local authority housing in Ireland.

For most EU countries, this isn’t an issue.  Almost all of the consumption of housing is the result of household expenditure.  Government spending does not go to provide housing, at least not directly.  The general government sectors don’t make payments to landlords or provide housing directly.

As the list above shows, in Ireland government consumption expenditure is responsible for around 10 per cent of total consumption of housing.  This figure is by far the largest in the EU.

For 21 of the EU27, the share of housing consumption due to government expenditure is less than one per cent (and is essentially zero for around half of those).  The closest country to Ireland is France and even then that is at a level that is less than half the outturn for Ireland. 

That is not to say there isn’t public or social housing in most of these countries. There is.  But it is happens in such a way that it is provided by entities that are outside the general government sector.  And they generate their revenues from rents paid by tenants rather than payments by government.  That’s not to say that either approach is right or wrong just that they are different.

The value of housing consumption may be underestimated in other countries to the extent that regulated or controlled rents are used in determining imputed rents for owner occupiers.  In Ireland, for around five per cent of households, the value of their housing consumption is based on the cost of providing those housing services rather than what the tenants might have to pay as private tenants. Again, neither is right or wrong. Just different.

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The level and distribution of income in Ireland in the 2020 SILC

Eurostat have 2020 figures for Ireland to the EU-SILC, the EU’s Statistics on Income and Living Conditions.  Ireland is one of the last countries to have provided figures to Eurostat and the national version won’t be published by the CSO for another few weeks.

Those figures won’t be much different to what is now available on Eurostat but will come with much more detailed background notes.  One such item to be explained is that all the 2020 figures Eurostat have for Ireland are marked with a “b” – for series break.  It is not yet clear what this is. It could be that was a change during 2020 with in-person interviews shelved as COVID hit.

And at the outset it is probably worth noting that although this is the 2020 SILC, the year represents when the data was collected rather than the period for which it applies to.  The CSO carry out the survey across the full year, and respondents are asked for details of their income in the 12 months prior to the survey.

Thus, if someone was interviewed in January 2020 for the 2020 SILC, the reference period for their income would almost wholly encompass 2019.  This would move one month forward for people interviewed in February and so on.  Indeed, when this data goes through the OECD’s methodology it will be assigned to 2019 when published on the OECD’s income inequality database.

Another difference worth noting is the equivalent scale used to compare households of different sizes.  The CSO apply a national equivalence scale with applies a weight of 1.00 to the first adult, 0.66 to all subsequent adults and 0.33 to all children under 14.  These are added together with the household’s income divided by the result to get income in terms of equivalent people.

Eurostat uses the OECD-modified scale which gives a weight of 1.00 to the first adult, but 0.5 to all subsequent adults and 0.3 to all children under 14.

This means that a household of 2 adults and 2 young children would have an equivalising factor of 2.32 with the CSO’s approach and a factor of 2.1 with Eurostat’s approach.  This changes the level of equivalised income within each dataset but should not have a hugely significant impact on growth rates or other relative comparisons.  So, the figures the CSO itself publishes in a few weeks could be slightly different but the overall trends will be the same.

The Level of Income

We will start with median equivalised income in nominal terms.

In and of itself the actual level is not that informative.  Eurostat’s figure for 2020 is €26,250 but income per equivalent person is not a concept we can readily relate to.  What matters are the growth rate and relative differences, both within the income distribution in Ireland and with other countries.

Eurostat’s figures show that for the SILC data collected in 2020, the change in median equivalised income was +2.8 per cent.  That matches the average nominal growth rate of the previous 15 years though the significant volatility in the outcomes that gave rise to that average is evident from the chart.

Relative to the rest of the EU15, Ireland had the fourth-highest median equivalised disposable income  - in nominal terms.  While some exchange rate conversions are made no adjustment is made for different price levels in the below chart.

The Distribution of Income

Three of the commonly used inequality measures that are applied to the SILC data are the gini coefficient, the quintile share ratio and the at-risk-of-poverty rate.  Here is the gini coefficient fir Ireland since 2004 with a higher figure representing higher inequality.

Ireland’s estimated gini co-efficient has been trending downward over the last few decades – but it should be noted that the changes are exaggerated by the truncated vertical axis used in the above chart.  The changes are small.  The Eurostat figure for the 2020 SILC is not significantly different from what it was the previous year, going from 0.283 to 0.287.

Within the EU15, Ireland’s gini coefficient for disposable income is in the middle of the pack.  Ireland stands out more for the change in the gini coefficient over the last 15 years.  This following chart shows how the average for each country from 2018 to 2020 differs from its average for 2004 to 2006. 

For most of the EU15, the gini was either unchanged or increasing over the period.  For those countries showing a reduction in their gini coefficient the fall in Ireland was the second largest, with only Portugal showing a larger fall.

The gini coefficient is a useful indicator but as an measure which condenses a population-wide distribution of income into a single number looking at other measures can also be useful.  The quintile share ratio compares the income share of the top 20 per cent of the income distribution to the income share of the bottom 20 per cent.

The pattern here corresponds to what is shown by the gini coefficient.  Over the last 15 years, Ireland’s quintile share ratio has fallen from around five in the mid-2000s to around four now.  This indicates that incomes at the bottom of the income distribution have grown faster than those at the top.

Ireland’s quintile share ratio is the sixth lowest in the EU15.

The at-risk-of-poverty rate focuses in the lower end of the income distribution and looks at how many people live in households with an equivalised income that is less than 60 per cent of the national median. 

With Eurostat putting Ireland’s median equivalised income at €26,250 in 2020, this gives an at-risk-of-poverty threshold of €15,750 for a single-person household.  If we multiple this by 2.1 we get the threshold for a 2 adult plus 2 young children household: €33,075.

Here is the share of people in Ireland who live in households with an equivalised income below the 60 per cent threshold.

This shows a similar pattern to the quintile share ratio and Ireland’s position in the EU15 is also the same (sixth lowest).

As it is a measure of inequality, the at-risk-of-poverty rate is not always a good indicator of changes in living standards at the lower end of the income distribution.  The post-2008 period in Ireland is a good illustration of this.  We know that there were very significant falls in income but this is not reflected in any noticeable increase in the at-risk-of-poverty rate in the period from 2009 to 2012.

This is because the at-risk-of-poverty rate is a relative measure.  As incomes in the economy fell, the threshold for been assessed as at-risk-of-poverty also fell.  One way to get an insight into absolute changes in living standards is to use a fixed threshold (with changes only made for inflation rather than the general trend of income in the economy).  Eurostat provide an anchored at-risk-of-poverty rate with the 2005 threshold as the anchor.

The at-risk-of-poverty rate was 20 per cent in 2005.  In the chart above, the 2005 threshold is rolled forward (adjusted for inflation) and the share of the population below that threshold is reported.  It is the changes rather than the levels that are informative here.  We can see that this anchored at-risk-of-poverty measure rose significantly after 2008.  It had been falling consistently since 2014, but was unchanged in 2020.

There’s much more to the SILC than income figures but that’s probably enough for now.

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