The CSO have released the Non-Financial Institutional Sector Accounts for 2009. These give an insight into the financial transaction with the corporate, government and household sectors of the economy. In this short analysis we will focus on the figures provided for the household sector.
An increase in savings is not necessarily a bad thing, particularly if incomes are rising. However the Irish economy is going through a severe contraction and it is clear that incomes are falling. In fact, in 2009, net household income contracted by €8.2 billion from €98.3 billion to €90.1 billion.
This represents a fall in household income of 8.2%. This is a significant fall in household income. Most of this drop can be attributed to the drop in wages earned by household which fell by €6.4 billion, from €79.3 billion to €72.8 billion.
To find net household disposable income we must subtract taxes and social contributions paid by households and add social benefits paid to households. In 2009 taxes paid by households on their income and wealth fell by 14.8% from €15.4 billion to €13.1 billion. Social contributions fell by 9.7% from €17.5 billion to €15.8 billion.
Although aggregate household income fell by €8.2 billion in 2009 this €4.0 billion drop in taxes and social contributions insulated net household disposable income from much of the drop.
As the same time that taxes paid by households were falling, social transfers paid to households were rising, further increased net household disposable income. In 2009 social benefits paid to households rose by 7.5% from €24.5 billion to €26.4 billion. This further added €1.9 billion to net household disposable income.
To net effect of this reduction in taxation paid and increase in benefits received (and some other miscellaneous transfers) is that, although net household income saw a significant fall of 8.2%, the impact on net household disposable income was less severe and only experienced a drop of 2.3% falling from €91.7 billion to €89.6 billion. At the aggregate level the decrease in household disposable income has not been as severe as the fall in the overall economy. However, this may not last as increased taxes and reduced social benefits will see aggregate disposable income fall.
Net disposable household income as a proportion of net household income was around 90% for the period 2002 to 2007. In 2008 this rose to 93.3%, while in 2009, disposable income was 99.4% of net income.
Finally, we turn to expenditure. In 2009, household consumption expenditure fell by an alarming 11.3%, from €91.2 billion to €81.0 billion.
This represents a consumer withdrawal of more than €10 billion from the economy. With net disposable income down ‘only’ €2.1 billion, it is clear that the balance of the reduction in household consumption expenditure is being saved.
Consumers are observing what his happening in the economy (and to net household income) and, those who can, are engaging in precautionary savings on a large scale. At the aggregate level net household disposable income is being supported by the drop in taxes collected and the increase in benefits paid. With the precarious state of the public finances, households are taking the rational view that the drop seen in net household income will soon become evident in net household disposable income, as taxes rise and benefits are cut.
Of course, all these figures are aggregates. We cannot infer anything about individual cases from them. We do not know the distribution of the reduction in wages and taxes or the distribution in the increase in social benefits. It is only at the aggregate level that we can say that households have experienced a minor drop in disposable income and large increase in savings. It is evident there are many individual households who are far from this relatively benign scenario.
A table with the data used in this post for 2006-2009 is available below the fold.Tweet