More Poverty, More Growth

SILC 2012 disposable income chart from CSO.ieAccording to Michael Noonan, Ireland currently has the fastest rate of growth in Europe and all the oligarch-owned newspapers are talking excitedly about the “recovery”. Yet all the stories from those who work with the deprived and distressed is an ever-worsening economic squeeze on household income? So which of these stories is telling the truth?

It could very well be that not only are both of these stories true, but that the increasing poverty of a great number of households in the state could be the very thing that is driving the growth in GDP figures

 

- the more poverty there is for the majority, the more growth there is for national growth figures. How is this possible?

 

During the Celtic Tiger, Ireland famously became one of the two most globalised countries in the world, competing with city state SIngapore, for the title. What that means in practice is that the ratio of the value of imports and exports compared to the value of economic activity in the state - as measured by GDP, hovered near the 100% mark. For 2012, the most recent year figures are available from the World Bank, Ireland’s exports were valued at 108% of GDP and imports at 84%.

 

In practice a lot of these “exports” are intellectual property earnings by foreign pharmaceutical or software and IT services firms which is only passing through Ireland due to our accommodating status as a tax haven. But on the imports side, the economic development of the state, since independence, has done little to reduce general reliance on imports for the bulk of our consumer goods, other than basic foods. Which has the side-effect that if the capacity to consume of a substantial portion or even the majority of the population goes down, the import/export balance - which is part of GDP figures, goes up.

 

There is a second effect that means GDP figures can go up not despite, but as a result of disposable household income going down. This is the rent factor. Rents paid by people in the private rented sector are included in the GDP figures. As we know rents in our main cities, particularly in the economically dominant capital, have spiralled upwards, for reasons that remain unexplained.

 

It is easy to see that if private renters income remains stable and rents go up then they also have less disposable income to spend on imported consumer goods. Both of these factors increase GDP, while the tenant’s economic welfare - their disposable income - declines.

 

But surely the private rented sector is too small to have enough of an overall effect for GDP figures to be going up while the bulk of household incomes are going down? First of all, the ration of private and social rental tenants to mortgagees is less skewed to owner-occupiers than commonly held. The oft-recounted story that Ireland has one of the highest proportions of owner-occupiers in Europe, is a myth. In fact Ireland is in the middle of the European table on this, and the most recent figures are that only 64% of households are owner-occupied.

 

But more significantly, there is another effect that rent levels have on GDP which relates to mortgage-payers in a way most people are not aware of, because it purely notional - that is its a “bill” they never see and don’t have to pay.

 

The GDP calculation includes in its “income from rents and services” section, not only all the rent from private and social tenants, but also a fictional figure calculated for all mortgage-holders based on the price indexes in the rental market and added to GDP as if the mortgage-paying households were instead paying this notional rent. So even if your mortgage payments haven’t gone up, as interest rates are still on the floor, if the rent levels go up, then every mortgage payer contributes that much more “notional rent” to the GDP figures. And if the rent increases are high enough this can also offset any decline in real disposable income in mortgage-paying households as well as the rental sector.

 

Unfortunately the only available measure of real disposable household income is the CSO’s yearly Survey on Income and Living Conditions (SILC). The unfortunate bit is that it takes so long for the CSO to collect and process the survey that the latest available figures are from the 2012 survey and it’ll be early 2016 before we can prove either way whether the anecdotal impression that real median household income has continued to decline - which it has, uninterruptedly since 2008. What we can say is that the latest available national accounts (2014 Q2) show that the overall fall in all other high-level sectors recorded in the GDP figures are being more than outweighed by the rise in the  “Other services (including rent)” category. However the catch-all nature of the category makes it impossible to distinguish rent effects (including those calculated for mortgaged households) from the rest.

 

What we can say is this. It is entirely possible for median household income to be going down during this recovery - indeed, that the continuing increase in household poverty, aggravated by more and more unjust new household taxes, whether property or water linked, could well be fuelling this mirage recovery.

 

GDP growth may be good for the 1%, but if it is a result of increasing poverty for the mass of the population, then “their” economic growth is not “our” economic growth. We need to understand that “the recovery” is no alibi for a policy of austerity that is imposing economic misery on a vast number of the population and sacrificing the welfare of the people for the profits of corporations and their owners.

 

Update: 2013 figures released by cso.ie here - www.cso.ie/en/releasesandpublications/er/silc/surveyonincomeandlivingconditions2013/#.VagBUlTInK4

  • In 2013, the nominal median annual equivalised disposable income was €17,551 representing a decline of 0.9% on the nominal 2012 value of €17,702.  The real* median annual equivalised disposable income was €17,374, a decline of 1.9% on the previous year’s figure.  These changes are not statistically significant."

 

The crucial 2014 figures will unfortunately not be out until January 2016,

  


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