What are we Supposed to Spend?
There is something a little unsettling about the Finance Minister’s exhortation that we all go out and spend; namely, that the analysis he has received from his advisors is so wide of the mark that it makes a mockery of his plea.
On the surface, there would appear to be a lot of money to spend if only people would get that confidence-mojo happening. Proponents of this view point to the extraordinarily high level of ‘savings’. If we believe the headline rates, we are ‘saving’ approximately 12 percent of our income - salting it away out of fear over what will happen in the future.
Many economists and commentators have queried the reality of this - in particular, Seamus Coffey who hasput some hard numbers on this. His post is important reading. In short, he shows that the high saving rate is no such thing.
It is, in reality, a function of two processes:
- Households are no longer borrowing to fund their consumption expenditure (as they did in boom years); and
- Households are paying back the loans they previously used to fund their consumption expenditure.
This explanation is more than plausible when one examines overall deposits, which Seamus does.
Household deposits rose slightly since the beginning of the crisis and has recently fallen back - which is not something we should expect to see if savings were rising substantially. This reflects people paying down debt, or dipping into savings to pay for day-today expenditure which they can no longer afford on reduced income. There are still gaps in official information, but all the indications are that there is not a pot of savings-gold waiting to boost growth, employment and tax revenue.
That the Finance Minister is seemingly unaware of this is troubling. Is the Government banking on something that is unlikely to happen because it just isn’t there? If so, it gets worse.
We can safely assume that future consumer spending will not be credit-based. It will be based, among other things, on rising income, primarily wages. Real wage growth (i.e. after inflation) is expected to be sluggish at best.
- The Government projects that real wages will not start growing until 2014 - and then it will only be 0.1 percent. Even by 2015, real wage growth will still be below half-a-percent.
- The IMF is even more pessimistic - real wages will continue falling even in 2015.
This can be compensated by increasing employment. The Government projects that by 2015 there will be 72,000 more jobs in the economy (over 2010) or an increase of 3.9 percent. The IMF is more optimistic, projecting 97,000 more jobs, or an increase of 5.3 percent. Will this be enough to compensate for fall real wages? The Government seems to think so - they claim aggregate wages will be rising by twice the level of average wage increases but this all depends on where the jobs are created.
But there are further obstacles.
- Taxes will be rising. This will erode people’s take-home pay.
- Interest rate rises will have the same effect for the consumer market.
- What of households with teenagers and elderly relatives - tuition fees and health care costs may be rising.
- With people having less confidence in their pension fund provisions, we should expect more savings for old age, over and above contributions to pension funds.
- If social welfare rates do not rise at least with prices, hundreds of thousands will face falling real incomes.
- And let’s not forget the ongoing deleveraging as households try to reduce their debt levels.
Real wage sluggishness, higher taxation, interest rate rises, uncertainty about social provisions and deleveraging - this doesn’t bode well for a confident consumer market.
And while the Finance Minister is calling for more spending, his colleague over at Enterprise is busy trying to cut the wages who have the highest propensity to spend - workers covered under Joint Labour Committees. What impact will this have? Not a good one, that’s for sure.
The Government is projecting that consumer spending will flat-line next year and even by 2015, won’t even reach a growth rate of one-and-a-half percent. If it wants to return to a sustainable consumer spending market, one that is based on rising incomes rather credit, it will have to come up with joined-up policies.
Otherwise, Government ministers will be calling for more consumer spending from people who are slowly going broke.
Discussion
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Comment by: Nick Byrne/ R.H
Jul 12th 2011 at 14:07
Maybe the Minister of finance should practice what he preaches, and lead by example, and remove monies from his foreign investments and spend it at home. He could start by buying as much of this cake that he has been talking about and give it to the his poor constituents in Limerick City whom are presently surviving on the bare essentials.
It could possibly be that the Minister is not as detached from the suffering and shortcomings in household budgets of the ordinary people as we give him credit for.
Maybe he is referring to the eleven thousand or so millionaires whom are continuing to do quite well for themselves under these present circumstances. Maybe the Minister is considering the introduction of an incentive regarding these elite, in so far as if the elite will not spend their unethical monetary gains in the Irish economy, the very same economy from which they obtained them, at the expense of the weaker in our society, they will experience an effective tax rate which will impact their purchasing power to the same level as the ordinary citizen whom is presently barely surviving.
Maybe the Minister is considering similar incentives to those in the legal and medical professions whom have obtained unethical profits from the ordinary citizen. I am conscious of the possibility that some of your readers may view the words ‘unethical profits’ as an understatement, some of your readers may wish to use the words ‘fleeced the ordinary citizen’ instead.
Alas, maybe the Minister, not unlike a former leader of the country, whom was alleging that the honest independent economists, who were making ordinary members of the public aware of the direction our economy was going, were in turn, going to talk us into recession, is attempting to talk us out of recession.
Your point re ‘a mockery of his plea’ is well taken on board.