Households are resilient says Central Bank: How does yours rank?

Winter is coming warns personal finance columnist Jill Kerby. Do you have your house in order, financially speaking?

One thing that has emerged from the pandemic in this country and many others is that the financial impact has been variable: Hospitality, tourism and transport have been devastated, while many sectors like IT, financial services and the public and civil service have weathered the storm up to now.

Some have even boomed - like food processing and the grocery trade, pharmaceuticals and medical supplies and devices.

That the economy has not completely collapsed will be small consolation to someone who has lost their job or business but, combined with the tax take of the state also doing better than expected, it suggests that Ireland Inc has proved to be more resilient to the global coronavirus shock than many assumed we would be back in the Spring.

Irish households, claims the Central Bank, are also proving to be more reliant to the financial shocks, despite the sharp rise in unemployment levels.

The latest five-year Household Finance and Consumption Survey, albeit based on 2013-18 data, has shown that the recovery from the 2008 financial crash, reflected in years of debt paydown and a rise in savings, has put most households in a better position to cope with the impact of the COVID-19 crisis.

According to the survey, Irish household net wealth grew by over €76,000 (74%) for the median household between 2013 and 2018. This was driven in the main by house price developments and households paying down mortgage debt.

Inequality, as measured by the Gini coefficient, fell between 2012 and 2018, resulting in “a more equal distribution of wealth. A key driver of this was the decline in negative equity, which fell from 33% of mortgaged households in 2013 to 4% in 2018. Median gross household income surpassed its previous peak in 2007, reaching €47,700 in 2018, an increase of 18.5%.”

Meanwhile, the proportion of households “with some net liquid assets increased from 69.1% to 72.6%. The median value of net liquid assets had increased from €2,000 (5.1% of annual income) to €3,000 (6.4% of income) between 2013 and 2018.”

With debt-to asset and debt-to-income ratios declining, “households’ financial buffers (liquid savings net of debt) increased. The percentage of income used for repaying debt had also fallen since 2013, primarily due to rising incomes. Overall households in 2018 were less likely to say they were credit constrained compared to 2013, however one-in-eight households report having expenses greater than their income.”

Day of reckoning

The short-term consequences right now of the continuous improvement in nationwide household debt positions, the growth of net wealth and increased savings (expected to be up by €10 billion by the end of this year) should not be underestimated.

But no one should think that the huge 2020 budget deficit (c€9 billion) and the extra billions added to the National Debt - forecast to be €230 billion by at the end of the this year – means there will be no day of reckoning for us.

The clawback of state supports like the size of the weekly emergency unemployment payments and other business has already begun and, while the Minister for Finance has said that income taxes will not go up in the upcoming 2021 Budget, no one should imagine that state services will remain untouched or that other taxes/levies will not be imposed.

The Social Protection Budget for 2020 was €21.3 billion, at a time of full employment.

Increasing non-employment benefits, especially pensions is probably unlikely. Taxing universal welfare and health service benefits, in order to favour those in greater need would be also make sense during this emergency.

Ireland is a country with a highly progressive income tax system and the rate of inequality is lower than is sometimes assumed when social welfare transfers payments are taking into account. There is considerable room to introduce similar progressive charges in the form of wealth taxes, especially regarding capital gains.

With just weeks to go before the Budget, it makes sense to see just how resilient your household really is by reviewing your short-term finances. However important it is to keep funding your long-term pension, we all need to make sure we get through the next six to 12 months before either an effective COVID-19 or treatment is rolled out. Ask yourself:

How much debt am I carrying? Can I afford to pay off the most expensive (like credit cards, personal loans) or at least shop for a better mortgage, personal loan rate?

Am I overpaying for health insurance, life insurance, motor, home insurance, banking services? Utilities – gas/electricity, broadband, mobile phones. Check out bonkers.ie or switcher.ie

How much money am I wasting on sports memberships, subscriptions, food? A second car is a significant expense – is it really necessary if we’re working from home?

Is on-line shopping getting out of control?

With or without the help of a good financial adviser, don’t procrastinate.

Winter is coming…