Subscriber OnlyYour Money

Five key reasons why you are still feeling financially stretched

Smart Money: No inflation and rising wages. So why don’t you feel better off?

There has been almost no overall inflation in prices in the Irish economy in recent years. And wages are rising. So how come many – particularly in younger age groups – do not feel much better off? There are 5 key reasons why many are still feeling the squeeze. Here they are:

1. The Government is taking more of your money than before the crisis. Well it is if you are have a middle and higher income anyway. The big increases in taxes on income during the bust remain largely in place for those at most income levels except the lowest, with the USC being the main culprit, though not the only one. For the lowest earners, the main impact in terms of higher tax on their income during the crisis have been reversed by the reliefs of recent years. However at most earnings levels we are paying more tax on our incomes than before the crash, with the biggest percentage increases being for middle earners and higher earnings up to around €100,000.

For example, a single earner on €35,000 is paying about €1,000 more than in 2008, someone on €55,000 is paying about €1,500 more, it goes to €2,800 at €75,000 and €5,000 for the €100,000 earner. These equate to 6 to 8 per cent cuts in net income for many middle earners. And when you add in a a property tax bill of about €300 to €500 if you live in Dublin, or less outside the capital, the earnings drop is greater.

Of course part of the argument is that taxes here were too low before the bust – so some increase was inevitable. In international terms, taxes on income here are low for lower and lower-middle income earners, but rise quickly to above average for higher earners.


2. Not everyone has been getting a pay increase.

Average earnings fell during the crisis – though not by a lot on average across the economy. Of course this disregards significant job losses, as average earnings figures are based on those in work. Pay fell between the end of 2008 and about 2012 and only really headed convincingly higher in 2016. We have now just about overtaken 2008 levels in cash terms, though there has not been much overall inflation in the meantime. Weekly pay is on average just over 7 per cent ahead of 2013 levels, with pretty much all the rises in the latter years.

However there are large divergences between different sectors. By far the biggest gains in the last few years have been in finance, insurance and real estate – up 4.9 per cent year-on-year, according to the latest CSO figures for early 2018, and 16.5 per cent up since 2013. This is closely followed by the ICT sector, up a whopping 7.6 per cent in the last year and 13.6 per cent over five years.

The increase in the boom sectors are even more notable against a backdrop of average private-sector increases of just 1.8 per cent, with a 3.6 per cent rise in the public sector, mainly due to pay deals involving restoration of losses during the crash.

In many other areas, wages are, on average, not rising by much at all. The only sector to fall over the last year was administration and support services, with a pay drop of 1.1 per cent, but in a number of other areas – industry, construction (where wage growth has slowed sharply) and professional, scientific and technical activities, the annual rises were not far off 1 per cent on average, while in accommodation and food they were just 0.5 per cent.

In many ways the story of the crash is told by construction, where around 145,000 were employed in 2008 earning around €750 per week on average, falling to 52,000 in 2013 earning an average of €639 and now back to almost 100,000 people earnings around €750 again, with sharp wage increases in 2015-17 slowing over the past year.

Recruiters and economic forecasters believe that wages should rise more significantly on average this year, perhaps by 3 to 4 per cent for many, as the economy comes close to full employment. Also, there are many people moving from unemployment, or under-employment into work, reversing the losses of the crash years.

3.. Spending patterns vary for different households:

The consumer price index, the measure we use to gauge the level of inflation, is based on the spending basket of the “average” household. But there are huge variations in spending patterns between different households. So for some households the experience will be markedly different.

Not surprisingly, mortgage payments and rent are two items which skew household expenditure significantly. CSO household spending data – the most recent of which relates to 2015/2016 – shows the significant impact that rising rents will have had on many incomes in particular. Housing costs account for 28 per cent of the spending on those renting in the private sector, compared to an average of less than 20 per cent and just 10 per cent for those who own their home without a mortgage.

So while rent caps will have offered some protection to those with existing leases, the private rental sector is one area where higher inflation is having a big impact. The latest figures from the Residential Tenancies Board shows rents increasing at an annual rate of 7 per cent to top €1,000 per month in the first quarter. It is important to note to that this covers all rents, while the figures published this week , showing a 12.4 per cent rise to €1,304, covers the average cost of new rental contracts. Both are important pieces of information, but they cover different things.

Spending patterns also vary in other areas. Typically, better off households spend a lower proportion of their incomes on basics such as food and fuel and light and more on services like health and childcare and on transport – including cars .

When you match these spending patterns with different levels of price increases in different areas, you can see how the impact on households varies.

The broad picture is of goods prices easing and services prices increasing.

The price of basics such as food and clothing have remained largely unchanged on average over the past decade and in some areas – like household appliances and furnishings – prices have fallen continuously and significantly .

On the flip side prices in areas childcare, health and education where, for example, the increase in charges levied on those going to third-level has been a key factor – have risen. On average households with children spend 12-13 per cent of their spending on childcare and this would be higher for younger families, making them particularly sensitive to inflation here. Many households have also been hit in recent yeas with rising motor insurance costs, which, despite recent falls, remains 50 per cent up over the past ten years( though 2008 levels are now seen as unsustainably low).

4. The impact of mortgage costs and house prices.

Rising house prices in recent years have been a key factor for those who have bought – and those looking to buy. Particularly affected are those who bought at the peak of the boom in 2006-08 and those now seeking to get on the ladder, as prices again start to creep back to Celtic Tiger peaks. Because of the peculiarities of the Irish housing market, the overall inflation figures – while they do include a component for mortgage costs - cannot fully capture the cost for the worst-affected groups.

Household spending data shows that those with mortgages are the biggest spending group in society, partly due to paying the mortgage and partly because the average household size is bigger. Typically households with mortgages spend 22 per cent on housing costs, according to CSO data. However this is an average, including those well into their mortgages and also those on trackers, many paying around 1 per cent interest. New mortgage holders will often be paying a third of more of their income on mortgages alone.

So those who bought in the boom, or recently, are caught both by higher prices and by higher mortgage costs than the tracker buyers. According to the latest Central Bank data, average rates on a new mortgage here at 3.23 per cent are the highest in the euro zone and well above the 1.78 per cent average. From the point of view of the inflation rate, mortgage rates are not going up – in fact they are easing. But nonetheless this is the key financial factor for many younger households.

5. Even though there is no inflation, the actual level of prices is high.

The final point is that while overall inflation here has been very low, we started from a position where prices here were close to the top of the EU league and are still there. Recent Eurostat figures showed that Ireland was the third most expensive country in the EU, behind only Denmark and Luxembourg, with prices 25 per cent above the average for a basket of consumer goods and services. Out of a wider group of 39 European countries, we ranked seventh.


The bottom line is that Ireland remains an expensive place to live and there are a few key reasons holding back the feelgood factor for many households, particularly younger ones, notably the cost of housing and rising rents. The top line story of rising wages and little inflation only tells part of the story and the rising cost of some key services in recent years has hit home for some. So have higher taxes on relatively average salaries. Equally, it is important to recognise that strong growth has delivered tens of thousands of new jobs and that incomes are now on the rise. Affordable housing is the key to spreading the gains more widely.It is normal for younger families to be more stretched than their older counterparts, but the broken housing market is leaving them with an unfair burden.

Smart Money is a subscriber only column published each Thursday which looks at the impact of the big economic trends on your life. Next week: Is it ever upwards now for electricity prices?