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The Weekend Read: Although our economy grows stronger, disposable incomes in Ireland remain stubbornly low. This new series advises consumers on ways to make their pay packets go further, now and in the future
Jennifer Winder-Baggot at her home in Dublin 8. Photograph: Dave Meehan Jennifer Baggot: considers herself fortunate to have a job and a house. Photograph: Dave Meehan
Kevin Dunne with his children Daniel (8) and Ellie (10), at their home in Portarlington, Co Laois. Photograph: James Flynn/APX Looking for savings: Kevin Dunne with his children, Daniel, who is eight, and Ellie, who is 10. Photograph: James Flynn/APX
Parents of young children will be familiar with a question, usually asked in the middle of long, bad-tempered car journeys: “are we there yet?” Anxious to mollify their offspring, some parents have been known to respond with words designed to create the impression that the journey is nearly at end when the reality is quite the opposite.
The same thing could be said of Ireland right now. Over the past 18 months the Government has gone to great lengths to suggest that we are “there” – or at least thereabouts. The green shoots of recovery have turned into sturdy saplings, and we can finally start to look at the bad times through our rear-view mirrors, as our little economic miracle motors proudly over the horizon.
Or so the story goes.
Some of the pieces used to put together the recovery jigsaw certainly look very positive. The Organisation for Economic Co-operation and Development says that determined policy efforts have boosted confidence and underpinned the “robust, broad-based recovery now under way”.
Along with caveats about rising property prices and a still-high budget deficit, it adds that the Republic has “come a long way in the past five years since it entered the EU-IMF financial assistance programme”.
Statistics bear out the OECD’s optimism. Consumer spending is contributing to economic growth for the first time since 2008, according to the Michael Smurfit graduate business school at University College Dublin and the Marketing Institute of Ireland.
They say that retail sales rose 3.7 per cent in 2014 and 5.7 per cent for the first half of 2015. Spending on services, meanwhile, was up 4.1 per cent in 2014, and a further 9.3 per cent for the first quarter of 2015.
Jump to JENNIFER BAGGOT’S STORY
But this positive spending trend is due more to a steady increase in employment – 93,000 jobs were added, representing a 5 per cent increase, from 2012 to the first quarter of this year – than to a broad sweep of society seeing an increase in take-home pay.
That is not to say that disposable income has not increased. It has, a little. The average disposable income, excluding rent or mortgages, across the State in 2008 stood at €20,922, according to the Central Statistics Office. That fell to a low of €17,920 in 2011, then started to inch up again.
Jump to KEVIN DUNNE'S STORY
In 2012 the average household disposable income was €18,193, still €2,729 less than 2008, or €227 a month less. A forthcoming round of figures is expected to show the upward trajectory continuing, but the figure is unlikely to come close to the highs of 2008.
This week the Economic and Social Research Institute pointed to a significant lift in consumer sentiment in recent months. “Given that the increase in expenditure is on items such as motor vehicles and certain other durable items, it would suggest that much of the increase in expenditure may be more due to increases in disposable income per head rather than due to the increases in employment,” says Kieran McQuinn, an associate research professor at the institute.
“Everything’s grand now”
As the Government repeats its “everything’s grand now” mantra – and wills it to be so in the run-up to the first giveaway budget in almost a decade – hundreds of thousands of people in the much talked about squeezed middle will be looking at their meagre resources and limited disposable income and wondering why, if the Celtic Phoenix is soaring, things haven’t improved for them.
For many, in fact, the economic situation is worse now than in the nation’s darkest hours. Being bombarded by positive messages from official sources is proving particularly taxing for some of the most heavily indebted people, says Noeline Blackwell of the Free Legal Advice Centres.
She points to the solidarity generated by the bust, as everyone was in the same mess – or at least felt they were – but worries that it is dissipating. With so much talk of recovery, many people are looking at their perilous financial situations and questioning their own worth, she says.
“People coming into us seem more down because of all the bouncy messages, which contrast with both the absence of hope in their own situations and the length of the struggle. For many people this struggle has been going on since 2009, and even before that, and it has just ground them down. It has been so unremittingly grim.
“What we are seeing now is a sense of not exactly despair but a lack of hope,” she says. “The rhetoric is consistently telling us that things are better, but for some people the sense of struggle is, if anything, worse. In some ways people are just worn out.”
An assessment by Deloitte bears out much of what Blackwell says. It says that although many people are more positive – optimism about debt, employment, disposable income and health has increased by between 2 and 7 percentage points since September 2014 – many people who say the situation has worsened believe that more strongly than they did a year ago: their pessimism has deepened by between 1 and 12 percentage points.
“The fact that there are Irish consumers who believe their situation is getting better is likely a result of the improving economy,” David Hearn of Deloitte says.
“Yet this is not yet being felt across the board, and there is a cohort of Irish consumers who have become more pessimistic. Overall, the findings point to evidence of a dual economy emerging among Irish consumers.”
Work by the consultancy firm Amárach also points towards a lot of negative sentiment. In September 2009, 50 per cent of the people it polled thought the economy was worsening; a further 28 per cent thought it was bad but stable. Only 1 per cent of people thought the economy was either improving or had fully recovered.
Fast-forward six years and the picture is different – but not perhaps as different as the Government might like. Twenty-five per cent of us, it says, now believe the economic situation to be showing clear improvement or to have recovered; everyone else believes that things are still bad – and 13 per cent suggest that they’re getting worse.
“There are two stories out there. There is the macroeconomic story – and I think people are starting to believe that; they believe that, when it comes to the wider economy and the public recovery, things are getting better,” says Gerard O’Neill of Amárach.
“But there’s the micro story, too, and that is where a private recession still exists, and there is a hesitancy to believe things are getting better on an individual level.
“That is why we are still seeing people paying off debt at a much higher rate than they are borrowing. The private sentiment hasn’t caught up with the public sentiment, and when it comes to the private narrative people are still a lot more cautious.”
Is it any wonder? Since 2009, when we first faced crisis budgets, changes to income tax have seen average gross income fall by about 5 per cent, or about €2,000, for people earning €40,000 a year. More than €3,500 has been taken from a household or individual with an income of €70,000. In many cases people have also had to contend with wage cuts of between 5 and 15 per cent.
There is also the 2 per cent rise in VAT, which has quietly taken more than €200 out of the pockets of most households – substantially more than the water charges that have caused such disquiet despite being capped at €160 a year.
The hit from the local property tax is harder still. A person with a home valued at €325,000 will pay €585 next year.
Tally it up and a home-owning couple who were earning €70,000 in the good times have considerably less than €60,000 today.
It’s hard to square these numbers with the claim by Taoiseach Enda Kenny, at the height of the Greek bailout crisis this summer, about the impact his administration has had on people’s take-home pay. He said that the Coalition “did not increase income tax, we did not increase VAT, we did not increase PRSI, but we put up alternatives to those measures, proposed in order to keep a pro-growth policy and make our country competitive, grow our economy and provide jobs for our people”.
“It’s nonsense,” Micheál Collins of the Nevin Economic Research Institute says.
Collins accepts the idea recovery, at least in part. “The macro recovery has been pronounced, but on a micro level it has been very slow. Housing has been putting an enormous burden on some people, and that is far more pronounced among a certain cohort aged between 35 and 50.”
Dr Stephen Kinsella, an economist at the University of Limerick, says that too much emphasis is being placed on income and that the ratio of income to expenditure is what matters most. He says many people – himself included – have seen no improvement on that score for five years.
O’Neill agrees, and says it all comes down to the wealth-debt ratio. “Wealth is an opinion; debt is a fact. We need to see the wealth-debt ratio tip in favour of the former, but we still have a long way to go before that happens.” He says an intergenerational dynamic is depressing consumer sentiment. “You have parents of children who are in their late teens telling themselves that it is not as good for their children as it was for them.”
He calls this group the “sandwich generation”. They have adult children who are their dependants, and their parents, in their 70s and 80s, are heading in that direction too. “The wealth-debt ratio of this group is break-even at best, but more probably it is negative.”
He is not optimistic that people will see their disposable income improve much in the short term. “Even if you leave out what might happen in China and the emerging markets, which could set things back even further, the pace of recovery is very slow. It will be 2018 before a full recovery will take place, so you are still looking at a lost decade for many people.”
JENNIFER BAGGOT’S STORY
‘We can’t afford to go on holidays or have our house rewired’
The Pricewatch team advise Jennifer Baggot how to save money
INCOME AND SPENDING Jennifer Baggot and her husband, Stephen, live in a three-bedroom former council house in Dublin 8. She describes herself as middle class and says that she is fortunate to have both a job and a house.
Stephen works in information technology, and she is a part-time pharmacist. Their joint income is €43,000 a year. She says she knows it sounds like a lot, but when their outgoings are totted up they have very little left.
Their mortgage, which they recently fixed for two years, costs €1,380 a month, and in an average month they spend about €800 on groceries. “I do most of my shopping in Lidl and in the Dublin co-op,” she says.
Baggot also grows her own vegetables, on an allotment near her home. “I’ve been doing it for years, but this summer I think was the first time it might have saved us money,” she says, laughing.
A further €95 of the couple’s monthly income goes on gas; electricity costs €70 a month. They have no childcare or education costs but spend about €80 on prescription medication. Their mobile phones come in at €85.
“I have a cheap phone and the cheapest contract I could find, so that costs €25 a month. My husband’s contract costs €60 a month.”
They pay €65 to cover landline and broadband costs. Transport costs €190 a month, most of it for the public transport that her husband takes to work, six kilometres away; she spends a small sum on petrol to take her to and from work.
Another €39 goes on television, while a combination of her health-insurance policy and his hospital cashback plan costs €111. They spend €29 on home insurance, and a life-insurance policy tied to their mortgage costs €55.
The couple spend €40 a month insuring her car. An average of €100 a month goes on clothes, while their social life costs €480 a month (in this she includes gifts, Christmas and “the odd takeaway pizza”).
All told, this couple’s annual expenditure is just under €43,500 – on that income of €43,000.
“We scrimp and save but don’t seem to have that much left at the end of the month. I buy most of my clothes second-hand, and we don’t go out that much.
“It seems crazy that we can’t afford to go on holidays or have our house rewired,” she says. It needs to be done, but the couple don’t have the €4,000 it would cost.
“We are lucky to have a house, but our parents had a more comfortable life than we have. My dad was a professor, and he would have been on a good salary. He doesn’t understand how we are scrimping and saving all the time. I honestly don’t know where we could make more savings.”
THE PRICEWATCH TEAM’S ADVICE
Baggot appears to have a very good grasp of her finances and knows where most of her money is going.
But there are still ways to improve their finances.
“If she were to go full time as a pharmacist then their financial difficulties would almost certainly be over,” Karl Deeter, a financial analyst and mortgage broker, says.
She has fixed her mortgage for the next two years but could make some savings on her life insurance, he says. “Sticking with the policy sold by the bank when they took out their mortgage is not the best idea. This couple have no dependants, so they could look at taking out a cheap mortgage- protection policy, which they could probably get for around €30 a month.”
That would save them €240 each year.
A bigger saving could be found were the couple to change their way of commuting. Baggot’s husband has an economical Leap card, but he still spends €20.50 a week on his commute – just under €1,000 a year.
He has a bike but doesn’t use it. Baggot points out how unpredictable the weather is – but, according to Met Éireann, if he were to cycle to work, five days a week, he would get rained on only once every 25 days.
Then there’s the grocery shopping – the second-biggest annual outlay for this couple. Baggot says she is a frugal shopper, but she still may be spending more than necessary, according to Caitríona Redmond, a food blogger who feeds herself, her husband and their three children on €100 a week – half what this couple spend.
“I would say two adults can eat really well on €60 a week. All the supermarkets have weekly deals selling vegetables for just 49c,” she says.
If they could shave just 20 per cent off their grocery shop they would cut costs by €80 each month, or nearly €1,000 a year.
When it comes to utilities, David Kerr of the price-comparison website bonkers.ie suggests that they are paying over the odds for at least one element. “The €90 a month on gas seems high to me. It may be that there is poor insulation in the house. There are sustainable-energy grants available for improving insulation, but it does cost money upfront.”
He says that the killer for most people is staying on standard tariffs. About 85 per cent of homeowners are on the standard – expensive – band. By switching to a discounted electricity tariff with Energia and the best gas offer with Flogas, this couple could see annual bills fall by €307.
Making these fairly small adjustments would see them better off by €2,507 each year, which would go a long way towards covering the cost of rewiring their house in 2016.
KEVIN DUNNE’S STORY
‘80% of my social welfare is gone by evening’ How Pricewatch can help Kevin Dunne INCOME AND SPENDING
Kevin Dunne, from Portarlington, in Co Laois, is a single father with two children who relies on social welfare. He has a monthly household income of €1,763, which includes rent allowance and children’s allowance.
He pays €500 a month in rent and spends €80 on his main grocery shop, to which he adds another €30 for “getting small bits on other days”.
His prepays €100 a month for electricity and spends €78.33 on satellite TV and broadband; another €55 goes on his mobile phone. Solid fuel costs €60 in the winter months, and he spends €80 a week on heating oil, again in the winter months.
As he is out of work he has no childcare costs, but he puts the monthly cost of education at €40 – most of which he paid at the start of September.
Dunne spends a further €100 on petrol each month, plus €70 on insurance. Between himself and his two children he spends €30 a month on clothes and €100 on socialising.
He is also paying back €40 on a credit-union loan of €39,000 and €24 a month on Irish-dancing lessons for his daughter. He puts the cost of Christmas at €1,000 and his children’s birthdays at €500 a year – or €125 a month over the year. He also spends €120 a month on cigarettes.
His monthly outgoings total €1,962, meaning that he goes ever further into the red.
Dunne was working in the motor trade until he got sole custody of his children; then he had to give up the job, because, he says, he “couldn’t juggle everything”.
“I spend €25 a week on electricity, which I get through a meter, and I can only afford to buy home heating oil week to week. I use it to heat the house for 45 minutes in the morning and 45 in the evening, before the kids go to bed,” he says.
“My landlord is very good, and I pay around €150 less in rent than the going rate. I just use the car for the school runs. The kids go to schools on opposite sides of the town, so walking them isn’t an option.
“I might go out once a month, and that will cost around €40. I do all my shopping in Aldi, and maybe once a month we will get a takeaway pizza. There is a Centra five minutes’ walk away, and I do my top-up shop there. I get my social welfare on a Thursday, and by that evening 80 per cent of it is gone.”
THE PRICEWATCH TEAM’S ADVICE
Dunne could make the fastest – if not the easiest – saving on cigarettes. He says he is building up to quitting. He can’t do it soon enough: outside of the health ramifications, he’s spending nearly €1,500 year on them.
“I would be looking at the €30 he is spending on the day-to-day purchases in the shop,” says the food blogger Catríona Redmond. “Kevin needs to write down everything he buys, and exactly when he buys it, for two or three weeks, to get a sense of his shopping patterns.
Then he needs to change how he stores things like milk and bread. Both freeze perfectly well. He needs to cut out the visits there.”
Were he to do that he could probably add €10 a week to his big shop but save €80 a month.
“It seems to me that €100 a month on prepaid electricity is very expensive. That’s €1,200 a year compared to the €720 which is on offer from Energia,” says David Kerr of bonkers.ie. “Prepaid is the most expensive option; it works for some people, but it is not cheap.”
If he could come to a better arrangement on electricity he could save about €30 a month. Add that to his potential savings on shopping and cigarettes and he could be €230 a month better off – which could just stop him going into the red.
Given that Dunne can’t afford health insurance and doesn’t own his home, there is little by way of concrete advice that mortgage broker Karl Deeter can offer. “Sometimes the only thing people can try and do is develop alternative income streams, so if this man has any skills that can be utilised then he needs to explore them.”
This series continues next week
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