Diminishing disposable income in Ireland could soon affect share prices, as consumers spend less money in the private sector. Inflation beating increases in items such as alcohol and health insurance, combined with a raft of new government taxes has meant that the Irish public has less to spend than ever.
A recent survey found that half the population have less than €100 in disposable income left each month after essential bills have been paid. With so little disposable income available, there’s little left for spending in the economy, which in turn is bad for businesses, small and big.
Funding an inefficient government
The cost of recapitalizing the banks, along with inefficient public services has taken its toll on the taxpayer. One example was the recent Irish Water scandal, whereby consultants were paid €85 million to advise on the set up of the new state company. It’s inevitable that this will translate into bigger bills next January when water charges are introduced and yet another drain on disposable income. Despite the much-mooted recovery in the economy, things are set to get much tighter for Irish households.
In 2012, Ireland was the fifth most expensive state in the EU. At the same time, pre-tax national income per capita was just 11th in the EU. According to the Central Statistics Office (CSO), average annual consumer inflation in 2013 fell to 0.5%. However, there is a massive variance between price hikes in the public sector and the private sector. In education, for example, prices rose more than nine times faster than in across the whole economy. In all, state controlled prices have risen by 22% since 2008, while aggregate consumer prices rose just 3% with private sector pricing showing an increase of just 0.2%. When you consider that state-controlled prices make up about one-third of all household consumption, these are hugely significant figures.
Wasteful public services are killing the economy
Local authority rents and state-regulated gas prices rose by over a fifth since 2007, despite private housing and the price of other fuels falling. Hospital services rose 36% and health insurance an inflation-busting 117% while third level education fees rose 60%.
In all, the state controlled sector managed to take 10c out of every euro spent on goods and services since the beginning of the financial crisis. At the same time, disposable incomes fell due to higher taxes and decreased earnings. As a result, households have in the region of 12% to 15% less disposable income. Factor in unemployment and purchasing power is down by 28c in the euro and just 2c of that is due to private sector inflation.
Disposable income: Anti-competitive practices
In the private sector, of course, consumers can switch to lower priced alternatives. However, in the state-controlled sector, this is much more difficult. For example, no one can escape the increase in public transport costs, up 52% in three years. Staying in your car won’t help either due to state driven increases in motor tax, tolls and petrol duty.
State-sanctioned inflation is rapidly transferring wealth away from ordinary people to fund inefficient state services, meaning lower disposable income, less money to spend on consumables and declining revenues at the companies that produce those consumable. Sooner or later, this will have to be reflected in company valuations and share prices.