What kind of household is yours? New research from the Central Bank published with its latest quarterly bulletin gives a fascinating insight into the characteristics which determine who will be hit hardest by the energy crisis and who can afford to bear the rising costs. It shows how the number of vulnerable households shrank in the years running up to the pandemic, but still remains significant. The big problem, as the research by Central Bank economists Simone Arrigone, Laura Boyd and Tara McIndoe-Calder shows, is that households with the least cash to fall back on tend also to be those most exposed to rising energy and food prices. This provides a challenge for Government policy if prices continue to rise into next year.
The good news
First, the good news: There has been much debate about how successful or otherwise the economy has been in recent years. And different data can be used to support varying points of view. The Central Bank research provides important new evidence — the increased economic resilience of Irish households in the years running up to the pandemic. This is only one measure of economic wellbeing, though it is interesting, especially as the researchers are using CSO survey data and combining indicators for wealth, incomes and consumption to provide a novel classification of Irish households.
The researchers estimate that the percentage of “economically precarious households” — those with limited financial resources to fall back on, or with resources not easily accessed — fell from 43 per cent of all households in 2013 to one in four in 2018, and fell further up to 2020. They estimate that by then, 85 per cent of households were able to meet spending out of income or liquid assets. The rest — around 180,000 households — spent all their income on a regular basis and had no savings.
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Of course in 2013 the country was suffering the fallout from the financial crash and many households were heavily in debt, or negative equity. Up to 2020, the run-down in debt and rebuilding of savings added to economic resilience and then, between 2018 and 2020, higher wages kicked in, actually allowing savings to be built up. The financial rebuilding of households and the rise in net Irish wealth is interesting — a big factor was the recovery of households from negative equity, which benefited lower and middle income households most. Higher income households benefited from the rise in value of financial assets — until this year anyway.
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Four groups
The research breaks households into four groups, again combining wealth and income characteristics and relating that to consumption. The least well off is the precarious group with limited financial buffers, comprised of households who cannot meet regular spending out of income, savings or other resources. Next there is a precarious group with illiquid assets — households who cannot meet regular spending out of income or savings but have other wealth which is hard to draw on, typically a house. Then there is an affluent group who may struggle to pay the bills sometimes and, while they have some financial resources, struggle to save regularly — and finally affluent savers, who can afford to meet regular spending commitments and also save.
The authors estimate that around 15 per cent of households — the 180,000 mentioned above — are in one of the two precarious groups. One third of households are estimated to be in the third group — affluent but not having the resources to put anything by each month. We might classify them as a squeezed middle. Meanwhile over one half are in the final, better-off group.
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This research confirms the finding of earlier Central Bank and ESRI research, based on CSO data, that lower income households spend more on essentials and are thus most exposed to a cost-of-living crisis which is showing up particularly in the price of energy and food. Counting these two categories as essential along with mortgage and rental costs, the research shows that precarious households spent around one quarter of their incomes in this area in 2020 compared to one fifth for affluent households.
Precarious households
What types of households are more likely to be precarious? Compared to affluent households, precarious ones tend to be younger, more likely to be headed by women and more likely to be single parent homes. They are more likely to be renters than homeowners, though those who did own their homes were more likely to be highly indebted. And not surprisingly they have lower income and little if any savings. Typically, affluent households have savings to cover a year of spending, while for precarious households it might be a month or less.
What happens next? The data shows the big potential impact on precarious households from the price rises that have already taken place. On average, households now need 30 per cent of disposable income to pay for essentials — food, energy and housing. But this rises to around 40 per cent for precarious households and threatens to further run down the limited financial buffers many have, which reduces this financial leeway to a week on average. While higher mortgage rates are a small issue on average, they do threaten to hit around one in six economically precarious households with home loans hard. And as the protection of fixed rate loans runs out, this pressure could rise further.
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Under a severe scenario with a further 10 per cent hike in food prices, 25 per cent in energy, rents up 5 per cent and a two percentage point mortgage rate rise, the spending on essentials for the most precarious households could rise to 46 per cent, adding another €150 to monthly bills. Notably, even the third group — affluent households with limited ability to save — see spending on essentials rising to over one third of income in this scenario, which as of now looks quite possible.
What does this mean?
The research shows that the financial resilience of households has increased substantially and that around half of all households — typically older, dual-income or retired — have significant resources to help ride out the cost-of-living storm. However, precarious households — who even before the pandemic had savings of only €500 on average — are exposed. The analysis was conducted before Budget 2023 which did announce temporary supports, many of which will help this group. One issue is that if prices do continue to rise, the analysis suggests — though the researchers do not draw this conclusion — that a repeat of temporary payments may be needed next year, given the very limited resources of the exposed households. An issue would how best to direct the bulk of this to the 180,000 households identified as most vulnerable. A repeat of at least some once-off welfare supports would be one way to do this.
More help may also be needed for the middle group on higher incomes but unable to save — the squeezed middle — who will also feel the pinch. This group, together with low income working households, may be more difficult to target than those reliant on welfare supports. This was probably one reason why some supports were given to all households in the budget — but if repeat supports are needed, a more targeted approach would be more affordable. Either way the Central Bank research is a valuable resource in identifying the pressures and the groups who need help.
