Consumer Spending Patterns in Ireland

Reading a household budget

A household's budget shows where its income goes. To compare households of different sizes and incomes, we do not compare euro amounts. We compare shares: the percentage of income (or of total spending) going to each item.

Why shares? Because €150 on food is a big deal for a household with €400 a week and hardly noticeable for one with €1,600. The share makes the two comparable.

The CSO Household Budget Survey

Where do the real figures come from? The Central Statistics Office (CSO) runs the Household Budget Survey (HBS). Thousands of households across Ireland record their spending over a period, and the CSO also collects their income, size and location. The survey measures how households spend their money: average weekly spending on food, housing, transport, recreation and so on, broken down by income group, household type and region.

Results are used by many people:

• The CSO uses the spending shares to set the weights of the Consumer Price Index (CPI). A price rise on something that takes a large share of budgets counts for more.

• The government uses the data when designing the Budget, for example to judge who would be hit hardest by a rise in VAT or excise duty, or how well social welfare payments cover the cost of living.

• Businesses use it to see which markets are growing as incomes rise, and where to locate or what to stock.

Income elasticity and types of good

When income changes, spending on different goods changes by different amounts. Income elasticity of demand (YED) measures this response.

The sign and size of YED classify the good:

Note the link to shares. A necessity has $YED < 1$, so its share of the budget falls as income rises. A luxury has $YED > 1$, so its share rises. This pattern for food is known as Engel's law: the share of income spent on food falls as income rises.

Comparing households: shares and Engel's law

Survey tables usually compare income groups. The method has two stages: first find shares, then see how the shares change with income.

Businesses read these tables as a forecast. If incomes in an area are rising, firms selling goods with a high YED (holidays, premium products) can expect their share of consumer spending to grow. Firms selling inferior goods should expect a squeeze, and may need to move upmarket.

Using the data: business and policy

Elasticity and planning

Take a household survey with three income groups. To find YED for an item between two groups, use the percentage change method: compare spending and income of group B with group A (the starting point), exactly as in the formula.

For business, the implication is straightforward: expect luxuries to grow faster than the economy during an upswing and to fall faster in a recession, while necessities are steadier and inferior goods move against the cycle. A retailer needs a product mix that matches the phase of the cycle.

Price elasticity and revenue

When a firm also knows PED, it can predict revenue. If demand is inelastic ($|PED| < 1$), a price rise increases total revenue ($TR = P \times Q$), because the percentage fall in quantity is smaller than the percentage rise in price. Take $PED = -0.6$: a 10% price rise reduces quantity by about 6%, so revenue rises by roughly 3.4%. If $|PED| > 1$, a price rise would reduce revenue.

When price and income both change, add the two effects on quantity: $\%\ \Delta Q \approx PED \times \%\ \Delta P + YED \times \%\ \Delta Y$. Each elasticity measures its own effect, holding the other variable constant.

Limitations of survey data

Here is an illustrative pattern of the kind the CSO Household Budget Survey reports, as shares of weekly spending by income group. The figures are rounded and for illustration only: check the latest CSO release for exact values.

Lower-income households spend a noticeably larger share on housing and food, and higher-income households spend more on transport, recreation and eating out. This is the pattern YED predicts: necessities take a falling share as income rises and luxuries a rising share.

Survey data have limits. A cross-section survey compares different households at one time. Using it to predict how one household will behave as its income rises assumes that a poorer household would behave like a richer one if it became richer. In reality, tastes, age, household size and location differ between groups. Prices and expectations also change over time. Surveys rely on households recording their spending accurately, they are based on a sample, and the data may be out of date by the time they are published. Predictions should therefore be treated as estimates.

When rent takes a bigger share

Rents in Irish cities have risen faster than incomes since 2010. Housing is a necessity with price-inelastic demand (households cannot easily cut back on where they live), so when rents rise faster than incomes it takes a growing share of a budget. Take a student household with a monthly income of €2,400 and rent of €1,000: the share is $\frac{1000}{2400} \approx 41.7\%$. If rent rises 15% to €1,150 and income rises 3% to €2,472, the share is $\frac{1150}{2472} \approx 46.5\%$. That leaves less for other goods and for saving. Lower spending on other items reduces aggregate demand, and lower saving reduces funds available for investment (saving is a leakage, but also the source of credit).

Policy responses include rent controls (such as Rent Pressure Zones), which limit increases but may reduce the supply of rental homes, and housing supplements (such as HAP), which raise tenants' ability to pay but may push rents up if supply is limited. Increasing the supply of homes helps in the long run but takes time and costs money. In discussion, always state the benefit, the side effect and who gains or loses.

Back to the start

Why did the two households spend so differently? Because food and housing are necessities (YED below 1), their shares fall as income rises, while holidays and eating out are luxuries (YED above 1), so their shares rise. Supermarkets and governments care because those shares predict how spending, prices and tax revenue will move as incomes grow or fall.

Summary

• A spending share is $\frac{\text{item}}{\text{income (or total spending)}} \times 100$. Always check which total is used. Saving is income minus spending.

• The CSO Household Budget Survey records how households spend, and is used for the CPI weights, for Budget decisions and for business planning.

• $YED = \frac{\%\ \Delta Q}{\%\ \Delta \text{income}}$. Negative: inferior good. Between 0 and 1: necessity. Above 1: luxury. Keep the sign.

• Engel's law: the share of income spent on food falls as income rises.

• Survey data are cross-section and sample-based, so predictions from them are estimates.

• When the price of a necessity such as rent rises faster than income, its share rises, squeezing other spending and saving.

Key terms: household budget, spending share, disposable income, Household Budget Survey (HBS), income elasticity of demand (YED), normal good, inferior good, necessity, luxury, Engel's law, cross-section data, aggregate demand.