The pricey isle? How standard of living in Ireland compares with EU

Headline GDP figures tend to suggest that Irish people are well off. Gross Domestic Product per head figures in Ireland are second only on the EU list to famously high-income Luxembourg. But international comparisons using Irish GDP data are meaningless.

The figures per head here is more than twice the EU average. But new data from the EU statistics agency, Eurostat, shows that rather than being near the top of the EU league, Irish households are 13th out of the EU 27, 6 per cent below the EU average, in terms of a measure of the goods and services which their incomes buy. Here's why:

1. The data

With statistics, it is always vital to know what you are looking at. GDP per head, which ranks Ireland second in the EU, is the overall level of output in the country divided by the number of people (see graph). Luxembourg’s GDP is inflated by the employees going from surrounding countries to work there every day, pushing up GDP but not counting as residents for the purpose of looking at GDP per head.

In Ireland, GDP is inflated by the accounting practices of multinationals, all the more so in recent years for reasons partly related to the movement of very valuable intellectual property assets here. Former Central Bank governor Patrick Honohan estimated that based on a more realistic measure of national output, Ireland would fall to between 8th and 12th in the EU league of per capita income.

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The latest EU figures measure what is called Actual Individual Consumption (AIC). This is the amount of money people spend on goods and services plus a calculation on what they receive in individual services from the State in areas like health,education and housing.

Measurement here is not straightforward, of course. And University College Cork economist Séamus Coffey has raised some questions about the treatment of housing in the data . For most countries, the AIC and GDP per head measures are similar. But not for Ireland, which goes from more than twice the average on GDP, to slightly below, on the AIC data.

By removing the inflated part of Ireland’s GDP, the AIC figures probably gives a better measure of the material wellbeing of households compared to the rest of the EU. The AIC measures goods and services which households consume, paid for by their disposable incomes and in some cases, indirectly via tax.

The AIC data is based on the volume of goods and services which households benefit from – and so this requires an adjustment for different price levels. A key reason why Ireland is coming in below the EU average – and well below the average of the 19 euro area members (around 89 per cent ) – is because prices are higher here than the average, measured as second only to pricey Denmark for consumer goods and services. This means income doesn’t go as far in Ireland in terms of what we can buy, dropping us down the league. This is a key reason for Ireland being below the EU and euro area averages.

2. How to interpret it?

It would be a mistake to take the figures too literally. These kind of cross-country comparisons are really difficult to do with precision. And there are some odd-looking things . But in broad terms the figures suggest that the living standards of households is close to the average of the EU27 and around 10 per cent below the average in the euro area. Ireland may outrank countries like Germany, the Netherlands, Belgium and Austria when looking at GDP per head, but on the basis of the AIC data, these countries are well above the EU average, while we are a bit below. Irish household living standards are measured as being close on average to Italy and above countries like Spain and Portugal, which despite low prices, also have relatively low incomes.

The figures may seem to rank Ireland a bit lower than you might think intuitively – the UK, for example, no longer an EU member, is 10 per cent above the EU average. Perhaps the methodology does count against Ireland for some reasons – but it is clearly more realistic than the GDP per head data. Perhaps the best way to look at it is that household material wellbeing here is around the EU average – and a bit below the euro zone average.

3. The prices dilemma

High Irish prices levels are the reasons why relatively high incomes here do not translate into a higher position in terms of living standards. A complicated set of calculations are done to try to take account of price differences – to try to achieve what is called purchasing power parity.

The latest Eurostat data (see graphic) shows that Ireland is the joint second most expensive country in the EU for a basket of consumer goods and services with Denmark highest and Luxembourg second. (The data used to adjust the AIC figures is slightly different but has similar results). Ireland is relatively expensive in many categories – alcohol and tobacco prices are driven up by excise duties, for example, and are more than 85 per cent above the EU average, while food prices are a more modest 13 per cent higher. Clothing and footwear are in line with other EU countries. For buying cars, transport services, communications services and eating out, Ireland is consistently more expensive on average, while restaurant and hotel prices are close to 30 per cent above the EU average.

It comes as little surprise that in the vital area of housing costs – which include mortgage and rent payments and also utility and energy bills – costs here are 77 per cent above the average, a key reason why the overall cost of living here is high. Here high rental costs in many areas of the market and relatively higher mortgage rates come into play.

4. The policy implications

Over the longer term, the Irish economy has made significant progress since joining the EU – then the European Economic Community (EEC) – in the early 1970s, with living standards moving from well below the other States to around the average now. However, the AIC data raise two longer term points.

One, is that we ranked higher – more than 110 per cent of the EU average – before the 2008 financial crash. As this data was based on consumption, perhaps we were indeed living “beyond our means” back then. In the meantime, households have spent less and saved more – and many diverted cash into paying down net debt and consumed less. Tax levels also increased after the crisis – as well as households, the State deficit rose sharply, only partly due to the banking crisis. So the long-term impact of the last crash, in part, remains.

The second key issue relates to prices, which seem to have risen faster here than in other euro area members over the years. Irish incomes and wealth have risen – but so have prices. And high housing costs are only part of the story. Ireland is a small market without the economies of scale of bigger countries – and this is one reason for high prices here. But it is only a part of the story, for the generally high cost of living holds living standards down, even among many on reasonable middle incomes.