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Our €87.5bn in the bank does not add up to a spending spree

At the end of March, Irish householders had €87.5bn in savings in resident credit institutions.

That's the money Michael Noonan wants us to liberate and spend, spend, spend.

The perception is that since the economy tanked we have been squirelling away money, that tens of thousands of families have tens of thousands of euros resting in their accounts.

That theory is based on a simple, perhaps simplistic, calculation; 1.5m households with €87.5bn in deposits equals €60,000 per household. But this is not necessarily "savings." It include current accounts. And wages and pensions lodged in current accounts and withdrawn from the "hole in the wall" or used to pay mortgage, rent, utility and shopping bills are not real savings.

Some experts suggest that out of the €87.5bn, 25 to 50 per cent could be in current accounts.

Nor is the level of personal savings in Irish financial institutions rising.

The quarterly Central Bank figures showed deposits actually fell by €1.7bn in the first three months of 2011.

They had fallen by almost €2bn (2.1 per cent) during October, November and December 2010. So nearly €4bn held in Irish resident credit institutions vanished in just six months.

Where did this money go? Retailers will tell you it wasn't spent in shops. Irish Small and Medium Enterprises Association (ISME) chief executive Mark Fielding said last week that the latest Central Statistics Office figures confirm retail sales volumes are down almost 25 per cent since 2007. Retail was in 'freefall' and drastic action was needed

And restaurant owners, hoteliers and publicans will tell you the missing money wasn't spent on eating out or drink. Nor was it spent in supermarkets. Tesco Ireland recorded a 3.9 per cent drop in sales here last year.

Did the money leave the jurisdiction? Did it go under the bed, or was it simply used to pay off debt including credit cards or to "overpay" mortgages. There is anecdotal evidence that people are moving money to the North or into the safe hands of the Post Office or "investing" in prize bonds as a secure haven for cash.

Interestingly, money in the Post Office is not included in the Central Bank figures showing the amount we have in resident credit institutions. Nor is the money we have moved to foreign banks.

Another factor is that people may now be drawing down savings to cover holidays, Christmas and January sales spending, new cars and general house renovations -- which they formerly used to put on the credit card or overdraft or short term loan.

Seamus Coffey of University College, Cork, raises a compelling argument that dismantles Michael Noonan's notion that there are billions in spare cash sloshing around deposit bank accounts.

His theory is based on the fact that the amount of money Irish householders are borrowing is in sharp decline. While the amount we are borrowing for basic consumption, not including house purchases, was growing at 18 per cent a year in 2008, it is now falling 18 per cent each year.

Yes, Irish people have a decent savings rate (12 per cent) but the UCC economist suggests it has shot up for two reasons.

Firstly, householders are no longer borrowing to fund consumption. Secondly, householders are paying back the loans they previously used to fund consumption in the good times. So households are spending -- on goods they bought a long time ago.

Seamus Coffey suggested in his Economic Incentives forum that there may be households who are "saving" by paying down loans quicker than they need to.

He told the Sunday Independent: "The people who were saving three five or seven years ago are still saving, but most of those savers are generally 50 plus, don't have young families and young children to support.

However, the people who were borrowing three or five years ago, perhaps on their credit card, to fund their day-to-day spending have stopped. That has brought consumer spending down."

It is clear that Michael Noonan's exhortation to spend our way out of trouble may be based on a flawed perception of what is actually happening in ordinary Irish households.

Last week, economist Stephen Kinsella suggested that with the Government committed to no income tax increases or social welfare cuts and with further cuts in public sector wages ruled out, one of the options open to Mr Noonan is taxing savings.

"Could an increase in taxes on savings be on the cards? I certainly think so, given the large amount of savings projected to be here in 2012," he said.

Sunday Independent