Bulgarians are Willing to Spend 90 Cents of each Leva they Earn
Household income and expenditure data in the fourth quarter of 2018 triggered mixed responses. As is often the case with such an opportunity, most media have put the accent on the "bad" - faster spending growth (10.5% on an annual basis) than income, although income growth (7.5%) is significant higher than any changes in the price level. Examined in a vacuum, these data may seem worrying for some, but from an economic point of view there is nothing surprising at least at this stage.
In the second half of 2018, statistics recorded the strongest quarters of the average consumer prediction of the pre-crisis households (0.90 and 0.87 respectively, which means that every 1 lev income households consumed respectively 90 and 87 st. in the third and fourth quarters of 2018). The marginal propensity for consumption is over 1 for the sixth consecutive quarter, which means that household spending rises faster than their income. However, this dynamics can not be explained only by changes in the price level, although apparently higher inflation in the second half of 2018 has played its role. However, this process began well before the surge in inflation last summer and shows a longer-term increase in consumption due to good earnings and a strong labor market. Household behavior is also supported by the higher values of the consumer confidence indicator for 2018 compared to 2017.
Household expenditure data are highly positive - food costs reach a 30.2% bottom and nothing in 2019 for the first time will fall below 30%. This dynamics speaks of an improvement in households' living standards as they show a decline in the relative share of the funds they have to spend on essential goods. Although these data must be handled carefully due to their volatility, the largest relative growth on an annual basis is seen in the cost of "leisure, cultural recreation and education" - another sign of improved welfare. If we can draw any negative trend, this is the lasting trend of increasing households' tax and social security costs, which also remains in force. Absolutely each of the quarters of 2018 registered not only an increase from 2017, but also set a new record in this respect, the latest data showing a relative share of tax spending of 12.7%.
Improvements are also seen in terms of income structure. Wage earnings account for 55% of total household income - a circumstance driven by both continued and rising wages in 2018, as well as sustained high employment and declining unemployment. As a result of the well-being of the labor market and the economy as a whole, social benefits and benefits already form less than 2.5% of household income despite the increase in some social payments.
All that has been said so far describes only the average Bulgarian household. The cross-section of the observed population by decile groups allows for much deeper observations, unfortunately limited to that time until 2017.
Wage earnings are only leading in the last six decade groups and account for more than 50% of them in the last four. Expenditures and benefits are expected to account for over 10% of household income in the first decade.
Domination of income from pensions between the second and fourth decades shows that there is a large proportion of pensioners concentrated there, as is confirmed by other statistical surveys such as EU-SILC. The low relative share of wage income in the 30-40% of the lowest income population is mainly due to the demographic structure of this type of households - here are the retirees mentioned above as well as a large part of the large families (family benefits for children form 6 % of the incomes of the poorest 10% households at an average of 0.7%).
Not only the demographic composition of the poorest households, but also their socio-economic status, are among the reasons why their income from wages is not only much lower but also their relative share even decreases. Between 2008 and 2017, the relative share of wage income for the first four decade groups declined, and in the first two decades it was already under 35%.
The continued exclusion from the labor market of part of the adults in these households (including through the constant increase in the minimum wage), in practice, shortens the link between their welfare and the general state of the economy. This is particularly true for the poorest 10%, whose profile generally includes low-educated people living in poor regions, the long-term unemployed, single pensioners or low-paid members of large families. The significant increase in the minimum wage in recent years has not had a visible effect on the income structure of this type of households for a simple reason - many of them have no contact with the labor market.
The main thing that makes an impression on the cost structure is that the higher place on the income ladder results in a lower share of food expenditure and a higher share of tax and social security costs, which is not surprising given the distribution of the employed among the different benefit groups.
In spite of clearly visible and even deepening differences in some respects, Bulgarian households share two general and long-term trends: one positive (a reduction in the relative share of food expenditure) and one negative (the increase in tax and insurance costs).
Both household income and expenditure data in the last quarter of 2018 and long-term trends are markedly positive in terms of the average household. The change in the structure of income and expenditure over the past decade shows that positive changes include virtually all income groups but are much more pronounced in the upper half of the income distribution. While income dynamics in the lower decile are heavily dependent on the size of pensions, these groups also include a significant proportion of the most vulnerable groups in the labor market, whose integration is still not happening. If there is something that the past 3-4 years of record increases in the minimum wage have shown, it is that increasing employment in the lowest-income groups is not among the sought-after or achievable effects.
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