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Oran Hall A cry for more disposable income

Some public sector workers have not accepted the compensation proposals made to them by the Government, so, so far, there is no deal. There are several issues in the mix, but the big issue is that they really want more disposable income.

Disposable income is what is left from personal income after the deduction of income tax and other statutory deductions such as education tax, National Insurance Scheme contributions, and National Housing Trust contributions. It is what individuals have to pay their debts, utility bills, food bills, school fees, rent, mortgage, and transportation costs, for example.

The extent to which they are able to pay these expenses determines their standard of living. It is thus fair to say that the public sector workers are saying that among other issues, they want more disposable income to help them raise, or at least, maintain their standard of living.

As the Government has not increased personal income tax and the rate of statutory deductions, there is no apparent change in the disposable income of individuals whose nominal income has not changed relative to last year’s income.

To be better off, the public servants clearly want more disposable income to be able to buy what they have not been able to buy so far or to buy more of what they have been buying. It is reasonable to conclude too that they want to be able to save and invest more.

Increasing their income to what they see as an acceptable level is their best way to increase their disposable income and their standard of living. A higher level of income alongside unchanged tax rates, no new taxes, and unchanged statutory deduction rates, though ensuring a higher disposable income, do not guarantee a higher standard of living when we consider the ability of inflation to erode the value of money, and thus, purchasing power.

In such a case, therefore, where real purchasing power declines, higher incomes do not necessarily translate to people being better off.

Additionally, what people do with more income is important. If it is directed largely to consumption at the expense of savings and investing, the individual’s capacity to create and grow wealth is compromised.

Apart from the expectations of the teachers, doctors, and police officers, other groups and individuals are interested in their disposable income increasing. The means through which they expect this to happen is the raising of the income tax threshold, which would give them a higher level of tax-free income and thus a lower level of taxable income. In this case, individuals would pay less income tax and thereby take home more pay.

Minimum wage earners have their own expectations as the Minister of Labour and Social Security is expected to announce the new minimum wage soon. This higher rate, when it ultimately takes effect, should see such workers taking home more pay. The higher disposable income should contribute to them raising their living standard even marginally.

In a more indirect way, sanitation workers of the National Solid Waste Management Authority, who will see their status change from contractors to full-time employees, like some security guards, should see some improvement in how they use their disposable income. For example, with benefits like health insurance, less of their own funds should now be used to cover their health-related expenses.

The risk many people face when their disposable income increases is the tendency to increase spending to match the increase. Worse, some increase their spending in anticipation of the expected improvement of their cash flow. This temptation is real considering what many people have to bypass when they have a limited disposable income.

Generally, it is prudent to avoid spending income from savings and investments as such income tends to be required to meet longer-term goals and needs. Many individuals, though, to the extent that they have the time, use their skills and experience to create one or more additional streams of income (and I am not saying this is what the public sector workers should do), thereby increasing their disposable income.

A worthwhile approach to take when disposable income increases is to recast the budget to take into account the increased level of income but being careful to organise spending to fit within the boundaries determined by the income. Establishing meaningful priorities to guide spending can go a far way in keeping the budget in balance.

– Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and

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