Monday, November 28, 2022

What did we do with €166 billion of Gross National Savings?

The last post used the sector accounts to give the steps that led to there being €166 billion of gross national savings in 2021. Here we will look at bit closer at what this €166 billion was used for.

A large chunk of it was already accounted for by one item included in the previous post – €105 billion of gross capital formation.  This left an excess of just over €60 billion of gross savings over investment. 

Gross Savings and Net Lending by Sector 2021

Accounting for net capital transfers and the proceeds from acquisitions less disposals of non-produced assets meant that the total amount available for net lending was €64.4 billion.  The sectoral split shows that almost all sectors were net lenders in 2021 with the only significant net borrowing being the €7 billion deficit recorded for the government sector.

So, that leads us to ask what did we do with that €64 billion? The answer is in the financial transactions account, though the numbers here are pretty big.  Unfortunately we are not provided with the same sector split in this account (foreign-owned etc.) that is available elsewhere.  Still the main sectors do provide some insight.

Financial Transactions by Sector 2021

Across all sectors, total transactions in financial assets led to an increase in these assets of €644 billion while there were transactions giving a €583 billion increase in financial liabilities.  The gap between them is net financial transactions and this was €60.9 billion in 2021. 

This is not exactly equal to the €64.4 billion of net lending that was available in the capital account but given the scale of the figures it is not a surprise that they do not fully match.  What may be a surprise in 2021 is that the largest contributor to the statistical discrepancy between the two is the household sector.

That aside, the figures for the household sector are the most straightforward.  Households added almost €14 billion to their deposits in 2021.  They also put nearly €4 billion in insurance and pension schemes. 

The figures indicate the household bought nearly €6 billion of equities in 2021. Digging a little deeper into that item shows that around two-thirds of that was made up of purchases of unlisted shares.  Transactions in unlisted shares was something that piqued our interest a few years ago but the scale here is significantly smaller.

The government column shows that there were excess liabilities taken on relative to the deficit that needed to be financed.  With €20 billion borrowed versus a deficit of €7 billion this meant that €13 billion was added to the government’s financial assets, mainly deposits, which are held with the Central Bank.

The Central Bank itself is included as part of the financial corporate sector.  The numbers here are enormous (in large part due to IFSC activities) but the net figures are pretty small.  The figures for the non-financial corporate sector are also large and again it is hard to identify discernible patterns in the components but financial transactions did result in an improvement of around €44 billion in the financial position of the sector.

So what did we do with €166 billion of gross national savings?  Spending on capital formation by all sectors added around €105 billion to the capital stock and left just over €60 billion for net lending. The household sector added €22 billion to its financial position, the corporate sectors sectors €46 billion, the while the government sector had to borrow €7 billion.  The next step will be look at the impact these had on the national balance sheet.

Wednesday, November 2, 2022

What to do with €166 billion of annual Gross National Savings

Over the past week the CSO have published further insights into the 2021 Annual National Accounts with additional tables on disposable income and savings and the 2021 Institutional Sector Accounts.  Here we will give a quick run through the output, income, spending and saving of the Irish economy in 2021.

The turnover of the Irish economy is probably something a touch north of €1 trillion.  Of this, some will be goods and services sold in the same condition as received (e.g. wholesaling and retailing) so do not contribute to output.  The latest estimate of the CSO is that the value of output produced in the Irish economy was around €800 billion in 2021.

Output and Value Added by Setctor 2021

And it is no surprise that the largest contributor to this was the sector of foreign-owned non-financial corporations.  The value of their output was almost half a trillion in 2021.  Of course, the value of output includes the value of intermediate goods and services used in production (e.g. flour for bread). 

Subtracting intermediate consumption (which will include imported intermediate goods and services) gets us to Gross Value Added of each sector.  Including the value of taxes less subsidies on products (which are not sectorised) gives the Gross Domestic Product of the Total Economy.

The operating surplus of each sector is got by adding subsidies on production received (such as wage support schemes) and subtracting taxes on production paid (commercial rates, water charges, motor tax for businesses etc.) and also subtracting compensation of employees paid.

There was just over €110 billion of compensation of employees paid across all sectors of the Irish economy in 2021.  The share of this coming from foreign-owned companies (financial and non-financial) was 33.4%. This is up from 27.3% in 2013.

To get from operating surplus to national income we add in the recipients of the compensation of employees and the net recipient of taxes and subsidies on products and production.  These obviously are the household and government sectors but in both cases there are some minor cross-border flows.  And then account is taken of net property income comprising dividends, retained earnings, interest and other investment income. In overall terms, these resulted in a net outflow of €103 billion from the Irish economy in 2021.

Operating Surplus and Income by Sector 2021

Again, there is no surprise that the largest source of these outflows was foreign-owned companies.  These companies generate significant value added and operating surplus in Ireland but the main beneficiaries of these profits are their foreign-resident shareholders.

It is the net profits that are allocated to non-residents.  In national accounts net means after depreciation.  So some of the profits of foreign-owned companies are included in Ireland’s Gross National Income to cover the maintenance and/or replacement of the capital assets used in the production process.  Their profits also contribute to national income via the corporate taxes paid on them.

The above table also includes €10 billion of net property income received by redomiciled PLCs – companies who have moved their legal headquarters to Ireland.  This inflow is mainly the difference between the retained earnings of these companies’ subsidiaries in other countries and the dividends paid out to their, mainly non-resident, shareholders.  The retained earnings of these foreign subsidiaries is counted as Irish foreign-direct investment abroad though outside of the legal headquarters Irish residents will not be the ultimate beneficiaries of that investment.

We next look at the transition from Gross Income to Gross Disposable Income which involves accounting for taxes, social transfers and other current transfers.

Gross Income and Gross Disposable Income by Sector 2021

Here we see the Corporation Tax paid by foreign-owned firms.  Foreign-owned non-financial corporates paid €11.5 billion in 2021 with foreign-owned financial corporates paying a further €1.2 billion.  These payments contribute to Ireland’s Gross National Disposable Income.

Some cross border transfers such as foreign aid and Ireland’s contribution to the EU budget means that Gross National Disposable Income is a few billion lower than Gross National Income (€319 billion versus €323 billion).  Though EU subsidies to agriculture were counted as in inflow earlier in the sequence.

And then we come to the use of that disposable income.  On the current side, there is consumption expenditure and on the capital side there is capital formation.  There is an adjustment for the change in pension entitlements (the difference between household contributions to private pensions operated by the financial sector and household pension benefits received from the financial sector).  This only changes the sectoral balances of those two sectors and not the balance for the Total Economy.

Disposable Income Consumption Savings and Capital Formation by Sector 2021

We can see that Consumption Expenditure uses €153 billion of the €319 billion Gross National Disposable Income.  This resulted in Gross National Savings of €166 billion in 2021 that is used in the title of the post.

In principle, this is savings that is available to add to national wealth – in either financial or non-financial assets.  Of course, an immediate pause for thought is that €90 billion of it arises in foreign-owned non-financial corporations (with a further €10 billion with redomiciled PLCs).  Yes, we would like them to have savings to maintain and/or replace the capital assets they have deployed against Irish labour (factories, plant & equipment etc.) but this level of savings goes well beyond that.

The savings also coves the depreciation of assets owned by Irish-resident subsidiaries of foreign-owned companies but which are not deployed against Irish labor.  This include the aircraft fleets of aircraft leasing companies and the produced intangible assets that US MNCs have onshored here in recent years. 

These companies will seek to repair/maintain and ultimately replace these assets and the savings shown above are to cover that.  The savings can also be used to repay any debts that may have been used to acquire those assets.  These savings are not available to use by the broader economy The pilots and cabin crew who fly the aircraft and the scientists and engineers who undertake R&D for US MNCs are almost exclusively based outside of Ireland.  The assets might nominally be located, or registered, in Ireland but the activity they underpin takes place elsewhere.

The aircraft might be flying around south-east Asia but there is some activity in Ireland. That is primary related to the financing and leasing activities of the companies.  A US pharmaceutical MNC might undertake its R&D in the US but it could have significant manufacturing facilitates.  From an Irish perspective we are really on interested in the savings that can allow those activities to continue – mainly to repair and/or replace buildings and plant and equipment.

It is true that aircraft leasing companies resident in Ireland have significant savings to cover the costs of the aircraft fleets and the Irish-resident subsidiaries of US MNCs have significant savings linked to the produced intangible assets they have onshored here but these are not savings in the “national” sense.  They cannot be used for other purposes and cannot be used to add to the wealth of the resident population.  But even stripping out foreign-owned NFCs and redomiciled PLCs there was still €65.5 billion of gross savings in 2021.

As noted above, one way to add to national wealth is through capital formation.  And the table gives the gross fixed capital formation of each sector.  As it turns out, a lot of the €90 billion gross savings of the foreign-owned NFC sector, in aggregate terms at least, was used for capital formation.  The sector undertook €74 billion of capital formation in 2021.  This left a surplus of savings over investment for foreign-owned NFCs of €16 billion.

All told, the savings minus investment of the Total Economy in 2021 was €60.7 billion in 2021.  Although we have reached it using the Sector Accounts this is the equivalent of the balance on the Current Account of the Balance of Payments

With GDP of €426.3 billion, a current account surplus of €60.7 billion is equivalent to 14.2 per cent of GDP.  Now, we clearly know neither figure reflects the underlying position of the Irish economy.  As the previous table shows the current account includes €16.2 billion from foreign-owned non-financial corporates and €9.5 billion from redomiciled PLCs.

But even stripping those out that still leaves a surplus of savings over investment of €36.3 billion.  This is the €65.5 billion of gross savings of the domestic sectors less the €29.2 billion of capital formation they undertook.  The most notable contributions to this are the elevated savings of the household sector and the surplus of the domestic non-financial corporate sector. 

The level of the savings in the household sector has been observed since the start of the pandemic.  It is not clear why the domestic NFC sector is running such a surplus but the CSO do point out that the investment rate (to GVA) of domestic NFCs is about eight percentage points below the EU average.  It this was at the EU average it would add close to €5 billion to the capital formation of domestic NFCs (and reduce their contribution to the current account by a commensurate amount).

Here is a look at the contribution of the domestic sectors the the current account since 2013.  The chart shows the aggregate [S-I] position of the domestic sectors as well as the latest estimates of the modified current account (which is a related measure).

Savings minus Investment by Sector and the Modified Current Account 2013-2021

Whether we used the sector approach of [S-I] or the asset approach of CA* it shows a significant underlying surplus of savings over investment.  The magnitude of this is something in the order of €30 billion (and as noted that is after the domestic sectors undertook €29.2 billion of capital formation).

So, while there mightn’t be €166 billion to add to national wealth.  It looks like there is something around €60 billion to do so.  So what to do with it.  Well, we could eschew wealth and use it for consumption.  If it is to be added to the national balance sheet it could be used for capital formation such as new housing for households.  But it looks like a lot of is going on the financial balance sheet, particularly household deposits.  Perhaps there is reason for such caution but a bump in spending (current or capital) wouldn’t go amiss either.

Tuesday, October 11, 2022

Corporation Tax in the Q2 2022 Institutional Sector Accounts

Ireland’s surging revenues from Corporation Tax are evident in the Institutional Sector Accounts which are now available for the second quarter of 2022.  Here is the four-quarter sum of Taxes on Income or Wealth (D.5.) paid by the non-financial corporate sector since 2004.

Taxes Paid by NFCs 2000-2022

Obviously, we are interested in what has been happening in recent years and, in particular, the near-vertical increase seen in recent quarters.  Looking at the series there are three level changes that can be identified over the past decade: 2015, 2018 and 2022.

This is more evident if we look at the annual change of the four-quarter sum.  The three peaks correspond to the years listed above and are instances when the annual increase was 40 per cent of higher.

Taxes Paid by NFCs Annual Change 2012-2022

Of course, what is striking about the latest increase is that it is a 50 per cent increase on what was already an elevated level.  We could go back through some of the factors behind the 2015 and 2018 jumps but here will we focus on the most recent increase – though as the most recent it is the one we know least about.  It will be the first half of 2024 before the Revenue Commissioners report aggregate data for the CT returns filed with them for financial years ending during 2022.

One thing we can look at from the Institutional Sector Accounts is the indicative effective tax rate using Net Operating Surplus (NOS).  Some differences aside, NOS in the national accounting equivalent of Earnings Before Interest and Taxation (EBIT) from financial accounting.  There may also be some timing differences that distort things from time-to-time but these should wash out.

Here is the ETR on the Net Operative Surplus of Non-Financial Corporates since the start of 2014.  To help with some of those timing issues both the numerator and denominator are taken as a four-quarter moving sum.

ETR on NFC NOS 2000-2022

What we see is that, bar the odd fluctuation, the ETR on NOS has been generally fairly stable over the past decade or so.  And this is a period when there have been some tumultuous changes in Ireland’s national accounts (2015 and all that).

There a small step-up evident in late 2018.  It is possible this is due to rule changes related to the claiming of capital allowances for intangible assets introduced in Budget 2018. But that is something for another day.

It can also be seen in the chart that the ETR is below the 12.5 per cent headline rate for Ireland’s Corporation Tax.  A key reason for this is likely to be differences in the treatment of the depreciation of aircraft. 

For tax purposes in Ireland, aircraft can be amortised over an eight-year period while in the national accounts a wide-body aircraft is depreciated over 25 years, which better reflects the actual lifespan of the asset.  In both cases the gross, or pre-depreciation, profits will be the same.  Due to the longer depreciation period, the net profit in the national accounts will be higher and this reduces the effective rate.  Tax accounts for aircraft leasing will have more depreciation (or at least will have more depreciation quicker) which will reduce net profits and lead to a higher ETR, probably close to the 12.5 per cent rate.  Again, this is something for another day and is not really our interest here. 

Our interest is in the ETR in the chart for the past two or three quarters which is the highest for the period shown.  At 9.6 per cent, the ETR for Q2 2022 is around two percentage points higher than the average from 2014 to 2021 (7.3 per cent).  The average in 2019 and 2020 (post the 2018 step-up) was 8.0 per cent.

Is there something that could be pointed to that could have caused this recent rise in the ETR?  There is nothing that particularly stands out.  There doesn’t appear to have been any rule or rate changes that could be pointed as contenders as explanations.

One issue could be the preliminary nature of the 2022 figures for NFCs in the latest institutional sector accounts.  The CSO will have a fair handle on gross profits - from trade data and other sources.  They can obviously see how much Corporation Tax is being paid from the monthly Exchequer statements – but the detail behind those payments may not yet be available to them.

As alluded to above, companies are currently paying Corporation Tax linked to profits made in 2022.  Companies make preliminary Corporation Tax payments in months six and eleven of their financial year – by which time it is expected that they will have 90 per cent of their expected Corporation Tax liability paid.  Companies then file their full Corporation Tax return in month nine following the end of their financial year and accompany that filing with any outstanding amount due.

So a large company with a year-end of December 31st will make its first preliminary Corporation Tax payment in June (45 per cent), make its second preliminary payment in November (90 per cent) and file its full Corporation Tax return the following September.

A similar schedule has been set out for alternative year-ends. For example, if a company has a year end of September 30th, its first preliminary payment will be due in March, its second in August with its full return to be filed by the following June.  This could be significant has 2022 has seen unusually large CT revenues reported for March and August.

Corporation Tax Cumulative Annual 2014-2022

Of course, the Exchequer Returns also give no reason for an increase in the ETR.  One possible explanation is that the CSO have underestimated profits and that these will be revised up in subsequent releases which will, in turn, reduce the ETR.  It’s certainly possible but the CSO have been keeping an ever-closer eye on some of the key MNCs operating in Ireland via its Large Cases Unit (LCU).

An alternative explanation is that the gross profit figure is fine but that the net profit, i.e. post depreciation, will be revised.  Companies pay Corporation Tax on their net profit.  In recent years, there have been huge claims for capital allowances for intangible assets.  However, these allowances, at least as related to the original acquisition of the intangible asset, will be exhausted.

This means a company could face a much higher tax bill even if its gross profit is unchanged.  This is because it has run out of capital allowances to use as an offset against the gross profit.  If this was to happen, the companies net profit would increase and it would have to pay more tax.

It is possible that this is the reason for some of the 2022 increase in Corporation Tax.  Of course, absent the full returns of the companies it is just supposition.  It is not clear how the tax treatment of capital allowances for intangible assets aligns with the consumption of fixed capital for those assets in the national accounts.  Both are versions of depreciation and, as set out above for aircraft, they do not have to coincide.

The Institutional Sector Accounts show no decline in the consumption of fixed capital for NFCs.  Here are the quarterly CFC figures for the NFC sector since 2012. 

Consumption of Fixed Capital of NFCs 2014-2022

The step changes linked to the onshoring of intangible assets (Q1 2015, Q1 2020 and others) are clearly visible.  The increases over the past two and a half years are more gradual and more like those that would be linked to the ongoing, and regular, increase in the stock of tangible assets (buildings, plant and machinery) owned by the sector.

Could some of the 2022 increase in CT be linked to the exhaustion of capital allowances? It could be. It certainly is something that could happen over the coming years.  But it will a while before we have evidence of that. 

How it will be treated in the national accounts will also be worth keeping an eye on.  As noted, the exhaustion of the capital allowances will not impact gross profits – so GDP won’t be directly impacted. It is net profits that will change – so the impact may be on GNP.  Higher net profits accruing to foreign-owned companies would push down on GNP.  This would reduce the gap between GNP and GNI*.

Another possibility is that the intangible assets are relocated when the capital allowances run out.  This would have a direct impact on GDP – pretty much the reverse of what we have seen with the onshoring in recent years, most notably the event in 2015.

Friday, October 7, 2022

The Household Sector in 2022: Continued Savings

The CSO have published the Q2 2022 update of the institutional sector accounts.  They continue to show a strong performance for the household sector – at least in aggregate terms.  A previous discussion of estimates for distributional sector accounts is here.

It should also be noted that the figures are presented in nominal terms, i.e., not inflation adjusted. Here is the current account showing income, consumption and savings for the first half of the past five years.  Percentage changes relative to 2019 (pre-COVID) are also shown.

Household Sector Current Account 2018-2022 H1

The bottom line is that the household savings rate remains elevated.  The savings rate was 13 per cent for the first half of 2019; it was 24 per cent for the equivalent period of 2022.  This is the result of strong income growth (aggregate compensation of employees is up over 20 per cent since 2019) and modest consumption expenditure growth (up five per cent over the same period).

In the first six months of 2019, households received €50.0 billion of employee compensation.  This increased to €60.6 billion in the first half of 2022.  There was an increase in pay from all sectors but the largest, and fastest increase was from non-financial corporates.  Companies to the first half of 2019, businesses paid out €7.4 billion more on their employees, an increase of 23.1 per cent.

The increase in income has resulted in an increase in income taxes paid.  These are up 36 per cent compared to 2019.  Social insurance contributions are also up with contributions to private pension schemes up nearly 40 per cent (from €3.5 billion in the first half of 2019 to €4.8 billion this year).

The last few years has seen significant changes in social benefits received from the government sector.  These were €11.8 billion in the first half of 2019 and rose to €15.1 billion in 2020 (due the lockdowns and the Pandemic Unemployment Payment).  They rose to €15.9 billion in 2021 before falling back to €13.3 billion in the first half of this year.

All told, there was a near 20 per cent rise in the gross disposable income of the household sector in the first half of 2022 compared to the same period of 2019.  As noted, the increase in consumption expenditure has been more muted with only a five per cent rise over the same period.

The household sector had €7.4 billion of gross savings in the first half of 2019.  Although 2022 saw a slightly lower level than both 2020 and 2021, at €16.1 billion it remains significantly higher than pre-COVID levels with the savings rate continuing to exceed 20 per cent.

The capital account (below) shows that these savings are not being used for capital formation (investment spending) though the household sector did have just over €1 billion of net capital formation in the first half of 2022.  This compares to negative net capital formation in the equivalent periods of the preceding three years (as depreciation – consumption of fixed capital – exceeded gross capital formation).

Household Sector Capital Account 2018-2022 H1

One notable item in the capital account is the €3 billion of investment grants received in 2022.  This is linked to the Mica Redress Scheme which was approved by Government earlier in the year.

The household sector remained a significant net lender in 2022.  Other figures suggest that most of this is going on increased deposits (though the €3 billion from the Mica Scheme will go on the financial balance sheet as an “other receivable”.  There will also have been a reduction in loans liabilities.  What is needed is an increase in capital formation – new houses.

Thursday, July 21, 2022

Downward Historical Revisions and a Large 2021 Increase in the Modified Current Account

The current account of the balance of payments is an important macro-economic indicator. For a variety of reasons Ireland’s headline current account outturns are pretty useless as an indicator of the underlying position of the economy. To that end, the CSO have been publishing a modified current account for a number of years.  The latest estimates were published last week.

Historical Revisions

The first thing we note is that the historical series has been revised down.  This is something that may have been expected given it was thought that something may be mucking up the current account and the impact of the statistical discrepancy.  Anyway, here are the revisions.

Modified Current Account 2022 Revisions

For 2022, the estimate of CA* has been revised down from €24 billion to €13 billion.  This is still a significant surplus and equivalent to around 6.5 per cent of GNI* in 2020.

Large Increase in 2021

The second thing we note from the latest estimates is the large increase for 2021.  The 2021 estimate of CA* is a surplus of €26 billion or 11.1 per cent of GNI*.  In a very timely manner, the CSO have published institutional sector accounts that are consistent with the recent National and International Accounts.  Using these we can get a sectoral breakdown of the modified current account.

Modified Current Account by Sector 2022

The primary drivers of Ireland’s underlying position in the current account of the balance of payments are the household and government sectors.  This remains true to the large increase showing for 2021.

Household savings remained elevated in 2021 while the government deficit closed significantly - due mainly to surging revenues.  Typically taxes would not feature in a discussion of the current account.  They might impact sectoral positions but are generally internal transfers.

Corporation Tax and the Current Account 

Ireland is unusual in having a large share of Corporation Tax paid by foreign-owned companies.  Some of these have set up operations in Ireland to service the domestic market but the largest source of Corporation Tax are foreign-owned FDI companies with operations in Ireland to manufacture for or service markets abroad.

About three-fifths of Corporation Tax is based by US MNCs.  This tax is paid from the profits made on export sales and boosts Ireland’s current account.  The money is not counted as a factor outflow to foreign shareholders but goes to the government as corporate income tax payments.  Strong rises in other taxes such as Income Tax and VAT also helped improve the government’s position.  That the household sector maintained its savings at such an elevated level points to a strength in the position of that sector – albeit in aggregate terms.

The Corporate Sectors in 2021

At this stage we can’t delve too deep into developments in the corporate sectors.  That will come later in the year when a split by foreign and domestic ownership is made available.  For the moment we can see that this is where most of the revisions arise.  The “not sectorised” component of the current account for 2020 went from +€6.4 billion in the 2021 estimate to +€2.4 billion in the latest estimate. 

While the impact of the non-financial corporate sector in 2020 (though technically a residual to make the sectoral balances consistent with CA*) went from +€9.5 billion in last year’s estimates to €1.0 billion in the latest figures.  It is these two changes that led to the downward revision in CA* for 2020 shown in the opening chart.

The contribution of the NFC sector also seems to have played a role in the large 2021 increase in CA* – see the large red block in the column for 2021 in the second chart.  But, as noted above, probably best to wait until the foreign/domestic split of that is made available later in the year before drawing any conclusions on that. 

Who Should be Spending More?

Looking at the household and government sectors shows that the improvement in 2021 was more than just a measurement anomaly.  With the quarterly figures now available we can extend this to Q1 2022.  Here it is as a four-quarter moving sum.

HH Gov Savings minus Investment

One conclusion that could be drawn from this is that the government is (not yet) saving any of its corporate tax largesse – but the household sector is. Could we get households to spend more and the government to save a small bit?  And the increase in household spending can be greater than any saving done by the government.  We don’t need a +€20 billion outturn as currently shown in the above chart.

Events, Dear Boy, Events

If it’s extra spending we’re looking for then it may already be happening – but due to outside circumstances rather than a conscious decision to spend more. Here is national net monthly fuel imports. 

Fuel Imports Net 2005-2022

Pre-COVID these were running at around €400 million a month.  The latest figures go to May 2022 and show net imports of around €1 billion a month.  Import spending at that rate won’t be long in putting a dent in national net lending. But seems unlikely to be large enough to wipe it out.