Tuesday, April 18, 2023

The last insight into Apple’s use of capital allowances?

As is well known Apple revised its international structure in 2015.  Since then we have been tracking the impact of this via the annual publication of the consolidated accounts for the group of subsidiaries headed by Apple’s central international holding subsidiary, Apple Operations International (AOI).

As will be set out here, we may now have reached the last insight into Apple’s use of capital allowances.  The full picture is provided across by combining the previous posts as there are some elements in each that are not repeated here.

Where in the world is AOI?

One we will repeat is the location of AOI. As noted in the opening paragraph, the analysis deals with the consolidated accounts for the group of subsidiaries headed by AOI.  The accounts show that this group contains close to 80 subsidiaries, across Europe, Africa, the Middle East, Asia and Oceania. The accounts essentially cover all of Apple’s activities outside the Americas.

AOI is sometimes referred to as Apple’s main Irish subsidiary. AOI is at the top of the group of Apple’s subsidiaries outside the Americas.  And AOI is a company that was established in Ireland. But that does not mean that it is resident here.

We know from the 2012 US Senate investigation that under Apple’s previous structure, that though AOI’s functions were all carried out in the US, AOI itself was “stateless”; it did not have a tax residency.  Apple achieved this because AOI was not registered in the US where it was managed and controlled, and it was not managed and controlled in Ireland where it was registered.

When Apple revised it’s structure it eliminated AOI’s stateless nature.  Document leaks subsequently shows that AOI became a resident of Jersey in the Channel Island. See reporting here.  Jersey has a corporate income tax.  But the rate of that tax is zero percent.  Obviously, this is from a few years ago. But there has been nothing to indicate that AOI residency has changed since.

We know that Ireland is central to Apple’s current structure, but this happens in subsidiaries beneath AOI and not necessarily in AOI itself. AOI is the holding company for those, and, as noted, other worldwide subsidiaries.  The accounts show that the group headed by AOI had an average of 56,000 employees in 2022.  We would have to remove the first digit to get close to the number of those who are in Ireland.  So, all of the subsequent analysis refers to the overall performance of AOI and the group of nearly 80 worldwide subsidiaries beneath it.

How is the AOI group doing?

The AOI group is hugely profitable.  This is due to the cost-share agreement the group has with the US parent, Apple Inc, which grants the AOI group the rights to sell Apple’s products in markets outside the Americas.  The AOI groups gets this right by paying around half of Apple’s total R&D expense. In 2022, the AOI group had an R&D expense of $15.5bn most of which would have been paid to Apple Inc. which oversees the R&D the bulk of which is carried out in the US.

AOI Income Statement 2017-2022

From that cost-share payment, the AOI group had sales of over $220 billion and generated an operating profit of close to $70 billion.  There is no way Apple Inc. would enter into a similar arrangement with a third party. 

How much tax does the AOI group pay?

We can see that the provision for income taxes has been around $11.0 to $11.5 billion in each of the past two years.  To repeat another point from the earlier posts, a company making a provision for taxes is not the same as a company paying taxes.  We can get a better indication of how much tax the AOI group pays from the cash flow statement.

AOI Cash Flow Statement 2017-2022

In 2022, the AOI group made $7.7 billion of cash tax payments in the countries in which it operated.  That is lower than the provision for income taxes in the income statement but is a huge increase on the $1.4 billion of cash tax payments made in 2017. [We do not have access to AOI’s accounts for earlier years.]

Why are cash tax payments lower than the tax provision?

The earlier posts have gone through this. It is due to the AOI group having large amounts of deferred tax assets.  A significant amount of the tax provision does not result in a charge on cash it results in a charge on the deferred tax asset.

AOI Balance Sheet 2016-2022

In the above, we can deferred tax assets reducing from $25.7 billion at the end of 2016 to $5.0 billion at the of 2022.

How much tax does the AOI group pay in Ireland?

As with the previous posts, there is no direct way of establishing this from the presentation of the accounts.  The likelihood is a lot but firm conclusions are difficult to reach.  Here is the tax reconciliation statement from the consolidated accounts for the AOI group.

AOI Tax Reconcilliation 2017-2022

First, we note that the reference rate used is 12.5 per cent, which suggests that AOI is the main tax jurisdiction for the group. But it is not the only one.  The largest item in this table is now the “difference in effective tax rates on overseas earnings”.  It is not clear how significant it is but in the latest accounts this item has become “effect of different tax rates”.  The $2,335m figure for 2021 is used with both descriptions.

This description shown above would imply that a significant portion of the group’s profit is taxed at higher rates in other countries, though this depends on the interpretation of “overseas earnings” (words which are now dropped).

For 2022, the adjustment was $3.3 billion above whatever would be in the baseline tax charge at the 12.5 per cent reference rate.  If the effective tax rate on the relevant was 25 per cent then there would have been around $6.5 billion of tax on $25 billion of profit.  But that depends on the actual effective tax rate on those profits.

As we did last year we can pick up this thread in the overall accounts for Apple in its 10K filing with the SEC.  Here is the breakdown of the company’s entire tax provision in its latest annual report.

Apple 10K Provision for Income Tax 2022 - 2

In broad terms, the foreign (i.e. non-US) pre-tax earnings and the provision for foreign taxes align with those we see in the consolidated statements of the AOI group.  In the 10K accounts, foreign would also include activities in countries in the Americas excluding the US, whereas the AOI group covers Apple’s activities outside the Americas.

Anyway, reflecting what is in the AOI group’s accounts, we can see a large increase in the provision for foreign taxes in Apple’s overall taxes.  It rose from $6.5 billion in 2020 to around $12 billion in each of the last two years.  And this corresponds with the big jump in the adjustment for the “difference in effective tax rates on overseas earnings” or “the effect of different rates” in the AOI group’s accounts.

Something has happened in recent years that has led to a big jump in tax somewhere.  Looking at the 10K statement we can see that this is not the US: the increase shows there as an increase in the provision for foreign taxes.  While looking at the accounts for the AOI group suggests that this is not Ireland: the increase shows there as an increase in tax overseas earnings, assuming that “overseas” is outside Ireland.  We can really only be sure that it is outside the US.  We do not know what “overseas” means in the AOI group’s accounts.  And whatever has caused this seems to have gone under the radar.

We are now left with about $5 billion of the provision for taxes in the AOI group’s accounts that could be in Ireland.

What amount capital allowances are left?

The previous posts go through the 2015 acquisition of a now Irish-resident subsidiary in the AOI group that acquired the license to sell Apple’s products outside the Americas.  This huge acquisition, probably not far from $240 billion, resulted in a huge amount of expenditure that became eligible as a tax deduction. 

Under Section 291A of the Tax Consolidated Act this is achieved via capital allowances – the amount of the capital expenditure that can be deducted each year when taxable income is being determined.

A deferred tax asset of $30 billion ($240 billion of capital allowances multiplied by 12.5 per cent) was put on the balance sheet of a company in the AOI group when this transaction occurred.  Each year a large amount of the AOI group’s tax provision is charged against this deferred tax asset.  We can see the evolution of this in the following table.

AOI Deferred Tax Assets 2017-2022

We can’t go back to when the transaction occurred at the start of 2015, but we can see that at the end of the 2016 financial year, the AOI group had $22.6 billion of deferred tax assets from “Intra-Group Transactions” (which would describe one subsidiary buying a license from another subsidiary).

We can see that $4.4 billion were further used in 2017 and 2018 with $3.3 billion used in the four years since.  All told, the value of the capital allowances has declined from $30 billion with just $812 million remaining by the end of the 2022 financial year.  As this corresponds to around one-quarter of the recent annual usage, it will be the case that income generated in the first quarter of the 2023 financial year will fully exhaust the capital allowances.  This will expose all of the profit from the license held in Ireland to tax.

And we can already see evidence of this in Irish tax receipts.  Companies pay their Corporation Tax via preliminary payments made in months six and 11 of their financial year with their full tax return due nine months after the year ends.  For large companies these preliminary payments should correspond to 90 per cent of the final tax liability.  A company with a September year end will make its first preliminary payment in March with the second following in August.

Here are the month Corporation Tax receipts in March for recent years:

CT Revenues March 2009-2023 Bar

Prior to 2022, March was not a significant month for Corporation Tax revenues.  This has changed in the last two years and a link with Apple seems likely.  The increase in 2022 could be linked to the increase in the AOI group’s profits, with the profit of the Irish licensing subsidiary perhaps rising significantly above that which could be offset by capital allowances with the further increase in 2023 perhaps due to the exhaustion of those capital allowances now taking place. 

To date, there has been no evidence in Ireland of a significant Apple restructure. Absent that, we can expect to see strong August receipts in due course.  It is also possible we might see some changes in Ireland’s national accounts – due to the exhaustion of the capital allowances – and that is something we may return to.

Monday, April 17, 2023

What to do with €30 billion of savings?

To paraphrase a former Taoiseach, as a community we are living away within our means. This can be represented using the recently published Q4 2022 update of the Institutional Sector Accounts.  Here we show gross savings minus gross capital formation [S-I] for the government and household sectors – this is equivalent to a sector’s contribution to the current account of the balance of payments. Here they are on a four-quarter sum basis:

Savings minus Investment for HH and Gov

There was an expectation that household savings would decline as the pandemic eased but savings remain significantly above pre-pandemic levels.  For the government sector there has been an improvement due to the reduction of Covid-related income and business supports and the government’s position has been further boosted by soaring Corporation Tax receipts.

Although, the quarterly figures are only preliminary, summing over the four quarters of 2022 shows the household sector to have had a surplus of savings over investment of €20.5 billion with the government showing a surplus of €9.5 billion on the same measure.  Combined they sum to €30 billion.

The evolution of the line in the above chart, as well as the composition between household and government sectors is as good a starting point as any to discuss the performance of the economy since the year 2000.  But reaching an unprecedented position of +€30 billion is as worthy of examination as the developments that led to the deterioration to –€20 billion during the credit bubble.

Ireland’s Savings in Comparative Terms

But where do we stand relative to other countries? Here is a set of EU countries selected as those which have the necessary data available from Eurostat. The data are scaled by Net National Income which mitigates, but doesn’t completely eliminate, the need to adjust the figures for Ireland. Apart from the calculations done to get the [S-I] figures, no adjustment is made to the Eurostat data.

Savings minus Investment Selected EU Countries 2022

We see that Ireland is also high in comparative terms with other countries, though for the household sector there is a relatively small difference to Germany, Czechia, Sweden, The Netherlands and France.  With most EU countries running government deficits it is Ireland’s government surplus that leads to most of the gap. Still, for the household sector one can query whether we are at a sufficiently mature stage to be savings on a par with households in Sweden, The Netherlands and Germany.

The post is titled “what to do with €30 billion of savings” but we do know what has been done with it.  Households have put most of their surplus on deposit and the government has started contributing to a National Surplus Reserve Fund

The increase in household sector deposits has been noted for sometime.  Irish households have been deleveraging for around 15 years now. Post-2008 this was mainly via a reduction in debts. This has now switched to being an increase in deposits.

In the financial accounts of the Central Bank of Ireland, the household sector had just over €150 billion of currency and deposit assets at the end of 2019.  By the end of 2021 this had increased to €185 billion with a further rise to €195 billion by the third quarter of 2022.

Household Sector Loans and Deposits 2002-2022 Q3 CB Data

This increase in household sector deposits in Ireland has been one of the fastest in the EU14.

EU14 Household Deposits Change 2019-2021

However, the level does not stand out, whether using a ratio of deposits to income or using a balance sheet measures such as a ratio of deposits to loans.

EU14 Household Deposits to Income Ratio, 2021

EU14 Household Deposits to Loans Ratio, 2021

While there certainly is some interest in what households do with the near €200 billion of currency and deposits assets they now have (and knowing more about the distribution of those would be a useful step in that regard), a more pertinent issue is probably what happens to savings behaviour going forward. Will household saving continue at an elevated level? Should the government be running a budget surplus?

Macroeconomic Constraints: Real and Financial

The economy faces constraints but these are more real (resources) than financial (income).  The unemployment rate is below five percent while pressures in housing are well documented. But the domestic economy is running a very large balance of payments surplus – perhaps only second to Norway in European terms. Norway is benefitting from higher energy prices; Ireland from booming Corporation Tax revenues.

But in Ireland, it seems it is the household sector that is saving the largesse not the government sector.  Norway (population 5 million) added €100 billion to its sovereign wealth fund last year.

In response to the surge in inflation, the government introduced a large set of compensatory measures.  Some of these were targeted where they were needed but many were universal and seem only to have added to the burgeoning deposits of certain households.

If these measures are not repeated in 2023 then we may see some reduction in household savings. If not offset by spending elsewhere, this would see the government surplus rise (also aided by first quarter Corporation Tax receipts which have been particularly strong).

But what level of budget surplus is politically sustainable?  Should the government be increasing taxes aimed at households with elevated savings rates to recapture the benefits of the soaring Corporation Tax receipts or to ensure that those savings aren’t released into an economy already operating at close to capacity?  The need for increased housing supply is undeniable but should activity in other sectors be squeezed to try and create room for more construction activity? No solutions are offered here as we are merely pointing to the trade-offs faced.

The unusual position of the economy can be illustrated with a chart of the unemployment rate (representing an internal resource imbalance) and the current account of the balance of payments (representing an external income imbalance).  The two macroeconomic loops the Irish economy has experienced in the last 50 years are also highlighted (1975 to 1998 and 2003 to 2019).

Internal and External Imbalances 1975-2022

The imbalances experienced by the Irish economy have typically been in the top left quadrant: high unemployment and a large balance of payments deficit.  The economy is now in the opposite position: low unemployment and a large balance of payments surplus. 

The economy certainly has the income capacity to increases spending but it does not seem as if there is the resource capacity to do so.  Higher spending may push up domestic inflationary pressures which heretofore has largely been driven by external factors. 

There is also the sustainability of the income.  In the textbook descriptions, taxation is viewed as a withdrawal from the circular flow of income that would not be considered, at least directly, to lead to an increase in national income. 

Exchequer Corporation Tax 12-Month Rolling 2012-2023

Ireland’s Corporation Tax revenues do not fit with the textbook analysis.  Four-fifths is paid by foreign-owned companies and the bulk of that arises from (U.S.) companies that have a presence in Ireland to service international markets.  Corporation Tax is an injection to national income and that injection is reaching ever higher levels.  In the 12 months to the end of March, Corporation Tax receipts reached €24 billion.


Ireland is in a position of wanting to do things (such as build houses) and having the income to finance this activity but not the resource capacity to undertake it. With the unemployment rate close to four percent an increase in spending would likely lead to a rise in inflation.

We could view building houses as something we want to do all the time – which we should – and not just when Corporation Tax receipts are booming. To that end we could increase taxes to provide a sustainable revenue source to fund public capital spending on housing.  This could also create the resource space in the economy to accommodate that activity.

However, that is an economic argument not a political one.  Tax increases while the government is running surpluses are unlikely to get much traction.  But political myopia to the trade-offs we face does not mean that they do not exist. We should have something to show for the ongoing boost to national income: but that something should not be a surge in domestic inflation.

Monday, February 27, 2023

Do the Collisons have more wealth than half the population?

Around a month ago, Oxfam issued its annual missive on wealth inequality.  Each year it is designed to generate headlines and this year Oxfam Ireland did so by targeting the Collison brothers, John and Patrick.  The headline of the press release was:

Oxfam Headline 2023


A number of media outlets gave prominence to the claim (such as here, here, here, here, here, here, and here).  From Oxfam’s perspective this is achieving their objective and they certainly have no reason to change their approach.

The estimates of the wealth of individuals are taken from the Forbes Billionaires list. For the end of 2022, Forbes estimated that the net wealth of each of the Collison brothers was $9.5 billion.  This corresponds to the €15 billion figure in the headline.

There are a variety of sources that give estimates of the population-wide distribution of net wealth in Ireland.  In their recent reports Oxfam have used the estimates from the Credit Suisse Global Wealth Report

For 2021, the aggregate net wealth of Ireland’s adult population of 3.66 million adults aged over 20 is put at $920 billion (Table 2.2, page 110).  The wealth share of the bottom 50 percent is estimated to be 1.2 percent (Table 4.5, page 140).  Fairly straightforward arithmetic tells us that $11 billion is the estimated net wealth of the bottom 50 percent.  It also seems straightforward that the headline is correct.

But let’s look at the wealth estimates in a little more detail. First, by decile:

Credit Suisse Bottom 50 Percent Ireland

We can see that while the total for the bottom 50 percent is as Oxfam have stated, the result in very much dependent on the negative wealth share of the first decile.  Indeed, we get the somewhat contradictory outcome that although the Collison’s estimated net wealth is greater than the bottom 50 percent, it is significantly less than the net wealth of the those in the fifth decile alone (those between 40 percent and 50 percent of the wealth distribution).  For the aggregate total for the bottom 50 percent this wealth of the fifth decile is offset by the negative net wealth of the first decile.

While we might typically characterise the bottom 10 percent of the wealth distribution as the “poorest” this may not necessarily be the best descriptor.  Those with a negative net wealth have liabilities that exceed their assets.  It is likely that this is the result of borrowing used to acquire assets or borrowing that will help acquire assets in the future. 

Someone who has taken out loans to help them through third-level education may have a negative net wealth.  Someone who has taken out a loan to help start a business may have a negative net wealth.  A homeowner with a mortgage may have a negative net wealth if the value of the property drops below the amount owed on the mortgage.  In time, we would expect many in such circumstances to move up the wealth distribution.

Indeed, this would have happened to many homeowners who found themselves in negative equity following the 2008 crash.  And it appears that the estimation techniques used in the Credit Suisse reports have not fully factored in the reduction in negative equity of Irish homeowners.

For 2013, the Credit Suisse report puts the wealth share of the bottom 10 percent in Ireland at –3.5 percent. This was close to the nadir for house prices, but as shown above for 2021, the wealth share of the bottom 10 percent is only estimated to have improved to –2.8 percent in the Credit Suisse reports.

An alternative source of wealth distribution data for Ireland is the Household Finance and Consumption Survey (HFCS) undertaken by the CSO.  This actually is where the –3.5 percent net wealth share for the bottom decile in Ireland for 2013 comes from.  But the latest HFSC (for 2020) shows that the wealth share of the bottom 10 percent had increased to –0.6 percent.  In the 2018 HFCS, the CSO discussed the reasons for this:

In 2018, 8.0% of households in the first net wealth decile were owner occupied, compared to almost 80% in 2013. This large change is due to the increase in residential property prices over this time and the consequent movement of people out of negative equity. In 2013, 31.9% of all HMRs owned with a mortgage were in negative equity, whereas the 2018 rate is 4.1%. In 2013, just over three in four (75.8%) households in the bottom wealth decile were in negative equity, compared to 5.8% in 2018.

For 2020, the CSO estimate that the wealth share of the bottom 50 percent was +7.8 percent. Using this would give a very different result compared to the +1.2 percent used to give Oxfam its headline.  Per estimates from the CSO, the net wealth of the bottom 50 percent of the wealth distribution in Ireland is many multiple times the net wealth of the Collison brothers.

In the press release, Oxfam use the soundbite that “the rich are getting richer while the poor are getting even poorer” and also exhorts that “the very existence of billionaires while out-of-control inequality rises, is damning proof of policy failure.”

The wealth figures for the Collison brothers is based on the assumption that they each retain a 10 percent stake in the online payments firm they founded, Stripe.  In a 2020 funding round, investors provided $600 million to Stripe and in return received 0.63 percent of the company.  This gives a value of $95 billion for the overall company and the $9.5 billion figure used for respective net wealth of the Collison brothers.  Recent estimates suggest the value of the company has declined to around $60 billion – still a huge sum.

That the Collisons have set up a business that is valued at tens of billions has made no one poorer.  Indeed, Stripe has yet to even make a profit. People have collected more in payments from the company (such as wages etc.) than the company has generated in revenue.  Reporting on a recent note to investors Bloomberg said:

The payments giant forecast adjusted earnings before interest, taxes, depreciation and amortization of $100 million this year, according to people familiar with the matter. That compares with a loss of about $80 million in 2022, when Stripe processed $800 billion, the people said, asking not to be identified discussing internal financial information.

Although loss-making in 2020, Stripe was valued at close to $100 billion by investors because of the expectation it would make profits in the future.  No one is poorer now due to profits that Stripe might make in the future.  And even if the profit is $100 million in 2023, it shows that these expectations still have a long way to go. It will be a success if the Collisons can achieve it.

The role of expectations is significant in the wealth valuations of those who top various rich lists.  A prominent name on such lists is Jeff Bezos.  Bezos maintains an ownership of around 10 percent in Amazon, the online retailing company he founded.  Amazon’s market capitalisation hit $1 trillion for the first time in early 2020.  This pushed Bezos to top of the rich lists. 

But as with the Collisons much of this was based on expectations.  In the 20 years to the end of 2019, Amazon had earned a cumulative net profit of $30 billion. Not per annum, in total.  Jeff Bezos will have received some of this $30 billion in dividends over the years but it would have been an insignificant contributor, in relative terms of course, to the factors that pushed his net wealth to near $200 billion in 2021.

The key factor was further increases in Amazon’s share price.  By the middle of 2021, Amazon’s market capitalisation was $1.9 trillion.  Bezos’s 10 percent stake gets us the $200 billion headlines.  Of course, there has been a bit of a change in expectations in the interim and now Amazon’s market capitalisation is around $950 billion – a reduction of $1 trillion.  This reduction is greater than Credit Suisse’s estimate of the net wealth of the entire Irish population ($920 billion).

If Jeff Bezos’s wealth has fallen by $100 billion (10% of $1 trillion) who has benefitted from it? If the rich are getting poorer are the poorer getting richer?  Of course, it is nonsense to look for such transfers.  Jeff Bezo’s wealth has fallen because the expectation of the profits Amazon might make in the future has fallen.

It is typical to talk of “wealth accumulation” when referring to those at the top of the wealth distribution.  But while it is certain that neither Jeff Bezos or the Collison brothers are stuck for money it is not the case that they have accumulated the vast fortunes that have pushed them to the top of the global and Irish rich lists (can we still include them in Irish rich lists if they no longer live here?).  Their wealth is driven by the valuations other people put on the companies they have founded.

So, do the Collisons have more wealth than half the population? Errmm, No.  While supporting figures can be found in the Credit Suisse Wealth Report, estimates from the CSO tell us the claim is well wide of the mark.  And is the Collisons founding of a company that is valued at $60 billion “a damning proof of policy failure”? Again, no. But their doing it is a cheap way for others to get headlines.

This is not say there aren’t issues with inequality, there certainly are and Oxfam is absolutely correct to draw attention to world’s poorest.  But, as noted elsewhere,  the living conditions of the world’s poorest are not affected by whether the stock market valuation of Amazon is $1,900 billion or $900 billion, or whether a funding round for Stripe values it at $60 billion or $95 billion. While good for headlines in the media, the rich list valuations should not be the object of our outrage.

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.