Thursday, March 11, 2021

Some pointers in the sector accounts to the modified current account

The current account of the balance of payments is equal to gross savings minus investment in the sector accounts.  Ireland’s current account is hugely distorted by aircraft for leasing and intellectual property licenses for the technologies developed by US MNCs. 

The CSO publish quarterly figures for the balance of payments but given these distortions it can be hard to identify the underlying trends.  The CSO also publish a modified current account that strips out the distortions.  The is published on an annual basis and usually around six months into the following year so it will June or July before we get 2020 figures for the modified current account.

The sector accounts can give some general pointers.  Here is gross saving minus investment for the government and household sectors from Q1 2000 to Q3 2020.  All figures are on a four-quarter moving sum basis.

Gross Savings minus Investment for Gov and HH 1999-2020

Obviously, this excludes the corporate sectors (both financial and non-financial) but just looking at the government and household sectors does give the underlying trends.

We can see that in the run-up to the pandemic both the government and household sectors were running [S – I] surpluses, relatively small in the case of government and around €8 billion on an annual basis in the case of the household sector.

The pandemic has resulted in significant changes.  By Q3 2020, the government by running an [S – I] deficit of €11.5 billion,. while the surplus of the household sector had ballooned to €18.6 billion.

This meant that the combined outcome over the two sectors was actually little changed.  In Q3 2019, their combined [S – I] position was +€9.2 billion; in Q3 2020 it was +€7.2 billion.

As the chart shows, this is a world away from where we found ourselves in 2008 where a large deficit position needed to be reduced.  The COVID crisis has upended the economy but there is no underlying deficit to be reduced. 

In aggregate terms, we are living within our means even if individual sectors are running deficits, i.e. the government sector.  There will be a rebalancing when the crisis passes.  There won’t be a simple return to the 2019 position  but households will increase their spending and the need for government income supports will fall. 

There may some government spending that becomes permanent or other spending programmes could be expanded.  In the absence of revenue sources to fund any such increases there could be a deterioration in the underlying position.  But the above shows that when the modified current account is published later in the year we would be doing so from a position of relative strength.

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