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.
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.
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.
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.
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).
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.
Posts
