Numbers of FTBs continue to edge up

A couple of indicators during the week show that the number of first-time buyers (FTBs) continues to rise. First, the volume of market transactions tagged as FTBs in the CSO’s residential property price index.  This is updated monthly and the volume of transactions is shown here on a 12-month basis.

There were 17,500 stamp duty filings tagged as FTBs made in the 12 months to the end of August.  Of these, 12,500 were for existing properties and 5,000 were for new properties.  The increase in the last year has been exclusively in existing properties. 

The volume of FTB transactions has been rising for more than ten years and the total is now pretty much back on the increasing trend evident up to the onset of COVID. 

The second source is the mortgage drawdown data from the Banking and Payments Federation.  This is available quarterly with this week’s update giving figures for Q3 2023.  Again, the figures are presented on an annual basis.  One plus of the mortgage data is that it is available back to 2004 (though the new/existing split is only available from 2006).

The pattern in the mortgage series from the BPF matches that in the volume series from the CSO.  In the year to the end of Q3, there were just over 25,000 mortgage loan drawdowns by FTBs in the BPF data.  This is around 60 per cent of the levels seen during the height of the credit bubble.

There are a number of reasons why the level is higher in the BPF data compared to the CSO (25,000 versus 17,500).  Most of it is likely because they are counting different things: mortgage loan drawdowns versus market transactions.

People who self-build can draw down an FTB mortgage, but obviously there is no market transaction to be included in the CSO data.  FTB mortgages can be drawn down for non-market transactions, such as family transfers or someone may take out a mortgage to renovate a property they received as a bequest.  It may also be that a mortgage drawn down in stages is represented by multiple drawdowns in the BPF data.

With these in mind it could be taken that the CSO figure gives the lower limit for the number of FTBs with the BPF figure giving an upper limit.  The true number of FTBs may be closer to the upper limit.  Whatever about those differences, the trends match, and show both rising.

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The Household Sector in the first half of 2023

A few weeks ago, the CSO published the Q2 2023 update of the non-financial institutional sector accounts. We will use those to check in on the status of the household sector for the first six months of this year (H1) and how it compares to last year and to 2008.

First, the current account.  In the prevailing environment, it is important to note that the figures in the table below are in nominal terms, i.e. not inflation adjusted.  We will look at some of the aggregates in constant prices towards the end of the post.

The start point of the current account here is Gross Domestic Product. For the household sector this is the value added produced, a large share of which is due to the imputed rents attributed to owner-occupier households with the remainder arising from the activities of the self-employed.

From there the account proceeds through a series of inflows and outflows until the bottom line is reached, Gross Savings, which is disposable income not used for consumption.

Most of the items in the table show an increase for H1 2023 over H1 2022.  One of the most significant is the continued growth of compensation of employees received.  This is up 7.3 per cent (remember in nominal terms) and stood at €64.6 billion for the first six months of the year.  Non-financial corporations are the most important source of COE and their pay outlays are up 8.0 per cent in year-on-year terms.

The largest relative changes are for the interest flows. Both interest paid and interest received are up almost 60 per cent in 2023. Taxes on income and social contributions, particularly those paid to the government sector, rose in line with the rise in income.  Social benefits received rose slightly for H1 2023 but remain lower than they were in 2020 and 2021 as COVID-19 supports were withdrawn.

All told, the national accounts estimate of household disposable income for H1 2023 was €73.8 billion.  With consumption expenditure of €64.8 billion and a €1.8 billion adjustment for the excess of contributions to private pensions over benefits received from them, the gross saving of the household sector is put at €10.6 billion for the first six months of the year. 

This is lower than each of the previous three years and gives a savings rate of 14.5 per cent for H1 2023, which remains slightly higher than the 12.1 per cent recorded for H1 2019 in pre-COVID times.

To see how that saving might be used we can turn to the capital account.

Again, the figures are in nominal terms.  The key figures in the capital account are the amount Gross Savings taken from the current account and the amount of Gross Capital Formation (investment in new capital assets) undertaken by households.  These are the main items that give rise to the net borrowing/lending of the household sector.  There are some other minor flows for capital taxes paid, investment grants received and other capital transfers.

With gross savings of €10.6 billion and with the household sector “only” undertaking €4.5 billion of gross capital formation, the household sector had €6.6 billion available for net lending. This goes on the financial balance sheet.

The CSO don’t do quarterly updates of their financial institutional sector accounts but the Central Bank do with estimates for Q1 2023 the latest available.  These show the household sector adding a further €2.7 billion to their burgeoning deposit balances. Between currency and deposits, the Central Bank estimate that the household sector had €198 billion on hand in Q1 2023, up from €154 billion in Q1 2020.  Households also used savings to make the contributions to private pensions referenced above.

On the liability side there was very little movement in Q1.  Repayments on existing loans were pretty much equivalent to drawdowns of new loans, with a net increase in loan liabilities of just €36 million in Q1.  Though it should be noted that repayments have exceeded drawdowns for the past 15 years or so.

All told, the Central Bank estimate that the household sector had €507 billion of financial assets at the end of Q1 2023, with an offsetting amount of liabilities of €143 billion.

Some Constant Price Series

The CSO also some of the main aggregates using constant prices. These series are also seasonally adjusted.  Here are the series for Disposable Income and Consumption Expenditure.

It can readily be seen that the income increase shown in the table for the current account in nominal terms is eliminated with the adjustment to constant prices. In real terms, aggregate household disposable income has been declining in recent quarters.  Real consumption has continued to rise and is not far off its pre-COVID trend.  In aggregate terms, both series are well ahead of the previous peaks reached in 2008.

To conclude, we make one additional adjustment to the CSO constant price series – put them in per capita terms.

As the population is growing fairly rapidly this shows that the decline in per capita income is more pronounced than that shown by the aggregate figures, and that per capita real consumption has essentially been flat for the past year or so.

It is also interesting to make comparisons back to the previous local maxima for each series from 2008.  Both the disposable income and consumption series are actually little different to their peaks in early 2008 – the latest readings put both series about 2 per cent above those 2008 peaks.

This might suggest a “lost 15 years”.  However, the environment on which each were achieved are wholly different.  We can see this by looking at the ‘Saving minus Investment’ of the household and government sectors.  This is each sector’s contribution to the current account of the Balance of Payments and is the Net Lending/(Borrowing) of a sector excluding capital taxes, investment grants and capital transfers.  For this we return to nominal figures and annualise them by looking at their four-quarter moving sum.

The difference between 2008 and 2023 is huge. In 2008, the household sector was in deficit to the tune of €20 billion.  Via the circular flow, this borrowing was contributing to household income.  When the crash came the borrowing was taken over by the government as tax revenues collapsed and spending on income supports increased.  Without this borrowing, income (and consumption) would have been much lower.

For 2023, there is a combined surplus of €20 billion.  There is a €40 billion difference between the positions of 2008 and that of 2023.  Now both the household and government sectors have an excess of disposable income over their consumption and capital formation expenditure.  In terms of GNI*, it is equivalent to going from borrowing 12 per cent of national income to lending 8 per cent of national income.  Simply comparing the income and consumption outcomes misses the scale of the turnaround in the borrowing/(lending) position of the economy.

We are in an income position to spend more – Corporation Tax concerns aside! But do we have the resource capacity to produce the things that we would like to buy, such as new housing units?

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The aggregate Corporate Tax calculation enters an unsettled spell

In recent years when looking at the annual update from the Revenue Commissioners of the aggregate corporate tax calculation we noted that things were relatively calm, albeit it with elevated levels of receipts.  These were for tax returns filed for financial years ending during the 2018, 2019 and 2020 calendar years.

We now have the update for tax returns filed filed for financial years ending during 2021 (the last of these returns would have been filed in September 2022).  The 2015 upheaval is a well-worn track so we will just focus on the five most recent years.

The Determination of Taxable Income

We’ll start with the determination of taxable income.

Right from the top we can see big changes for 2021.  There an increase of over €55 billion in gross trading profits recorded on tax returns for the year, reaching €250 billion.  This carries right the way down the table with the end showing that taxable income increased by over €40 billion.

However, there are some significant changes along the way. Early on, we see that after being relatively stable from 2018 to 2020 the amount of capital allowances used jumped again in 2021, coming in at just under €100 billion as a result of a €23 billion increase.

Next we see a large increase in foreign income included in the tax returns of Irish-resident companies.  For 2021, this exceeded €20 billion for the first time and was close to €10 billion more than the next highest year.  The next part of the table will show the impact of this on tax payments (answer: very little). 

Other income also saw a jump in the amount of capital gains included to reach €5 billion in 2021. This is actually a regrossed amount.  The applicable CGT rate is 33% but the gains are included in the tax return to be taxed at 12.5 per cent. Hence, the gains are regrossed and multiplied by 2.64 (= 33/12.5) to get the amount to give the necessary amount of tax.

In charges and deduction we see that trade charges, mainly certain royalty expenses, rose back to levels seen up to 2019.  This was the largest change among these items.

All told, the CT returns filed for years ending during 2021 had just over €150 billion of taxable income with €6 billion of that subject to tax at 25 per cent.  We now turn to the calculation of tax due.

The Determination of Tax Due

The starting point of this part of the calculation, Gross Tax Due is simply the amount of taxable income multiplied by the applicable rates (either 12.5 or 25 per cent).

The relative simplicity of the Irish CT regime means there isn’t a whole lot going on here.  The biggest reason for the reduction of gross tax due is because of tax already paid. 

The largest single item in the above table is double taxation relief and this was almost €3 billion in 2021.  The additional foreign tax credit of nearly €450 million can be added to this.  These reflection the foreign corporate taxes paid on the €23.5 billion of foreign income included in the top half of the table.  Little additional Irish tax is due as the amount already paid, albeit abroad, covers the gross tax due in Ireland.

The item for gross withholding tax on fees is somewhat similar but in this case it is Irish tax that has already been paid.  In some circumstances, when the buyer of services is paying them they will pay 80 per cent of the invoiced amount to the supplier and 20 per cent to the Revenue Commissioners.  The 20 per cent represents a withholding tax at the standard rate of Income Tax.  When filing their tax returns, companies will record any service fees that have been withheld from them and reduce their tax due figure accordingly.  The Revenue Commissioners will already have received the amount.

The most significant item in the table that actually reduces companies’ tax bills is the R&D tac credit.  Between the R&D credit used and the excess R&D credit refunded the total cost was just over €750 million in 2021, a slight increase on the outturn for 2021.

All told, the bottom line is a tax due figure of €15.1 billion for tax returns filed for periods ending during 2021.  There are some timing differences but we can that, in recent years, the tax due figure from the aggregate CT calculation, closely matches the CT receipts collected for the Exchequer.

We will conclude with a look at some of the tumult in the aggregate figures, with most of this seeming to concern capital allowances, in particular those for intangible assets.

Snowballing Claims for Capital Allowances

As before we will look at the total amount of capital allowances claimed, the total amount used (that is, actually offset against gross profit) and the consumption of fixed capital from the National Accounts.

Up to 2019, the most significant feature was the growth in the figures. he ratios shown were relatively stable.  Up to 2019, capital allowances used were just over 90 per cent of the amount claimed, and consumption of fixed capital (depreciation) in the National Accounts was just under 90 per cent of the amount claimed.  This stability did not continued into 2020.

In 2020, we can see that capital allowances used fell to just over 50 per cent of the amount claimed.  We also see a break in the link between capital allowances claimed and consumption for fixed capital in the national accounts.

The break of this link is interesting as it suggests that the increase in capital allowances claimed is not fully linked to assets that would be included in the capital stock for National Accounts purposes.  In the last two years, capital allowances claimed in the aggregate CT calculation have risen by over €80 billion (from €86 billion to €173 billion) while consumption of fixed capital for NFCs in the national accounts has increased by “just” €20 billion (from €78 billion to €98 billion).

A second pointer comes from looking at how the unused capital allowances, which came to almost €75 billion in 2021, show up elsewhere in the CT stats.  Typically, we might expect an increase in unused capital allowances to result in an increase in loss carried forward.  In most situations, unused capital allowances from one period are carried forward as a loss to use against income in a subsequent period.

However, changes in losses carried forward were nowhere near large enough to accommodate the scale of unused capital allowances in the above table.  The are lots of losses forward sloshing around the Irish CT system and lots of them are the result of unused capital allowances but the changes in 2021 (+€7 billion in losses forward) are of little help in explaining what is going on with capital allowances.

Of little help except it tells us where to look.  There is one instance where unused capital allowances are not carried forward as a loss but as capital allowances to be claimed again in subsequent periods (until they are eventually used).  And those are capital allowances for intangible assets.  And perhaps, unsurprisingly, this is where there have been the largest changes in recent years.

Unfortunately, the Revenue do not provide figures for capital allowances for intangible assets used but we do have figures for such capital allowances claimed.  Here they are by sector for recent years with very large growth recorded for a number of sectors notably manufacturing, wholesale and retail, and ICT.

We can see from the total (€131 billion in 2021) that, on their own, capital allowances claimed for intangible assets significantly exceed the total amount of all types of capital allowances used in 2021 (€99 billion).  We can safely conclude that capital allowances for intangible assets are the reason those ratios broke down in the previous table.

Is there cause for concern? It is hard to know.  We know that there were significant onshoring of IP assets to Ireland in 2021 and 2022.  This would have increased the amount of capital allowances claimed.  And we know that there are now legislative restrictions on the amount of such capital allowances that can be used.

Since October 2017, new claims for capital allowances for intangible assets have been restricted to offsetting 80 per cent of the profit (before deduction of interest and these capital allowances) by such capital allowances.  Prior to this the cap was 100 per cent.  Any available capital allowances above this amount cannot be used in the current year and are carried forward to be claimed as a capital allowances in subsequent years.

The reason for the cap on capital allowances for intangible assets is to ensure that losses cannot be artificially generated for use elsewhere by a company or group.  Capital allowances for intangible assets are ringfenced for use only against profits generated by the acquired intangible asset.  If unused capital allowances could be carried forward as a loss they could be used against any profits.  All that has changed in recent years is the cut-off for the cap.

The cap will likely result in a “snowball effect”, at least initially, increasing the gap between the capital allowances claimed in any year and the amount used.  In the early years a company will have capital allowances that they can claim each year (following either the accounts or fixed rate approaches).  The cap may mean they cannot use all of these in the current year.

Then they may also have unused capital allowances from previous periods that they will also claim in the current year.  These will also be unused in the current year.  Thus the amount of unused capital allowances to be carried forward grows.  This could continue until they are no new capital allowances to be claimed and the unused capital allowances carried forward will be unwound until they are fully exhausted.

We don’t have precise figures but maybe a bit of guesswork can put us in the ballpark.  Claims for capital allowances for intangible assets have skyrocketed in recent years.  For the sake of exposition, let’s say the cap means that €10 billion of the amount claimed cannot be used.  That would mean that €10 billion would be carried forward to be claimed in the next period.

In the next period let’s assume that the cap again means that €10 billion of the amount claimed for that year cannot be used.  We than also have the €10 billion from the previous period that is brought forward and again claimed.  This means there are now €20 billion of unused capital allowances.

In the next period there’s another €10 billion of that year’s claim that can’t be used and this is added to the €20 billion from previous periods that are brought forward claimed again.  We are now up to €30 billion to be carried forward and so on.

We cannot say that this is the only thing that is going on but it does seem likely to be a large part of the story. And for the IP that was onshored in 2020 and 2021 this will go on for a few years yet. The gap between the amount of capital allowances claimed and the amount used will grow ever larger.  Down the line the full amount of the capital allowances will have been claimed and the amount available in any subsequent year will only be those which have been carried forward and these will eventually be fully exhausted.

The figures are so large that there may be something else going on but it is hard to make out. What we can see are the growing claims for capital allowances for intangible assets.  Due to the snowball effect outlined above this is likely to continue. It could be some time before calm returns to the aggregate CT calculation.

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Corporation Tax motors along

Corporation Tax receipts continue to pour in for the Exchequer. 2023 seems set to extend the decade long run of each year exceeding the previous year – though the gap to last year has narrowed.

In July, CT receipts for 2023 were running about €1.5 billion ahead of those for 2022.  August and September weren’t as strong as last year reducing the gap to €600 million. 

August seems to have been affected by some firm-specific idiosyncrasies that will wash out, while there is little to be taken from the September figure.  September is month T+9 for firms with a December year-end and is when they file their tax return and make their final tax payment for the previous year.

On a 12-month basis, CT receipts seem to have plateaued around €24 billion which is an extraordinary amount.

Which means that the growth of the 12-month sum has also eased considerably.

Optimism for the remainder of 2023 is mainly due to the strength seen in June. Companies with December year ends pay the bulk of the CT in June and November (corresponding to month 6 and month 11 of their financial year).

The €4.2 billion collected in June of this year points to November receipts of around €6 billion, which would be €1 billion more than the same month last year.

And with the rate for large companies set to rise to 15 per cent and the exhaustion of capital allowances for onshored intangible assets the risks to forecasts would seem to be on the upside.

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Population Projections

Almost all of the work the CSO does is retrospective – collect data on what has already happened.  There is one area where part of the work undertaken is forward looking – demographics.

After every Census the CSO use a set of fertility, mortality and migration scenarios to project out the country’s population by several decades.  These are not forecasts; merely projections of what might happen under different scenarios.  The most set available are those undertaken following Census 2016 and they give projections out to 2051.

The projections were based on three scenarios of net inward migration:

• M1: net inward migration of 30,000 per annum
• M2: net inward migration of 20,000 per annum
• M3: net inward migration of 10,000 per annum

and two fertility scenarios:

• F1: fertility rate remains at 2016  level of 1.8
• F2: fertility rate declines from 1.8 to 1.6 by 2031 and stable thereafter

When combined, the scenarios give six projections with the two fertility scenarios used for each of the three migration scenarios.

We have now passed the subsequent census and can compare the projections to the actual outturn of recent years.  Obviously, there are things the projections, which were published in June 2018, could not be expected to account for such as COVID-19 and the Russian invasion of Ukraine.

Anyway, here are the six projections and the actual outturns seen.

Reality was outstripping the projections even before they were unpublished.  Of course, this reality was not confirmed at the time and only fully revealed with the results of Census 2022.  The latest population figure for 2018 (4.885 million) is 20,000 more than the highest projection for that year (M1F1 4.865 million).

For 2020, (with the figures covering April of each year) the gap between the actual population (5.029 million) and the highest projection (4.988 million) was 42,000.  The gap to the lowest projection for 2020 (M3F2 4.904 million) was 126,000. And that is for a time before COVID or Ukraine could have any impact.

For 2023, just five years after the projections were published and the gaps now range from 117,000 to 274,000.  Now clearly, the impact of those fleeing the war has impacted that but there were already significant, and growing gaps, by 2018.  Under the lowest projection (M3F2), the actual population of 2023 was not due to be reached until 2034.

We can compare the migration scenarios set out in the projections to what has actually happened since 2016.

• 2017: +39,200
• 2018: +44,400
• 2019: +44,000
• 2020: +44,700
• 2021: +21,800
• 2022: +51,700
• 2023: +77,600

Hindsight is 20/20 vision and all that, but right off the bat it can be seen that even the highest scenario of +30,000 per annum was significantly exceeded.  More recent years have been impacted by COVID19 and Ukraine.

Are such population projections important?  They are to the extent that they impact policy.  Our current National Planning Framework was published in 2018.  The baseline projection on which this was based was for the population to reach 5.7 million in 2040, just 400,000 more than the 2023 population. The NPF stresses the need for plans to be flexible and the ability to adapt for higher population outturns.  We are already there.

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Wages and Salaries in the Labour Costs of the EU14

Eurostat produce a quarterly labour cost index. A number of sub-components are also produced. Here is the ‘wages and salaries’ component for the Business Economies (NACE B to N) of the EU14 (the previous EU15 now excluding the UK) with Q1 2013 set equal to 100.

All the selected countries have seen nominal hourly wage growth over the period ranging from 43 per cent in Austria to 13 per cent in Italy.  Ireland is second-ranked with an increase of 33 per cent over the period, along with Germany.

Next, we look at the annual growth rates with a four-quarter trailing moving average taken to smooth out some of the volatility in the series.

We seen that annual nominal hourly wage growth in Ireland is fairly stable over the past few years, averaging close to 4 per cent since 2018. This would enough to be Ireland, top of the group in 2019 and again briefly in 2020 but accelerations in many countries has seen Ireland’s relative position drop towards the bottom and is now close to Sweden, Denmark and Finland.

Of course, nominal changes are just changes in numbers. We want to assess real changes, i,.e. changes in the purchasing power of wages. To do that we must adjust for changes in the price level. We will do that with Eurostat’s Harmonised Index of Consumer Prices (HICP).  Here it ins since 2014, with the start of that year set equal to 100.

We can see that the HICP for Ireland was remarkably stably through the most of the period shown. In the HICP for Q4 2020 was little changed from what it has been in Q1 2014, i.e. there was no inflation over the period.  This certainly changed in 2021.  In the last couple of years, prices have risen by around 20 per cent in most of the selected countries. However, the reasons for the inflation have largely been common the relative ranking is largely unchanged.

Compared to Q1 2014, Ireland’s HICP was 18 per cent higher in Q2 of this year. This was the third-lowest increase in the EU14 with Greece and Denmark seeing smaller increases.  The largest increase was in Austria where the HICP was over 30 per cent higher compared to its level in 2014.

Inflation rates are coming down. The use of a four-quarter moving average understates the extent of the recent falls in inflation rates.

Our purpose is to adjust the nominal wage growth rates for inflation. We see that Austria has both the highest nominal wage growth since 2014 (43 per cent) but also the highest price level increases over the same period (HICP +32% since 2014).  Here we combine both Eurostat datasets to get an index of real, i.e. inflation-adjusted, hourly wages.

Combining wage growth and HICP inflation sees the green line move to the top, but the last few years have seen a steep decline. From 2013 to the end of 2020, real wage growth is put at +20 per cent for Ireland, around five percentages points higher than any of the other selected countries. 

During 2021 and 2022, real wages declined as the rate of inflation outpaced the growth of nominal wages.  In recent quarters they have moved closer together and real wages have been stable in Ireland in 2023 though are now only +12 per cent compared to the start of 2013. Much of the gains made up to 2021 have been reversed.  Real hourly wages in Ireland are now back to where they were in 2019.

To conclude here are the latest real annual growth rates for hourly wages:

As shown by the levels, Ireland is back close to zero. Nominal hourly wages are up close to 4.5 per cent and the HICP is around five per cent higher than it was last year.

To better see the trends for individual countries we will use a four-quarter moving average to smooth out some of the volatility.

Ireland has ground to make up to get back to the top spot it held in the pre-COVID years.

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