Savings, savings, everywhere...

Collectively, we find ourselves in the historically unusual position of having a surplus of income over expenditure.  And what is even more unusual is that this is true for both the household and government sectors at the same time.

Historically, the country has had only three periods of significant surpluses on the current account of the balance of payments.    

The first was during World War II when rationing and trade restrictions curtailed spending. The current account returned to deficit when the war ended.  The second period of surpluses was during the early part of the 1990s when the start of the Celtic Tiger resulted in strong income growth. These surpluses were much smaller than the previous episode and disappeared when spending growth caught up and exceeded income growth by the early 2000s.  

The third example of sustained current account surpluses is now, driven by a combination of strong income growth, including corporation tax revenues, and also, for a time, restrictions on spending.  Latest estimates put the 2023 surplus at around 3 per cent of national income in 2023, close to where it was pre-COVID.  

To get some insight into the source of these surpluses we can look at the outturns from the CSO for Savings minus Investment, [S - I], of the household and government sectors.  [S – I] from the national accounts is equivalent to the balance on the current account of the balance of payments in the international accounts.  Here they are in nominal annual terms (four-quarter sums) for the household and government sectors since 2000.

As can be seen above for the last two years or so this has been positive for both sectors.  In the 12 months to the end of June, the government sector had an [S – I] of €10.8 billion while it was €6.8 billion for the household sector.

The trough of late 2007/early 2008 when the household sector was spending far more than its income (mainly due to buying new houses) can be compared to the current level. Both are around €16 billion – though in opposite directions.

When household stopped borrowing to buy all those houses, government borrowing increased significant in 2008 and 2009 as tax revenues, which were been spent as soon as they came in, were reliant on property-based taxes.  The deficit on the public finances was closed over the following decade with the green bars above ticking modestly into positive territory by the end of 2018.

Of course, there has been a lot of growth and a significant bout of inflation since 2008/09 so a nominal comparison isn’t very informative.  We can put the above nominal figures as a share of GNI* (with a linear interpolation used to get the four-quarter sums and Budget-day forecasts used for 2024).

This shows what we would expect. The hole that was opened up prior to 2008 was much deeper than the heights of recent years. But the current position is still significant: in combined terms the household and government sectors have an excess of income over expenditure (both current and capital) that is equivalent to around five per cent of national income. 

This is roughly where it was pre-COVID (2019) but the composition has somewhat changed.  Back then, the excess was driven almost entirely by the household sector whereas now there is a contribution from the government sector (with the government’s position benefitting from soaring Corporation Tax revenues).

Compared to the first half of 2019, nominal aggregate disposable income of the household sector was about 43 per cent higher in 2024.  Nominal consumption expenditure was around 41 per cent higher.  This gives a slightly higher savings rate in 2024 compared to 2019, 17 per cent versus 15 per cent.

The change since 2019 is that more of that saving is going to capital formation rather than going on the financial balance sheet.  In nominal terms, household investment is running at around €16 billion a year, compared to €6 billion in 2019.

A good share of this increase is just price effects.  The volume of new housing purchased by the household sector is up about 10 per cent on what it was in 2019 but prices of new housing units are up around 20 per cent.  The value of purchases of new housing by the household sector rose from €3.3 billion in 2019 to €4.4 billion in 2023.  That makes only a minor contribution to the increase shown above.

A much larger share of the increase in household investment is likely due to renovations and improvements of existing dwellings.  We can see this from the breakdown of investment provided in the quarterly national accounts – though in this instance we are looking at an economy-wide measure than one specific to the household sector.  The government and corporate sectors will undertake some improvements but the household sector will be the main driver of changes.

In nominal terms spending on renovations and improvements rose from under €3 billion in 2019 to close to €8 billion now.  Again, there will be a price effect but the QNAs also show a steep volume increase, with volume close to doubling since 2019 and at there highest ever levels.  The key activities here are renovations, extensions and retro-fitting.  This seems to be the one spot on which there is additional spending.  If more new housing was available spending there would likely increase as well.

To conclude, we’ll look at the finer detail of the household sector from the Institutional Sector Accounts. First, the current account:

The bottom line is that slightly higher savings rate compared to what it was in the equivalent period of 2019 (the first six months of the year).  The data are nominal and we note that the CPI during the first half of 2024 was three per cent higher than a year previously and up almost 20 per cent compared to what it was in 2019.

The largest relative changes are for interest flows with both incoming and outgoing interest up just over 100 per cent.  The fastest increase in wages received was from the government sector, plus nine per cent, compared to around seven per cent for other sectors.

We can see how the saving is used from the capital account.

All told, the household sector was a net lender of €7.8 billion in the first half of 2024.  The largest destination of these funds are household deposit accounts. 

Latest figures from the Central Bank show that household deposits with entities regulated by it are growing by around €700 million a month, and at almost €160 billion are up €50 billion on where they were at the end of 2019.

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The past is a foreign country

We all like looking to the past for evidence and pointers to help understand the present.  A deterioration in the current of the balance of payments has been such a pointer for instances of economic mismanagement in Ireland. 

Following Honohan and Walsh (2002) we can see that in the last fifty years the Irish economy has gone through two loops of:

1. Imbalances building up via that deterioration of the current account,
2. Weaknesses being exposed and resulting in a shooting up of the unemployment rate,
3. A period of painful readjustment before,
4. Recoveries took hold.

These loops from 1975 to 1998 and from 2003 to 2018 are shown below using the unemployment rate (vertical axis) and the current account (horizontal axis).

The thing is though, these are not really useful for assessment the current position of the Irish economy.  2022 saw Ireland with an average unemployment rate of around 4.5 per cent while the surplus on the modified current account of the balance of payments (CA*) was equivalent to around 7.5 per cent of modified gross national income (GNI*). 

The economy had reached a near identical position in 2019 but then COVID19 reared its head.  Relative to the economic history of the State since its foundation, it is an unprecedented position: near full employment and large balance of payments surpluses. From a policy perspective, the unemployment rate could be a bigger constraint to achieving priorities. Sure, we should not forget the mistakes of the past, but they do things differently there.

Addendum: It is somewhat nonsensical but a further way of looking at it is to consider the sum of the unemployment rate and the current account deficit (thus a deficit is represented by a positive number).  This shows:

Again, we can see the imbalances building up after 1975 and 2003.  But the main thing is to highlight just how far 2022 is from even those starting points.  We know things can change quickly but we should also recognise where we are now is pretty much unprecedented.

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Still Waiting for US GDP to be Revised Up

We have been tracking the impact in Ireland’s national accounts of the structures of US MNCs for some time.  In recent years, many of those structures have changed leading to changes in several key metrics in Ireland such as the stock of intangible assets and the destination of outbound royalty payments. 

As a result of the changes in the destination of royalty payments we have been expecting revisions to US GDP.  See previous post here with an even earlier one here. 

The previous post goes through the impact of the changes introduced by Google and Facebook in 2020 when they ended their use of “double-irish” type structures.  We won’t repeat that detail here but will highlighted the updated position of the mismatch between the Balance of Payments figures for Ireland and the U.S.

One point we will reiterate is the changed nature of outbound royalty payments from Ireland.

Obviously the first thing to notice is the scale. These outbound payments are enormous. In the 12 months to the end of March they came to almost €140 billion.  What the chart also shows is the change in the destination of these royalties.

Up to 2020, most of the royalty payments from Ireland ended up in offshore financial centres such as Bermuda and the Cayman Islands, now the bulk of them are going to the US.  The non-US portion is still quite significant (€34 billion in the year to March) but due to suppressed data we don’t have direct insight into the destination of these. It looks like most of these payments are going to The Netherlands, Switzerland and Singapore (which would also be among the potential locations for US MNCs to locate their IP). 

Anyway our interest here is in the royalty payments from Ireland to the U.S. and these now exceed €100 billion in annual terms.

To see the mismatch (and avoid any classification issues) here are the balance of payments figures for services trade between Ireland and the US. What is shows are Eurostat figures for services imports by Ireland from the US and BEA figures for service exports from the US to Ireland. In principle these should correspond. Is that what we see? Hmmmm, no.

There is a few chart crimes going on there, most notable that the series are in different currencies, but the conversion from dollars to euro has nothing to do with the gap that has emerged since 2020 (and would actually only increase it).

We can see that Balance of Payments data on this side of the Atlantic is showing that, in 2022,  Ireland had almost $200 billion of services exports from the US.  Over on the other side of the pond, their Balance of Payments data shows that the US $85 billion of service exports to Ireland.  And as noted above, in principle these should be the same.

The chart is for all services so it cannot be a classification issue – unless the payments are accounted for by the BEA as goods exports or primary income, both of which are unlikely.

We cannot immediately assume that there is a GDP effect.  The trade could be in IP assets which, initially at least, would be GDP neutral.  There would be disinvestment (-) and exports (+) on the US side with investment (+) and imports (-) on the Irish side. 

But as might be expected given the contents of the post it is mainly a story of royalties.  Here are the royalties components from Eurostat and the BEA of the above overall services trade figures.

Mind the gap! Ireland reporting €102 billion of royalty imports from the US in Eurostat’s data becomes the US reporting just $16 billion of royalty exports to Ireland in the BEA’s data.  And as we started by looking at total services this cannot be explained by classification issues.  We have a difference of something approaching €90 billion.

For what it is worth, it can be noting that the revision to Ireland’s national accounts for 2015 (the 26% growth rate and all that) was of the order of €40 billion.  Some US commentators should perhaps be wary of skeletons in their own closets.

However, as the previous post goes through the likely GDP impact would not be the full difference shown above as a share of the royalty payments that previously went from Ireland to the like of Bermuda did subsequently flow on to the US as payments for R&D services exports.

Statements from Google and Facebook have confirmed that they are now licensing their technology directly from the US rather than offshore locations.  This should have led to a reduction in US R&D service exports and an increase in US royalty exports. 

The rise in royalty exports would be larger (reflecting the fall in profit reported in Bermuda etc.). It is possible there could be a GDP impact of $40-50 billion for 2022 – equivalent to around 0.2% of US GDP.  Not exactly headline grabbing.

Why the gap?

In part, the answer to this apparent puzzle comes down to scale. In a small economy like Ireland, the activities of companies such as Google and Facebook are relatively enormous. The Large Cases Unit (LCU) in the CSO will be in regular contact with these companies for filing updates and notice of any significant changes.  For an economy of the scale of the US, such companies are simply are not as important in and of themselves when it comes to the BEA’s production of their National and International Accounts.

In the BEA’s case they undertake “benchmark surveys” every few years of a wide number of market participants to get a deep understanding of what is going on.  Between these comprehensive “benchmark surveys” the BEA do quarterly surveys of a much smaller sample and extrapolate the data they publish from those.

The most recent benchmark survey for Transactions in Selected Services and Intellectual Property with Foreign Persons was carried out for 2017.  The data was collected in 2018 with the results published in 2019.  As it so happens, the BEA are in the process of collecting data for the latest such survey.  In this instance the benchmark year is 2022 with the data collected in 2023 and results not due until sometime in 2024.

So it looks like the significant changes implemented by US MNCs operating in Ireland fell in the middle of the gap between the BEA’s benchmark surveys that would have picked them up.  They were too early for the survey for 2017 and while they should be picked up by the ongoing survey for 2022 the results won’t be pulled together and incorporated in the BEA’s International Accounts until 2024.  It seems our wait for US GDP to be revised up will be going on for a while yet.

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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:

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.

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.

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

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.

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).

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. 

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.

Conclusion

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.

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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.

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.

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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.

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.

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.

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. 

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.

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Ireland’s Burgeoning Current Account Surplus and the ‘Statistical Discrepancy’ in the National Accounts

The current account of the balance of payments is an important macroeconomic indicator.  As with many of Ireland’s macroeconomic statistics the underlying picture is distorted by the activities of MNCs.  The modified current account, CA*, is an attempt to overcome this and the CSO will publish the 2021 estimate over the coming weeks.

As with last year, we can look to the sector accounts to try and get a preliminary perspective on where the current account might be going.  Again, at this stage we will limit the analysis to the household and government sectors are these are the least impacted by the MNC distortions but have seen some significant pandemic-related changes in recent years.

Over the twenty years shown, this paints a picture we are pretty familiar with.  More recently, the household sector has been running a large surplus as savings soared.  On the other hand the government has seen large deficits as spending increased in response to the pandemic.  The chart shows gross savings (income not used for consumption) minus investment (capital formation). 

The preliminary figures in the quarterly sector accounts are that for 2021 the combined household plus government sectors had a surplus of savings over investment of €14.6 billion.  This will contribute to a significant current account surplus for 2021.

For 2020, the equivalent figure for the two sectors was a surplus of €8.7 billion.  However, when the contribution of the other sectors of the economy (the corporate sectors) were added, the estimate of the modified current account for 2020 was €24.0 billion.

As was considered here after the results were published this seemed a bit excessive.  There is no doubt that Ireland is running a large current account surplus, but one this is equivalent to 11.5 per cent of national income?

We can use the 2020 Institutional Sector Accounts to get some insights into the sources of this surplus.

Obviously 2020 was a tumultuous year but the increased deficit of the government sector was offset by the surplus of the household sector.  Given what was going on the changes for the domestic corporate sectors both non-financial and financial are relatively modest. 

In this chart, the category for foreign corporations/redomiciled PLCs is a residual that makes the breakout by sector consistent with the estimate of the modified current account.  Although positive, the contribution of this element to the current account fell in 2020 so doesn’t seem to tie in with efforts to explain a burgeoning current account surplus.

What may be worth looking at is the light grey segments of the bars.  This is the “not sectorised” part of the current account.  As set out here, this item arises in Ireland’s national accounts due to the discrepancy that typically exists between the income and expenditure estimates of GDP produced by the CSO.  The official estimate of Ireland’s GDP is essentially the average of the two approaches.  If the figures are close to each other this discrepancy will be small.  However, it is perhaps not a surprise that it can be large – and volatile.

The following table shows the estimates of GDP from the income and expenditure approaches for 2015 to 2020.  Start at the top of the table for the income approach (wages plus profit plus net product taxes).  And go from the bottom of the table for the expenditure approach (C + I + G + X – M).  The official GDP estimate is the midpoint of the two.

As can be seen, for 2020, the income approach gave a GDP estimate of €369.7 billion while that for the expenditure approach was higher at €376.1 billion.  This €6.4 billion difference is resolved by a €3.2 billion “statistical discrepancy” on either side.

This position was the reverse of 2019 when the estimate of the income approach exceeded the estimate from the expenditure approach.  In overall terms, the income estimate went from being €4.0 billion more than the expenditure estimate in 2020 to being €6.4 billion less than it in 2020. All told, this resulted in a €10.4 billion swing in the impact of the “statistical discrepancy” between the two years.

In most instances, given the scale of the figures involved, the statistical discrepancy is not a significant factor.  However, as we work down the accounts and get to things like the current account then it can be significant relevant to the size of those outcomes.  And if we go further again and looked at a sectoral breakdown of the current account then these changes are certainly significant.  In the previous chart, the change in the contribution of “not sectorised” to the current account from 2019 to 2010 was the €10.4 billion referred to above.

Just because something is “not sectorised” doesn’t mean that it doesn’t exist; it’s just that the figures don’t give any insight into what it actually is.  There is some reason why the 2020 growth of the expenditure estimate (6.1 per cent) was much stronger.  It could be that there was an underestimate in 2019 and this is something that the statistical discrepancy allows for.

Or maybe there was something missing from the income approach estimate for 2020 that dragged down its growth rate (3.1 per cent).  Again, this is something that the statistical discrepancy allows for.

Of course, if it was known what was causing the divergence between the figures it would just be included.  The statistical discrepancy arises because it is not known what is causing it.  Have we any reason to put more weight on the income or expenditure estimates of GDP? Not from this remove at any rate.

What it does do is give pause for thought where there are references to a current account surplus of close to one-eighth of national income.  For sure, there is a current account surplus and it does give scope for additional spending (by who?) but maybe we should be looking at average over a number of years rather than being fixated on the estimate for any one year. 

Over the six years shown in the table above, the annual average for difference between the GDP estimates from the income and expenditure approaches is less than €300 million, or pretty much nothing in the context of a GDP number that now exceeds €400 billion. 

This may give some credence to a view that there is nothing systematic going on.  However, it should be noted that the preliminary 2021 figures in the quarterly national accounts show a statistical discrepancy of a similar magnitude and direction to 2020.

So, what we have seen for the household and government sectors and not sectorised all point to another large CA* estimate in the forthcoming release.  Of course, these are preliminary figures and may be revised when the full National Income and Expenditure results are published.  But if measurement issues aren’t enough to dispel any complacency, don’t forget the lurking impact that corporation tax revenues are having on the current account.

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When will US GDP be revised up?

The publication in July 2016 of Ireland’s National Income and Expenditure (NIE) Accounts for 2015 generated somewhat of a storm.  These were of course the revisions that introduced us to the 26 per cent growth rate.  As is now well understood this was as a result of Apple transferring to Ireland a license to use its significant intangible assets (brand, designs, patents etc.) in markets outside the Americas.

For the past year we have been waiting for something similar to arise in the national accounts of the United States.  Now obviously, something that is similar in nominal size (in the scale of tens of billions) will have a far lower relative impact on the GDP of the US than it would for Ireland but the principles and drivers are the same.  It is all down to the location of intangible assets.

Outbound royalty payments from Ireland to pay for the use of these intangible assets sum to huge amounts.  The full-year total for 2021 is likely to exceed €100 billion.  Recently, however, the changing nature of these royalty payments has been important to consider.

Up to the end of 2019, most of the licenses which were responsible for the outbound royalty payments from Ireland were held in jurisdictions with no income taxes such as Bermuda (as with Google) or the Cayman Islands (as with Facebook).  This has changed over the past two years and now around four-fifths of the royalty payments from Ireland are directed to the United States. 

These Irish imports are US exports and contribute positively to US GDP.  For 2021, royalty imports from Ireland to the US are set to be about €80 billion higher compared to what they were in 2019.  Even in the scale of nominal US GDP ($23 trillion in 2021) this is a pretty significant sum.

However, the GDP impact will be less than the change in royalties.  This is because some of the royalty flows that went from Ireland to Bermuda and the Cayman Islands were, in turn, transferred on to the US in the form of payments for R&D activities.  These were a US export so would already be accounted for in US GDP.

As an example of this here are the accounts of Google’s holding company which was based in Bermuda.

We immediately note that the company had no turnover in 2020.  This is because Google ended its licensing arrangement via Bermuda.  For the previous year, we see that the company had a turnover of $26.5 billion.  The main source of this was the royalty payments made from Ireland.

On the outgoings side the company had $14 billion of administrative expenses.  A further breakdown provided in the accounts shows that the company incurred $10.4 billion of expenditure on research and development.

This $10.4 billion is the payment that has to be made back to the parent for the license to use Google’s platforms and technologies around the world.  Google and its subsidiary in Bermuda entered a cost-sharing agreement (CSA) whereby each party contributed to the overall group’s research and development costs based on the size of the market it had responsibility for.

In 2019, Google had a total R&D expense of $26 billion and it looks like the subsidiary in Bermuda paid for around 40 per cent of that.  The $10.4 billion paid went to the US and would likely have entered the US national accounts as an R&D service export.

As the income statement shows, the subsidiary in Bermuda had a profit of close to $14 billion in 2019.  This portion of the royalty flows from Ireland was not further transferred to the US and did not contribute to US GDP (but would be counted in US GNP as a factor income inflow).

With the royalties now flowing in full to the US this split no longer applies and all of the amount should be counted in US GDP – a outcome that better reflects the fact pattern and substance that generates Google’s profits.

We can see further evidence of this from Google’s overall accounts.  Here is the domestic/foreign split of Google’s profits for the last three years.

For 2019, Google reported that around 60 per cent of its profit was due to foreign (i.e. non-US) operations.  The $23.2 billion of foreign income for 2019 would have included the $13.7 billion of profit reported by the subsidiary in Bermuda.

For 2020, this profit was no longer reported in Bermuda and we see there was a commensurate fall in income from foreign operations.  As the royalty payments now go direct to the US, this profit is now included in domestic income and the share of Google’s profit that is attributed to US operations has increased.

In 2021, Google had a huge jump in profits to over $90 billion and $77 billion of that (85 per cent) was attributed to domestic operations.  This wasn’t because Google’s growth in 2021 was concentrated in the US.  Indeed, the share of Google revenue that came from customers in the US declined (from 47 per cent in 2020 to 46 per cent in 2021).

The reason most of the additional profit that Google made in 2021 was attributed to domestic operations is because the functions, assets and risks that are responsible for that profit are located in the US.  The innovation and development that delivers Google’s technologies and platforms is undertaken in the US.  And the value-added of those activities should be counted in US GDP, not Bermuda’s (or Ireland’s).

And we can see the same if we look at other US companies.  Here is the domestic/foreign split of Facebook’s profit.

For 2019, Facebook reported that almost 80 per cent of its profit was due to foreign operations.  Most of this was attributed to a Facebook subsidiary in the Cayman Islands that held the license to use Facebook’s platforms and technologies around the world. 

In mid-2020, Facebook changed its licensing arrangements and began to license its IP to its international headquarters in Ireland from the US rather than the Cayman Islands.  Thus, the royalties that Facebook continues to pay from Ireland now go direct to the US rather than to the Cayman Islands.

For 2021, Facebook reported that over 90 per cent of its profit was due to domestic activities.  And, as with Google, as the US is where the main functions, assets and risks that generate Facebook’s profit are located this is much more in line with the substance of the company which the profit division for 2019 did not represent.

Similar profit splits can be seen for other US MNCs.  Here is Amazon which reported that 94 per cent of its profit in 2021 was due to its operations, including R&D, in the US. Unlike Google and Facebook, however, this split has been evident for sometime and seems is not the result of a restructuring of its licensing arrangements.

For other US companies their split of profit between domestic and foreign operations remains incongruous.  Here is the split for Apple.

In recent years, the share of Apple’s profit that is attributed to foreign operations has been relatively steady at around two-thirds.  Unlike the companies above this is not in line with the substance of the company.  And we know that as a result of the 2015 restructuring a large share of Apple’s foreign income is reported in Ireland and included in Irish GDP.

Anyway, our interest here is US GDP not Ireland’s.  To what extent are the restructurings of Google, Facebook and others reflected in the national accounts of the US?  There is strong evidence of them in Irish figures compiled by the CSO – the opening chart in this post is an example of that – but it is not clear that the equivalent flows are reflected in US figures compiled by the BEA.

Unfortunately, we cannot directly compare CSO and BEA data.  While trade with the US might be a key components of Ireland’s national account the reverse of that is not necessarily true. It can also be the case that different definitions are used – including for geographic allocation. 

However, given the size of the companies and the nature of the restructurings undertaken it  should be possible to see the impact of them in the overall service export figures of the US.  The two we will look at are “research and development services” and “charges for the use of intellectual property”.

As Google and Facebook, and likely more besides, have ended their cost-sharing arrangements with companies in Bermuda and the Cayman Islands we would expect US exports of research and development services to decline (though it may have been that the BEA was reporting that these payments came from Ireland).  And as the companies are now licensing their intellectual property from the US we would expect to see an increase in US royalty exports (in line with the increased payments to the US evident in the Irish data.

So what do we see if we look at US exports of research and development services and charges for the use of intellectual property? 

The above shows them in overall terms and does not use a geographic split.  Google changed its structure from the start of 2020; Facebook did so from the middle of 2020.  But there doesn’t appear to be any evidence of these in the royalty or R&D exports figures published by the BEA.  Perhaps, it is other categories that should be looked at but looking through the BEA data does not reveal any that stand out.

The BEA figures for total royalty exports show pretty much no change in 2020, going from $115.5 billion in 2019 to $113.8 billion in 2020.  In contrast, the CSO figures show Irish royalty imports from the US going from €13.1 billion in 2019 to €53.0 billion in 2020. 

We can’t do a similar comparison for R&D services (Bermuda never included these flows in its balance of payments statistics) but a look at the geographic split shows few changes.  The slight fall in US R&D exports shown in the chart above is due to Switzerland which didn’t feature as part of the company examples set out above.

It is hard to know what is going on. Maybe the BEA had already fully accounted for the profits of Google, Facebook etc. and was overlooking the tomfoolery that was going on with Bermuda and the Cayman Islands.  But that seems unlikely.  Company accounts are the source data for many measures in the national accounts.  It was by following company accounts that led the CSO to publishing the 2015 NIE with its 26 per cent growth rate.

And even if relatively small in the context of US GDP the amounts involved are non-trivial.  Looking at the performance of Google and Facebook in 2020 suggests that something of the order of $40 billion may have to be accounted for with possible twice that amount for 2021.

Last year we estimated that US 2020 GDP could be revised up by 0.1 per cent as a result of the changing royalty flows.  That was with data that went to Q3; with full-year data it is possible that if a revision for 2020 is necessary it will be closer to 0.2 per cent.  US GDP growth for 2020 (and also for 2021) would be revised up.

It still only speculation to say this will happen.  But the shifts in the domestic/foreign split of the profits of Google, Facebook and likely more are pretty significant.  The BEA will publish its full-year balance of payments data at the end of March.  It will be interesting to see if the significant changes showing in both the CSO’s statistics for royalties and the companies’ figures for their profit splits show up.

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Is something mucking up the modified current account?

The current account of the balance of payments is an important indicator of imbalances in an economy.  The historical estimates of Ireland’s current account show significant deteriorations in the late-1970s and mid-2000s which were followed be periods when real growth turned negative (the shaded regions).

The concern with the latest estimates of Ireland’s current account is not that it shows deficits that are too large but of surpluses that are too large.  When published back in the summer the modified current account balance for 2020 was put at 11.5 per cent of GNI*, with comparable surpluses only recorded for the period of The Emergency (WWII to the rest of the world) in the early 1940s.

And the large surplus in the modified current account wasn’t just something that emerged with the COVID pandemic it is something that has been growing over recent years.

We can examine some of the sectoral developments underpinning the current account with the 2020 Institutional Sector Accounts which have been published by the CSO.  We will focus on the modified current account which strips out the impact of a number of globalisation effects (such as IP transfers, aircraft leasing and redomiciled PLCs). 

Some of the extra breakdowns provided by the CSO are useful in examining the improvement in the current account since 2013.  Here is a breakdown of savings minus investment by institutional sector with the combined sum representing the total economy current account.

The published figures are taken for all sectors bar that for foreign corporations (financial, non-financial and redomiciled PLCs).  The figures for foreign corporation is a residual to fit with the estimates of the modified current account, CA*.

The improvement from 2013 to 2019 can be attributed to two factors: an improvement in government’s position from large deficit in 2013 to modest surpluses in 2018 and 2019 and a switch in the impact of foreign corporations on CA* (through the residual component) from being negative in 2013 to positive in recent years.  It is not clear what has driven this change.

Clearly, there were a lot of sectoral changes in 2020.  The government moved into significant deficit while the surplus of the household sector increased considerably with these two effects largely netting out (in aggregate terms).

Domestic non-financial corporations have been in a surplus position in recent years while the impact of domestic financial corporations has always been relatively small though did become negative in 2020 for the time in the series which goes back to 2013.

A current account surplus of 11.5 per cent of national income is unusually large for Ireland.  Are there unusual factors which could explain it? Perhaps.  Corporation tax revenues have been soaring recent years and most of this is paid by foreign-owned corporations.  But the period that has seen Corporation Tax revenues go from €4 billion to €12 billion has been the CA* improve from a deficit of €1 billion to a surplus of €23 billion.  And of course the impact of the Corporation Tax on the current account will be tempered to the extent it is used to fund (import) spending elsewhere.

Is there an adjustment missing for the foreign-owned sector?  Possibly.  Though what that might be cannot be ascertained from this data.  And what about domestic companies?  Some of the balance-sheet developments for this sector have been extraordinary but it is not clear these have impacted the current account.

There is little doubt that Ireland is running a balance of payments surplus, and a significant one at that.  But the latest estimate of 11.5 per cent of national income is certainly close to the upper limit of the range of plausible estimates, and possibly even above it. 

Anyway, concerns about the precise level of an extant balance of payments surplus are a long way from the concerns raised by the balance of deficits of the late 1970s and early 2000s.  No one will be going on television to say we are living a way beyond our means.  Indeed, there is scope to increase spending if the things that people might like to buy (such as new houses) were to be made available.

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Outbound royalty payments head for €100 billion

One notable aspect of the presence of US MNCs in Ireland is the scale of outbound royalty payments. These are payments their Irish subsidiaries make for the use of technology developed elsewhere (mainly in the US itself).

The latest figures to the end of Q2 2021 put the four-quarter sum of outbound royalty payments from Ireland at €95.6 billion.  It is likely that the total for the 2021 calendar year will exceed €100 billion. 

While the overall total of outbound royalties has exhibited a fairly steady increase in recent years, the  destination of those payments has changed markedly. 

In the five years to 2019, the United States was the recipient of around 10 per cent of the outbound royalty payments from Ireland.  The 18 months has seen a huge shift and the latest figures from Eurostat show that the US was the recipient of almost 80 per cent of the outbound royalties from Ireland in the 12 months to the end of June 2021.

The chart shows the large drops in payments going to Offshore Financial Centres (Bermuda, Cayman etc.) and the Euro Area (which mainly went to The Netherlands before been subsequentlty directed to OFCs).  These payments were linked to “double-irish” type structures where US MNCs located licenses to use their technology in markets outside the Americas.

The Irish subsidiaries paid for the technology they were using (patents for pharmaceuticals, online platforms for ICT companies etc.).  This technology was almost wholly developed in the US but the US tax code facilitated US MNCs in putting the licenses to use the technology in no-tax jurisdictions where they had no substance.  This allowed the companies to benefit from the deferred payment of the US tax due on the profits those licenses were generating.

Changes in recent years have targeted these structures.  The US has moved from a worldwide system with deferral to a quasi-territorial system with payments due as the profit is earned. 

For many companies, most notable ICT companies, this has resulted in them moving the licenses for their technology back to the US. And now the payments that leave Ireland are flowing to the US.

Is this “stepping up action to address features of the tax system that facilitate aggressive tax planning, including on outbound payments” as required per the European Commission’s most recent set of Country Specific Recommendations (CSRs) to Ireland?

But if it is, what has changed? Very little.  There has been no change in the market countries being served by international HQs in Ireland.  The payments they make for the services provided by the ICT companies still flow to Ireland.  Royalty payments continue to be made from Ireland but are now being directed to the US, where the technology is developed, rather than Offshore Financial Centres.

The only place the end of the “double irish” has had any noticeable impact is in the United States.  This is not a surprise as the tax that was impacted by the structure was US tax (with companies benefitting from deferral on profits kept offshore).  Now the income flows direct to the US and is subject to immediate tax that – albeit at significantly reduced rates courtesy of the Tax Cuts and Jobs Act of December 2017.

Ireland Balance of Payments data is showing €75 billion of royalties flowing to the US in the 12 months to the end of June.  The equivalent figure two years earlier was €8 billion.  As the chart above shows this huge increase is clearly evident in the Irish data. 

But evidence of these payments remains absent in the data published by the US Bureau of Economic Analysis which show no increase in receipts of “charges for the use of intellectual property”.

Table 1 shows that total service exports from the US are around $800 billion a year so the changes noted here for payments from Ireland should have had a noticeable impact, at least in the relevant category. 

And even in the context of the entire US economy these payments are equivalent to something like 0.2 or 0.3 per cent of US GDP.  These things get huge focus when they come to attention in Irish national accounts. Will the US get to avoid such scrutiny for amounts of the same value because the relative scale will be 100 times smaller?

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What’s going on with the current account?

Ireland’s balance of payments is subject to huge volatility.  Among the reasons for this are transactions in intellectual property and aircraft for leasing as well as income flows link to redomiciled, but not Irish-owned, PLCs.  In response to this the CSO have been publishing a modified current account, CA*, which strips out the above of these issues.

Getting on a handle on a country’s underlying current account position can be an important part of determining if imbalances are building up.  As the long-run series in the chart below shows, Ireland experienced widening balance of payments deficits in the late-1970s and mid-2000s which precipitated severe problems.

Last week, the CSO published the 2020 estimate of the modified current account.  The surplus of €23.5 billion was equivalent to 11.5 per cent of national income.  This is an extremely large surplus by historic Irish and current international terms.

The only time Ireland ran a current account surplus of an equivalent size was during World War II when trade restrictions and rationing were in force.  Ireland’s current account needed to improve to wash out the imbalances built up prior to 2008, but the ongoing rise to record levels seems to be overstating it.

When can get some insight into this from the Institutional Sector Accounts.  The current account of the balance of payments is savings minus investment.  The sector accounts allow us to see the contribution by sector to the current account.  The chart below takes the annual outcomes from the sector accounts for saving minus investment with the figure for the non-financial corporate sector adjusted to make the total across all sectors consistent with the modified current account.

Immediately, we are drawn to the 2020 figures.  The household sector has been a net lender since 2009 but this increased very significantly in 2020 – due to restrictions on spending.  The support incomes the government sector moved to being a significant borrower. Financial corporations and the impact of items that are not sectorised have not had much impact on the current account in the last four or five years.

That leaves us with the red segment of the bars – the adjusted figure for non-financial corporations.  For the last few years this has been making a positive contribution to the current account and last year it was €12.5 billion.

For the time being we don’t have much insight into this.  While the modified current account is showing a significant surplus some caution should be exercised before considering it available for spending.

Later in the year when the annual sector accounts are published we will get a domestic/foreign split for the corporate sectors in 2020.  Here is what the 2019 figures showed:

There wasn’t really a whole lot going on the domestic sectors up to 2019.  By 2019 all of the household, government, domestic non-financial and domestic financial sectors were net lenders.

However, the most significant changes were happening within the foreign-owned sectors – those sectors we hope would be largely stripped out of the modified current account.  Either via standard net factor flows (repatriated profits etc.) or via the CA* adjustments for IP, aircraft and redomiciled PLCs. 

But even after all those the impact of foreign-owned sectors went from –€7.2 billion in 2017 to +€0.4 billion in 2019.  This was the largest contribution to the rise in the black line (the modified current account) up to 2019.

And the recent update to the modified current account shows that the 2019 figure has been revised up.  It €16.5 billion for last year’s annual sector accounts; when this years sectors accounts are published they will reflect last week’s update which put the 2019 modified current account at €20.2 billion.

It is clear there is something going on – and that it likely to be within the foreign-owned sector. What is not clear is whether it is something that would justify a further refinement of the adjustments made to get to the modified current account. 

It could be due to “good” investment such as manufacturing plants for pharmaceuticals or processors.  Or it could be another distortion that should be stripped out.

There is no doubt that Ireland’s current account has improved relative to the large deficits that were evident up to 2008 but there must be some doubt that that improvement has led to a surplus equivalent to 11.5 per cent of national income. A surplus, yes, just not a record one. 

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