Ireland in the Country-By-Country Reports of US MNEs

The IRS have published the latest update of their aggregate statistics compiled from the country-by-country reports filed with it by US MNEs.  The latest figures cover 2019.  The data are useful but have some limitations. Here we will look at some of the aggregate outcomes for Ireland and compare some to other countries.

The headline figures for Ireland are:

There are 632 reporting groups in the IRS data.  In total, they reported that they had around 163,000 employees in Ireland (2018: 151,000).

Some of the financial outcomes are immense. The companies report $735 billion of revenue, $55 billion of profit and $10 billion of tax. In 2018, these were $690 billion, $50 billion and $8 billion.

This might seem to imply an effective tax rate in 2019 of 18 per cent but the figures in the above table include entities that were loss making.  This pulls down the overall profit figure while having limited impact on the tax figure. When restricted to entities with positive profits an average tax rate of 13 per cent is found.

There is also a useful breakdown by economic sector with outcomes for 2019 shown below.

Manufacturing has the largest figure for employment (72,000).  There are also significant levels of employment in the sector encompassing Wholesale and retail trade, transportation and warehousing and in the Information sector.

When looking at tax payments, 2019 marks the first year when payments from the Information sector exceeded those from Manufacturing.  Between them, those two sectors they accounted for 90 per cent of the corporate tax paid by Irish entities in the CbC reports of US MNEs.  Payments in 2019 from US firms in the Manufacturing sector came to $4.1 billion and in the Information sector they were $4.6 billion.

The growth in the income tax paid (on cash basis) in the last few years has been extraordinary. 

The IRS CbCR data go back to 2016. In that year the total tax paid (on cash basis) for entities in Ireland was $4.3 billion.  The $10 billion figure for 2019 was more than double that and given what we have seen with Irish Corporation Tax receipts since then the figures in subsequent IRS updates will be even higher.

It is also worth putting the payments in Ireland in the context of the tax payments made by US MNEs in other countries.  Here are the 2019 figures for the EU27.

In 2019, US MNEs paid more corporate tax in Ireland than in any other EU country.  Indeed, the payments in Ireland were the third-highest in the world, trailing only the US itself (obviously) and the UK.

In total, the US MNEs in the IRS data paid $329 billion of corporate tax in 2019.  Of that, $204 billion was paid to the US. The next largest recipient was the UK with receipts of $10.6 billion.  In third spot is Ireland at $10.0 billion.  There aren’t many things Ireland comes third in the world at, but tax receipts from US MNEs is one of them.

The nominal figures don’t give a sense of the relative importance of the tax receipts from US MNEs to each country.  Here are the receipts of the EU27 but scaled to each counties Gross National Income (GNI).

Using GNI*, the corporate tax payments of US MNEs were equivalent to just over four per cent of Ireland’s national income.  This is double the level of the second-highest and eight times that of the third-highest.

We can also do a quick comparison of profits, assets, employment and effective cash tax rates in the US, Ireland and some selected jurisdictions.  The US continues to tolerate “stateless entities” so these are also included in the below table.

The total share in the bottom panel shows that these jurisdictions cover a large share of the activities in the US MNEs in the IRS CbCR data, though it should be noted that the coverage of the table is “limited to reporting entities with positive profit before income tax”.  This is to get average cash tax rates that better reflect the tax burden on profits.

The largest amounts are understandably in the US itself with more than half of profits, tax, assets and employment recorded there. 

The selected ten jurisdictions, including Ireland, account for one-fifth of profit but only eight per cent of tax, five per cent of assets and just two per cent of employment.  The profit/employment mismatch is most evident for The Cayman Islands, Bermuda and Barbados.  These jurisdictions are also those with the lowest average cash tax rates (all below one per cent).

In aggregate, the companies and entities in this data faced an average cash tax rate of 11.8 per cent in 2018.  In Ireland, the average cash tax rate was 13.0 per cent, which was by far the highest of the selected ten jurisdictions.  Singapore was next highest at 5.6 per cent.

To conclude here is a comparison of the employment figures for the EU27 in the IRS data.  It takes the number of employees for each country and puts it as a share of that country’s population.

For the Eu27 as a whole, the MNEs in the IRS data report that they has 2.65 million employees in 2029.  That is equivalent to 0.6 per cent of the population of the EU27 on January 1st of 2019 (446 million).

The national shares range from 3.3 per cent in Ireland (163,000 in population of 4.9 million) to 0.1 per cent in Latvia (1,800 in population of 1.9 million).

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The Household Sector in 2021

The CSO have published the Q4 2021 Non-Financial Institutional Sector Accounts.  These give preliminary full-year figures for 2021 though revisions are likely as fuller National Income and Expenditure results become available later in the year.  However, the biggest of these are likely to be in the corporate sectors so here we will focus on the household sector.

First, the current account. 

As with 2020, the COVID-19 pandemic had a big impact on the figures for 2021.  This is perhaps most visible on the bottom line – the household gross savings rate.  The gross savings of the household sector jumped from the near €12 billion it had been in 2018 and 2019 to €31.5 billion in 2020 and this continued into 2021 when the household sector finished with €27.2 billion available for wealth generation.  The rest of the table shows how this amount arose.

The starting figure here is Gross Domestic Product which for the household sector is a combination of the mixed income of the self employed (mixed because it arises from a combination of their labour effort and the capital they employ) and gross operating surplus (which for the household sector arises from owning housing assets with the imputed rent of owner-occupiers being the most significant amount). 

It will be later in the year before the split of this is provided but it could be that of the €36 billion total there will be €20-22 billion of rents (actual plus imputed) and €14-16 billion of self-employed earnings. The subsidies on production received are mainly those that go to agriculture.

Compensation of employees increased by 8.2 per cent in 2021, reaching €109.1 billion.  Of this, around one-quarter (€26.0 billion) was paid by the general government sector, while around two-thirds (€69.7 billion) arose from the non-financial corporate sector.  This will be mainly private sector enterprises but will also include publicly-owned NFCs such as the ESB.

The increase in income taxes was even greater rising by 18.3 per cent and exceeding €30 billion for the first time.  Social contributions also increased.  Of those, €16 billion were paid to the government sector.  This includes PRSI (both employees’ and employers’ PRSI with these included in the earlier item compensation of employees) and the pension contributions of public sector workers.

Social benefits paid to the household sector increased in 2020 – as part of the public health measures introduced in response to the pandemic – and most of this was continued in 2021, with social benefits paid by the government sector coming in at €30 billion in 2021.

All told, the household sector had an estimated €128 billion of disposable income in 2021.  Due to caution and closures nominal consumption remained below 2019 levels with household final consumption expenditure put at €102.5 billion for 2021.  This will include the imputed spending of the owner-occupier rents included as income earlier in the table.

With the addition of net pensions savings (the difference between private pension contributions and benefits from private pensions), this gives the gross savings amount of €27.2 billion.  We can turn to the capital account to see what the household sector did with this.

And the answer is not a lot.  Once capital transactions are accounted for the bottom line of the capital account shows that there was still €21.1 billion left for the household sector to use.  This unspent amount will go on the financial balance sheet.  It could be kept in cash(!), put on deposit, used to repay loans or to purchase other financial assets.

As set out in a previous post, the Irish household sector has a low investment rate, where the reference is to investment in capital goods.  As the table shows, the gross capital formation of the household sector has been in or around €6 billion for each of the last four years.  The main investment item of the household sector is housing – either improvements or extensions to existing dwellings or the acquisition of new dwellings.

The purchase of a second-hand dwelling from another household is not capital formation as it is just a change of ownership of existing capital (even if it switches from being a rental to owner-occupier property).  It could be capital formation for the household sector if it is purchased from a non-household entity (such as a local authority or investment fund). But most household capital formation is extensions or new builds.

The anemic level of capital formation by the household sector is illustrated by looking at the line for net capital formation.  This is capital formation after depreciation (consumption of fixed capital).  In the format of the table above this would be expected to be a negative number, i.e. a spending item, however this doesn’t hold for the latest figures for 2019 and 2020.  In those years, household capital formation wasn’t even enough to cover depreciation and it wouldn’t take a huge revision for there to have been a similar outcome in 2021.

So what did we do with the €21 billion that wasn’t used for consumption or investment spending?  It will be later in the year before the CSO update the financial accounts in the ISAs but we can get the insight we need from the quarterly accounts published by the Central Bank, with latest figures covering Q3 2021.  There are two key items for the household sector: on the asset side it is currency and deposits and on the liability side it is loans.

For the first three quarters of 2021, the Central Bank data shows a €15 billion rise in the deposits of the household sector.  Loan liabilities were essentially unchanged over the period.  The latest figures show the household sector to have €180 billion of currency and deposits and €128 billion of loans which is an incredible reversal of the position of just 15 years earlier. But maybe now we need a little more spending.

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Are Irish households reluctant spenders or supply constrained?

Developments in household savings have attracted some attention during the pandemic.  With spending opportunities curtailed due to public health restrictions household deposits, in aggregate, soared.

Here, though, we will look at pre-pandemic figures to assess the savings behaviour of the Irish household sector.  We will start with the Gross Savings Rate.  Essentially, this is household disposable income that is not used for current consumption.  When looking at this we see that Ireland doesn’t really stand out at all.

In 2019, the gross savings rate of the Irish household sector was just over 10 per cent and put Ireland as the median in the EU15.  Irish households had consumption expenditure of €104.6 billion from a total gross disposable income of €116.4 billion, leaving gross savings of €11.9 billion.  Total gross disposable income is gross disposable income with an adjustment for changes in pension entitlements.

However, that only gets us to the end of the current account.  To fully compare household sector spending against household sector income we must work though the transactions in the capital account, including gross fixed capital formation, i.e. investment spending.  The end of the capital account gets us to net lending/net borrowing which shows whether there is a surplus to be lent or a deficit to be funded after all spending (current + capital) has been accounted for. 

Relative to disposable income, the net lending of the Irish household sector in 2019 was the third-highest in the EU15. Capital transactions (including capital formation) absorbed €5.6 billion leaving €6.3 billion (5.4 per cent of total gross disposable income) unspent and available to go on the financial balance sheet of the household sector.  Only in Sweden and Germany was there household sectors with higher net lending rates than Ireland.

Not only did Ireland in 2019 have a level of household net lending that would be more appropriate for a mature economy it had a level that was higher than it had been in Ireland a few years previously.

In the aftermath of the 2008 crash, the Irish household sector became a significant net lender as the borrowing of the Celtic Tiger came to a halt and households sought to repair their balance sheets.  However, after 2012 this net lending declined and had fallen to around 3 per cent of total gross disposable income in 2016.

The economy continued its recovery in the years that followed and aggregate household income grew but spending (current plus capital) did not keep pace and the net lending rate was above 5 per cent in each of the three years prior to the pandemic.

Of course, the pandemic resulted in major upheavals.  One result was that savings increased in almost all EU14 countries (updated data for the UK is no longer provided to Eurostat).  Within this group the largest such increase took place in Ireland with the net lending of the Irish household sector going from 5.4 per cent of total gross disposable income in 2019 to 21.2 per cent in 2020.

We’re not concerned about the 2020 level which was artificially elevated by various features and responses to the pandemic but more with the pre-pandemic 2019 level where, as set out above, Irish households had the third-highest level of net lending as a share of total gross disposable income in the EU15.

If Irish households’ spending in 2019 as a share of income was comparable to what they were doing in 2016, expenditure (consumption plus investment) would have been around €4 billion higher. If Irish household expenditure matched the net lending outcome for Denmark in 2019, spending could have been around €7 billion higher and if it matched the Finnish outcome spending could have been around €12 billion higher (though €5 billion of net borrowing would have been required).

The chart of the gross savings rates across the EU15 for 2019 indicated that it was not consumption expenditure that led to the relatively higher net lending rate in Ireland.  Ireland’s household gross savings rate was the median for the EU15.

The issue arises in the capital account and is clearly seen if we look at the household gross investment rate: household gross fixed capital formation as a share of total gross disposable income.

And there we see Ireland right down towards the bottom.  In 2019 (i.e. pre-pandemic), Ireland had the second-lowest household gross investment rate in the EU15.  This contrasts with each year in the period from 1996 to 2008 when Ireland had the highest household investment rate in the EU15.  The household investment rate peaked at 29.2 per cent in 2006, around six times the current level.

From a national accounts perspective, what we mean by “investment” is linked to additions to the capital stock of fixed assets.  The most significant fixed asset for the household sector is of course residential property.  So, when we are talking about the gross fixed capital formation or “investment” of the household sector we are primarily talking about new dwellings purchased by households or extensions/upgrades to existing dwellings owned by households.

Investment in the context here is not putting money into financial assets such as shares nor it is the purchase of second-hand or existing dwellings as this is not capital formation but the change in ownership of an existing asset.

There is no doubt that purchases of new dwellings by households is muted.  And that would seem to be more due to supply constraints rather than a reluctance to spend.  One of the reasons Ireland has a lower household investment rate is that there are fewer new capital assets (i.e. new dwellings) for households to purchase.

It should be noted that a sector can also undertake investment if it buys existing assets from another sector.  So, if households were to buy existing dwellings from the government sector (such as local authorities) or from the corporate sector this would count as investment for the household sector. 

For the selling sector it would be included as disinvestment – a reduction in the capital stock of that sector – and in overall terms the capital stock of the economy would be unchanged.  However, in overall terms the net flows of existing dwellings between sectors have been relatively modest, though perhaps with a trend towards more net purchases by non-households.

In 2017 and 2018, there was a net flow of existing dwellings from non-households to households of around 2,000 per annum.  This reversed in 2019, though the net flow to non-households via transactions in that year was small (158 existing dwellings).

And it may be that the topline numbers for household investment miss something significant compositional changes within the household sector.  The vast majority of transactions in existing dwellings are intra-household – where one household sells to another household.  In 2019, there were 40,606 such transactions.

Figure from the Banking and Payments Federation show that first-time buyers drew down 22,500 mortgages in 2019 and that 14,500 of these were for existing dwellings.  Unless purchased from non-household entities these purchases would not count as investment for the household sector.

However, there is evidence of changes in use of existing dwellings within the household sector.  Figures from the RTB show a decline in the number of tenancies registered with them and an increase in the number of termination notices received by tenants because the landlord wishes to put the property up for sale.  There isn’t conclusive use (such as a register of residential properties of type of use) but it does seem as if properties are leaving the private rental sector and becoming owner-occupied.

This is investment by owner-occupiers and disinvestment by landlords but as both are in the household sector is does not appear in the topline numbers for the sector.  So while it does look like Ireland had an unnecessarily high household net lending rate before the pandemic it could be that some of our spending is being masked because it is first-time buyers purchasing existing dwellings that were previously in the private rental sector.

That doesn’t mean there isn’t a need for additional new dwellings for the household sector to purchase – there clearly is – but that headline numbers such as housing output or new dwelling purchases may not throw light on where the failures of our housing system are at their most acute.

There certainly is scope for Irish households to spend more – and energy prices are likely to be an automatic trigger of this.  Consumption will bounce back if public health restrictions remain lifted. 

This should see the household savings rate revert to 10 per cent of thereabouts.  If more new dwellings are made available for purchase by households this would increase the household investment rate. But it is possibly the private rental sector that has the most pressing need for capital formation and it does not seem as if that will come from the household sector.

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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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Underestimating housing consumption in the national accounts

It's not just household-level data such as the SILC where our approaches to the provision of social housing present measurement issues. In the national accounts, payments such as to HAP landlords are currently counted as a benefit-in-kind for households.  This is in contrast to the benefit-in-cash approach now applied in the SILC.

And, up to 2020, there was a further difference between the micro-data and macro-data approaches to measuring social housing.  In the national accounts an imputed social-transfer-in-kind was previously included for the 130,000 or so households who are local authorities tenants.  This has now been removed.

In the government accounts, on the revenue side, local authorities were treated as generating market output for sale.  For social housing this would be the rent contributions received from tenants plus an imputed amount to bring the value of the output in line with market values, which were based on rents in the private rental sector, using both unregulated and regulated rents.

On the expenditure side, this imputed output was used as a social-transfer-in-kind to households. There would also be expenditure incurred as compensation of employees, intermediate consumption and depreciation or fixed capital formation for the provision of local authority housing. 

This meant that the imputed value was on both sides of the accounts and netted out for the balance.  The  impact of local authority housing on the general government balance was the different between the rent contributions received from tenants and the other expenditure items incurred.

It also meant that the consumption of housing services by local authority tenants was based on the market value of the housing services they used as it is for private tenants (through actual rents paid) and for owner-occupiers(through imputed rents). 

The change introduced this year means that the consumption of housing services of local authority tenants is now treated as non-market output and the value of the consumption of that in the national accounts is based on the costs of providing it (mainly compensation of employees, intermediate consumption and depreciation) rather than an imputed market value. 

It should be recognised that most government-provided services (health, education, policing etc.) are included in national accounts on a cost rather than value basis.  The change to also do so with local authority housing had no net impact on the government’s accounts.  The imputed rents of local authority tenants were removed from both the revenue and expenditure  sides, as imputed market output for revenue and the social-transfer-in-kind for expenditure. 

Indicators like government spending to national income would have been reduced.  And so indeed would national income when the market output based on market value was replaced by non-market output based on costs. 

This change was introduced between the April 2021 Government Finance Statistics and the July 2021 Government Income and Expenditure Accounts.  The July publication included the following note:

Reclassification of local authority housing rent as non-market output

To date the provision of local authority housing was treated as a market output. This meant that the difference between the differential rent paid by the tenant and a market rent was calculated and included as P.11 (market output), with a corresponding imputed expenditure D.632 (social benefit in kind). However, Approved Housing Bodies (AHB) reclassified into the local government sector are considered as non-market producers, with no imputed rent calculation made.

On review, this approach was deemed not appropriate and thus a decision has been made to treat the local authority housing output as non-market. This ensures consistency with AHBs. This determination means that there is no longer an imputed D.632 expenditure related to local authority rent. Local authority rent payments are now recorded as P.131 (incidental sales and fees of non-market establishments). This methodology has been applied from 1995.

There can be lots of reasons for revisions between releases so attributing them solely to a methodological change may not always be correct.  Here are the figures for market and non-market output in the April and July releases.

For the three years shown (2018 to 2020), the market output of the general government sector was revised down by an average of €1.6 billion – and now takes a value of zero.  For the same years, non-market output was revised up by an average of €1.25 billion.  This suggests that around €350 million of housing consumption may have been “lost” as a result of the change in methodology.

In the greater scheme of things €350 million of consumption may not be that significant, though as a similar treatment is applied for housing by AHBs the underestimate may be slightly larger.  The underestimate is limited to the extent to which the costs of providing LA or AHB  housing is less than the market value of that housing.

In pre-COVID 2019, actual individual consumption was €133 billion, of which the consumption of housing services was €28.5 billion.  The consumption of housing services was made up of:

• Household Consumption Expenditure
  • Actual rentals for housing €5,393m
  • Imputed rentals for housing €16,459m
  • Maintenance and repair of the dwelling €289m
  • Water supply and miscellaneous services relating to the dwelling €357m
  • Electricity, gas and other fuels €3,091m
• Government Consumption Expenditure
  • Social transfers-in-kind via market producers €824m
  • Social transfers-in-kind via non-market production by Government €2,087m

A few hundred million extra in there isn’t going to make a huge difference but again maybe points to difficulties in measuring outcomes in relation to housing in Ireland.

There is no doubt that local authorities are not market establishments so deeming the goods and services they provide to be from non-market production has logic to it and imputing values is not an exact process.  However, for housing, a relatively close market comparator can be found, i.e. the private rental sector.  This can be used to give a market value for the output produced.  And up to this year that is what was done for local authority housing in Ireland.

For most EU countries, this isn’t an issue.  Almost all of the consumption of housing is the result of household expenditure.  Government spending does not go to provide housing, at least not directly.  The general government sectors don’t make payments to landlords or provide housing directly.

As the list above shows, in Ireland government consumption expenditure is responsible for around 10 per cent of total consumption of housing.  This figure is by far the largest in the EU.

For 21 of the EU27, the share of housing consumption due to government expenditure is less than one per cent (and is essentially zero for around half of those).  The closest country to Ireland is France and even then that is at a level that is less than half the outturn for Ireland. 

That is not to say there isn’t public or social housing in most of these countries. There is.  But it is happens in such a way that it is provided by entities that are outside the general government sector.  And they generate their revenues from rents paid by tenants rather than payments by government.  That’s not to say that either approach is right or wrong just that they are different.

The value of housing consumption may be underestimated in other countries to the extent that regulated or controlled rents are used in determining imputed rents for owner occupiers.  In Ireland, for around five per cent of households, the value of their housing consumption is based on the cost of providing those housing services rather than what the tenants might have to pay as private tenants. Again, neither is right or wrong. Just different.

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