Monday, February 12, 2018

The national balance sheet

After looking at the improvements household sector financial balance sheet here we consider what is happening to the balance sheet for the entire economy.  Ireland has a bit to go until the presentation of our national balance sheet data reaches the level provided by the ONS for the UK but we can get a good idea of what is going on from the information that is available. 

The national balance sheet essentially comprises four items:

  • Non-produced fixed assets (such as land)
  • Produced fixed assets (such as buildings, infrastructure, equipment and IP)
  • Financial assets (such as deposits, equity and pension savings), and
  • Financial liabilities (such as loans)

For Ireland, the CSO provide figures for the latter three but estimates of the stock of non-produced assets are lacking and a broader measure of produced non-financial could be provided with the addition of estimates for inventories, and possibly, valuables.  There are very few countries providing these figures to Eurostat but their number is increasing. 

Still, what we have gives us a good start and there is a lot going on.  First a look at the broad categories since 2001.

National Balance Sheet 2001-2016 Table

Excluding land, for which figures for Ireland are not available, we can see that total net worth of the Irish economy was just over €240 billion at the end of 2001.  This rose to over €440 billion by around 2006/07 but this was based on inflated valuations and by 2011 net worth had fallen back to €180 billion.  It has recovered since then at stood at €315 billion at the end of 2016, or €66,600 per capita.

Behind this net worth figure the gross amounts are enormous, particularly on the financial side which is influenced by the investment funds linked to the IFSC.  These have huge gross positions but, by and large, the assets and liabilities net off against each other.  We can see this if we look at the net positions by sector.

Unfortunately, we are only give a breakdown of net financial worth by sector.  Ireland is one of seven countries that do not provide a breakdown of produced fixed assets by sector (the other six are Bulgaria, Cyprus, Malta, Romania, Slovakia and Spain).  This means we can’t get net worth (as defined here) by sector but we can track net financial worth by sector.  And it’s quite the roller-coaster.

National Balance Sheet by Sector 2001-2016 Table

By 2007, net financial worth of the total economy was a little less than minus €60 billion.  In the nine years since it has deteriorated by over €400 billion.  As we looked at earlier the net financial position of the household sector has been steadily improving and by the of 2016 was up more than €100 billion on its 2007 level.  Over the same period the net financial position of the government sector has deteriorated by €150 billion, with the net financial worth of non-financial corporations going south to the tune of €400 billion.  The position of financial corporations has bounced around a bit but has never gone outside the range +/- €50 billion.

The government doesn’t have a whole lot to show on the balance sheet for its borrowing as a lot of it went to fund current expenditure.  There has been a significant rise in produced fixed assets and it is easy to see that most of this has been bought by the NFC sector so the fixed assets will be matched by accompanying financial liabilities.  The household sector has been deleveraging and there has been very little output of the produced fixed asset it would buy: housing.

Anyway, even though the net financial position of the economy is down €400 billion since 2007, once we account for produced fixed assets that have been acquired we see that the net worth of the economy has gone from €440 billion in 2007 to €315 billion in 2016, a reduction of €125 billion.  Part of this fall and rise will have been due to house prices but it should be noted that the value of dwellings included in produced fixed-assets excludes the value of the land on which the property sits.

Here is what has happened to the nominal net values (i.e. after depreciation) of the main produced, non-financial assets. 

National Balance Sheet by Fixed Asset 2001-2016 Table

It can be seen that the nominal value of dwellings (excluding site value) fell by €85 billion in the years following 2007 and has recovered about half of that.  The value of other buildings is well ahead of 2007.  In the past two years the stock of fixed assets has surged by €300 billion with most of this due to changes in the suppressed categories dealing with aircraft for leasing and IP licenses.  As most of these are likely linked to financial liabilities they will net out in the overall net worth position.

There might be other items we would wish to see included particularly in relation to contingent or accrued liabilities.  At the sectoral level this might give a different view but in overall terms the net position of the economy would be unchanged as a liability for one sector would be an asset for another.  This would be the case, for example, is accrued pension liabilities to public sector workers were included.  They would be a liability for the government sector and an asset for the household sector.

So where stand us in relative terms compared to the rest of the EU15?

EU15 Total Net Worth Per Capita 1995-2016

Not great actually, but after the vertiginous drop in 2008 and flatlining from 2010 to 2014 we have been pulling away from the bottom of the pack for the past few years.  The volatility in the Irish series is not seen for any other country.

What would happen if land was included?  Here are the per capita net worths excluding and including land for the four countries which provide such estimates.

Net Worth without and with Land

Given the changes here it seems probable that Ireland’s per capita net worth would roughly double if the value of land was included, though the relative ranking in 2016 may not be much changed if this was applied across all countries.  Let’s hope we can rise through the rankings in a more sustainable fashion this time.

To conclude here are the main items on the balance sheet in per capita terms for Ireland since 2001.  Click to enlarge.  And note again these values are nominal.

Ireland National Balance Sheet per capita 2016 Table

And for the countries of the EU15 (excluding Luxembourg) for 2016.

National Balance Sheet per capita 2016 Table

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