Why are the household sector financial transactions accounts of the CSO and the CBoI so different?

Both the Central Statistics Office and the Central Bank of Ireland produce financial accounts for the various sectors of the economy.  At the headline level they say much the same thing.  If we look at the household sector we can see that both report much the same outcomes for the net financial asset position.

However, if we go below the surface we see that how this end-of-year stock position has been reached, particularly for the past few years, differs hugely between the two agencies.  The are two ways in which the stock of assets or liabilities can change:

1. Financial transactions
2. Valuation effects

Both agencies produce financial transactions accounts so we can see how much of the change is due to actual transactions in assets and liabilities rather than valuation or other changes.

Here is the household sector financial transaction account of the Central Bank for 2012 to 2016 where annual figures are got by summing over the four quarters in each year.

Over the five years in question the net financial asset position of the household sector increased by around €90 billion.  The financial transaction account of the Central Bank indicates that just over €50 billion of this is due to financial transactions with households:

• putting an extra €12 billion on deposit
• adding €2 billion to their equity investments
• contributing a net €11 billion to private pension plans, and
• repaying €27 billion of debt

The other €40 billion was due to valuation effects which was almost entirely arose in pension funds with the value of these rising from €70 billion at the end of 2011 to €122 billion at the end of 2016 (which far exceeds the €11 billion of net transactions into them).

And now let’s look at the household sector financial transaction account published by the CSO.

Here, instead of being €50 billion, the net financial transaction of the household sector for 2012 to 2016 are put at €16 billion.  That’s quite the difference.  But for most items the differences are relatively small.  According to the CSO’s accounts the household sector:

• put €11 billion extra on deposit
• contributed a net €13 billion to private pension plans
• and repaid €27 billion of debt

But the numbers for equity transactions are hugely different.  The Central Bank had the household sector adding about €2 billion to their equity holdings while the CSO show the household sector making net sales of €36 billion – a difference of €38 billion!  And of this almost all relates to unlisted shares.  A previous discussion of the household accounts published by the CSO is here with the final part dealing with this issue of unlisted shares.

The balance sheet position of unlisted shares given by CSO and the Central Bank has been almost identical for the past few years.

There isn’t a smidgen between for the past few years which is quite something given then one figure is based on €2 billion of net acquisition transactions since 2012 (the CBoI) and the other figure is based on €36 billion of net sales transactions since 2012 (the CSO).

Why does all this matter? It matters for the savings rate.  Per the Central Bank numbers much of the improvement in the financial position of the household sector has been made by ongoing savings transactions such as adding to deposits and private pension plans and make repayments on loan liabilities.  Per the CSO numbers this activity has had a much smaller impact and almost all of the improvement has been due to valuation effects particularly for pension funds and unlisted shares.

Looking at this issue in chart form here is the net financial transactions reported by both agencies.

This divergence didn’t arise on the liability side:

But as the tables above have shown all the difference has arise on the assets side:

Why the difference?  The CSO produce far more than the Financial Accounts and are seeking to reconcile the outcomes with those in the Non-Financial Accounts.  In particular, they are looking for a reasonably good relationship between net financial transactions and net (lending)/borrower at the bottom of the capital account.  And they have it:

This capital account shows that from 2012 to 2016 the household sector was a net lender of a cumulative €7 billion and that in 2015 and 2016 household current expenditure on consumption and capital expenditure on fixed capital formation exceeded household disposable income.  The Irish household sector is a net borrower once more.

But as the balance sheets show this five-year period corresponds to a time when households:

• added around €11 billion to their deposits
• made €12 billion of net contributions to pension funds, and
• repaid €27 billion of debt.

How did households afford these €50 billion of financial transactions when there was only €7 billion of net lending available?  Well according to the CSO the household sector did this by selling €36 billion of unlisted shares – though this is probably the balancing item where the necessary reconciliation is dumped . But why is it necessary?