Thursday, April 8, 2021

The non-financial corporate sector in the institutional sector accounts

There are lots of reasons not the look at the figures for Ireland’s non-financial corporate sector in the quarterly institutional sector accounts (ISAs).  They are the figures that are most likely to be revised when the National Income and Expenditure (NIE) accounts are published in the summer.  And a much more information breakdown (by domestic, foreign-owned and redomiciled PLCs) will be published with the annual ISAs in the autumn. 

So, without expected it to be any more revealing that staring into a puddle here are the latest figures for the NFC sector.  First, the current account:

NFC Sector Current Account 2016-2020

Lots of big numbers as can be expected given the scale of the MNCs that operate in the sector.  However, most of the 2020 changes are fairly modest (at least they are in this release anyway).

We can see that compensation of employees paid by NFCs held up fairly well in 2020 only showing a decline of 2.5 per cent or €1.7 billion.  However, this was supported by the government’s wage subsidy schemes and subsidies on production received were up almost 500 per cent. The (mainly domestic) firms receiving these subsidies used them to support the wages of their employees.

Amidst all the big number we see the continued rise in Corporation Tax payments from this sector.  In 2020, the NFC sector paid €9.6 billion of Corporation Tax up from €8.4 billion in 2019. 

Another item worth noting is the continuing rise in the amount of interest paid by the NFC sector.  The interest amount in the ISAs rose a further €2 billion in 2020.  This may be linked to the onshoring of tens of billions of IP assets by US MNCs.

NFC Sector Capital Account 2016-2020

The figures in the capital account are even more murky – particularly those in the lower panel showing capital formation, acquisition of non-produced assets and net borrowing.

The NFC sector in Ireland has been doing an enormous amount of capital formation expenditure in recent years.  This has been to the extent that a €50 billion drop in NFC investment is of concern to no one.  This is because the main reason for the wild fluctuations in the GFCF has been IP onshoring by US MNCs.  These transactions can be worth tens of billions but their impact on the overall economy is limited.

The lower panel shows that their has also been significant expenditure on the acquisition of non-produced assets.  Again this is linked to IP onshoring but is IP that is not the result of R&D activity.  The assets here include licenses and marketing assets such as customer lists.  This shows a large drop in 2020, but, like capital spending, is a figure that is subject to revision in the NIE.

This means that the bottom line is not informative either.  The net borrowing position of the NFC sector may have improved by more than €70 billion but most of this is due to reduced onshoring of IP by US MNCs.  We’ll get a much better picture of what is happening in the business sector in Ireland, and most importantly the domestic business sector, as the CSO works through it release schedule for the year.

The government sector in the institutional sector accounts

The CSO will publish the 2020 Government Finance Statistics (GFS) in the next few weeks but we can get a preliminary look at what they will say from the Institutional Sector Accounts (ISAs) that were published last week.

Here’s the government sector current account for the five years to 2020.

Government Sector Current Account 2016-2020

For 2020, the most significant changes were subsidies paid (+€4 billion), social benefits paid (+€6 billion) and consumption expenditure on goods and services (+€5 billion).  All told, these contributed to a €16 billion deterioration in the current account position of the government sector.

One of the remarkable things is that all of these changes were on the expenditure side with revenue holding up.  There was a decline in taxes on products and production.  Taxes on products (such as VAT and Excise Duty) were down €2.5 billion with taxes on productions (such as commercial rates) down just under €1 billion.  Some of this fall was just to reduced activity while some was due to forbearance and payment breaks.

Taxes on income and wealth rose in 2020. This was entirely due to increased Corporation Tax from non-financial corporates which rose another €1 billion but taxes on income from the household sector (Income Tax and USC) were essentially unchanged in 2020.  Social contributions received (mainly PRSI) were also largely unchanged in 2020.

On the spending side some of the other changes were the eight per cent rise in compensation of employees paid by the government sector with this almost reach €25 billion in 2020.  It might be surprising the the GDP of the government sector rose seven per cent in 2020 (schools closed etc.) but in the absence of prices the value added of the government sector is mainly measured by the wages paid.  Finally from the current account, we can also see that the interest bill continued to fall and the interest amount in the sector accounts falling by a further €1 billion in 2020.

There were also limited changes in the capital account.

Government Sector Capital Account 2016-2020

The most significant change here was the further €1.5 billion rise in government gross capital formation in 2020 to reach €9.7 billion.

There was little change in most other items in the current account meaning that the overall change in the government’s non-financial position was a deterioration of €18 billion.  The government sector went from a modest net lending position of €1.5 billion in 2019 to a net borrowing position of €16.5 billion in 2020.

To the extent the the increased spending highlighted in the current account is temporary this deficit will fall as the need for emergency measures falls.  But if some of those represent permanent spending increases, as is likely, some of the deficit will be persistent.  It is that permanent increase in spending rather than any necessity to “pay the COVID bill” that will impact subsequent budgetary plans.

Thursday, April 1, 2021

The household sector in 2020

The CSO have published the Q4 2020 update of the non-financial Institutional Sector Accounts.  While there may be some revisions when the annual accounts are published later in the year, the quarterly data can be used to get preliminary figures for the year as a whole. 

Here’s the household sector current account for the past four years as well as the annual change in 2020.

Household Sector Current Account 2017-2020

The bottom section tells us that the disposable income of the household sector rose by just over four per cent in 2020.  The biggest reflection of the restrictions that were in place for much of the year is the nine per cent reduction in consumption expenditure.  This meant that the gross saving of the household sector almost doubled in 2020, reaching €28 billion and giving an unusually high savings rate of 23 per cent.

Although it looks like there was relatively serene progression in the aggregate income of the household sector in 2020 there was obviously a lot going on above that.  In overall terms, the compensation of employees received by the household sector was essentially flat in 2020 showing a fall of just –0.3 per cent.  This, however, masks a difference across sectors with all sectors bar the government sector showing a fall in 2020.

Compensation of employees from the government sector rose a further eight per cent in 2020 to almost reach €25 billion.  The increase since 2015 is almost 30 per cent.

GG CoE Paid 2006-2020

The nearly €2 billion rise in compensation of employees from the government sector almost fully offset the reductions elsewhere.  And those reductions would have been even larger were it not for the various wage subsidy schemes introduced which provided a subsidy to firms to support their wage payments to staff.

A little further down, we see that social benefits received by the household sector (excluding benefits in kind) from the government sector jumped from €24 billion in 2019 to €30 billion in 2020.  This increase was primarily driven by the Pandemic Unemployment Payment (PUP) though even the absence of this scheme there would have been an increase in these transfer as most, but not all, of the people impact would have been eligible for existing income supports.

And those are the most significant changes in the table.  It looks like there’s something going on with the FISIM adjustment but it seems to largely net out across interest paid and interest received.  There has been a reduction in contributions to private pensions in recent years. Social contributions paid to the financial sector have gone from €7.3 billion in 2018 to €5.9 billion in 2020.

This is perhaps surprising given the general increase in savings behaviour in 2020.  However, there was still a greater amount contributed to private pensions funds then paid out in benefits from those funds – the adjustment for pension entitlements in the second-last row was +€1.4 billion.

We can turn to the capital account to see what happened to see how the rest of the savings were used.

Household Sector Capital Accounts 2017-2020

Gross capital formation by the household sector was down in 2020, falling from €7.2 billion in 2019 to €6.8 billion in 2020.  This is probably not a surprise given that the main capital expense of the household sector is housing (purchases of new units and refurbishments of existing dwellings).  Restrictions would have reduced output in the construction sector.

The bottom line shows that most of the savings was carried through the capital account.  Net lending by the household sector exceeded €20 billion in 2020.  This means that most of the additional saving made its way to the financial accounts: higher deposits, lower loans and maybe increased investment in other financial assets but higher deposits and lower loans are likely to dominate.

To conclude here is the savings minus investment positions of the household and government sectors.  The figures shown are four-quarter moving sums.

Gross Savings minus Investment for Gov and HH 1999-2020

The turmoil of 2020 is clearly seen but is also noticeable is that as the year progressed the [S – I] deficit of the government sector was growing faster than the [S – I] surplus of the household sector.  The overall position across the two sector was still positive: if necessary the deficit of the government could be funded from domestic sources. 

Maybe the next 12 months will see an erosion of that savings behaviour possibly to fund a consumption boom which, in turn, will boost the government’s position.  It doesn’t even need the accumulated savings to be unleashed, just a reduction in the savings rate.

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