Wednesday, October 6, 2021

Household savings and the changes in aggregate income during the pandemic

The CSO have published the Q2 2021 update of the Non-Financial Institutional Sector Accounts. Here we will focus on the household sector (which in the quarterly ISAs also includes non-profit institutions serving households). 

A lot of attention has obviously gone on the spikes we have seen in the household saving rate during the pandemic.  In the first half of 2018 and 2019 the household savings rate was around 12 per cent.  For the equivalent periods of 2020 and 2021 it was around 30 per cent.  This is shown in the bottom line of the table below with shows the outcomes for the first six months of the past four years.

Household Sector Current Account H1 2018-2021

While a fall in consumption opportunities undoubtedly played a role in the rise in household savings the impact of changes income has been as important.  A couple of lines up from Gross Savings is the line giving Gross Disposable Income. In the national accounts methodology used here, “gross” means before depreciation of fixed assets.

Gross Disposable Income is a measure of national income after taxes and transfers.  Looking across this for the four years shows no signs of a pandemic the public health response to which saw large swathes of the economy shut down by government decree. 

Indeed, the figure for the first half of 2021 is around €8 billion higher than for the equivalent period of 2019.  This allied to the €4 billion reduction in consumption is what gives rise to the €12 billion increase in savings.

A key reason for the lack of a pandemic effect in aggregate household income is that the government stepped in to support incomes.  One element of this is visible in the household sector current account with the row for social benefits (other than benefits in kind) received from the government sector.  These were €11.8 billion in H1 2019 but were €17.2 billion in the first half of 2021, primarily driven by the Pandemic Unemployment Payment.

There is some evidence of the pandemic shock in compensation of employees received which H1 2020 showing annual falls for wages received from non-financial corporates and other households.  However, these drops are modest relative to the scale of the sectors that were shut down. 

A key reason for this is that the wages paid by companies were supported by subsidy schemes.  In the household accounts, the money is paid from firms to households but the firms first received it from the government sector.

Figures for the non-financial corporate sector show that the sector received €350 million of other subsidies on production in the first half of 2019 (a lot of which would be public service obligation subsidies to commercial semi-states and other companies) to receiving €2.7 billion in the first half of 2021. 

The increase was due to the various pandemic-related wage subsidy schemes that have been introduced.  In the absence of these there would have been a much more pronounced fall in the wages received by the household sector from non-financial corporates.

The top line above is Gross Domestic Product.  For the household sector this is the value added of the self employed, including agriculture and the rents from the provision of housing services.  These rents include those from buy-to-lets but are mainly the imputed rents of owner-occupiers for the housing services that they provide to themselves.  The GDP of the household sector

The imputed rent of owner-occupiers counts as income but as they also consume the associated housing services the imputed rent is netted out through final consumption expenditure and has no impact of the savings rate. 

Monday, October 4, 2021

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).

Royalty Imports to All Countries 2008-2021

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. 

Royalty Imports by Region 2011-2021

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?