Wednesday, November 3, 2021

Is something mucking up the modified current account?

The current account of the balance of payments is an important indicator of imbalances in an economy.  The historical estimates of Ireland’s current account show significant deteriorations in the late-1970s and mid-2000s which were followed be periods when real growth turned negative (the shaded regions).

Current Account 1937-2020

The concern with the latest estimates of Ireland’s current account is not that it shows deficits that are too large but of surpluses that are too large.  When published back in the summer the modified current account balance for 2020 was put at 11.5 per cent of GNI*, with comparable surpluses only recorded for the period of The Emergency (WWII to the rest of the world) in the early 1940s.

And the large surplus in the modified current account wasn’t just something that emerged with the COVID pandemic it is something that has been growing over recent years.

We can examine some of the sectoral developments underpinning the current account with the 2020 Institutional Sector Accounts which have been published by the CSO.  We will focus on the modified current account which strips out the impact of a number of globalisation effects (such as IP transfers, aircraft leasing and redomiciled PLCs). 

Some of the extra breakdowns provided by the CSO are useful in examining the improvement in the current account since 2013.  Here is a breakdown of savings minus investment by institutional sector with the combined sum representing the total economy current account.

Modified Current Account 2013-2021 by Sector

The published figures are taken for all sectors bar that for foreign corporations (financial, non-financial and redomiciled PLCs).  The figures for foreign corporation is a residual to fit with the estimates of the modified current account, CA*.

The improvement from 2013 to 2019 can be attributed to two factors: an improvement in government’s position from large deficit in 2013 to modest surpluses in 2018 and 2019 and a switch in the impact of foreign corporations on CA* (through the residual component) from being negative in 2013 to positive in recent years.  It is not clear what has driven this change.

Clearly, there were a lot of sectoral changes in 2020.  The government moved into significant deficit while the surplus of the household sector increased considerably with these two effects largely netting out (in aggregate terms).

Domestic non-financial corporations have been in a surplus position in recent years while the impact of domestic financial corporations has always been relatively small though did become negative in 2020 for the time in the series which goes back to 2013.

A current account surplus of 11.5 per cent of national income is unusually large for Ireland.  Are there unusual factors which could explain it? Perhaps.  Corporation tax revenues have been soaring recent years and most of this is paid by foreign-owned corporations.  But the period that has seen Corporation Tax revenues go from €4 billion to €12 billion has been the CA* improve from a deficit of €1 billion to a surplus of €23 billion.  And of course the impact of the Corporation Tax on the current account will be tempered to the extent it is used to fund (import) spending elsewhere.

Is there an adjustment missing for the foreign-owned sector?  Possibly.  Though what that might be cannot be ascertained from this data.  And what about domestic companies?  Some of the balance-sheet developments for this sector have been extraordinary but it is not clear these have impacted the current account.

There is little doubt that Ireland is running a balance of payments surplus, and a significant one at that.  But the latest estimate of 11.5 per cent of national income is certainly close to the upper limit of the range of plausible estimates, and possibly even above it. 

Anyway, concerns about the precise level of an extant balance of payments surplus are a long way from the concerns raised by the balance of deficits of the late 1970s and early 2000s.  No one will be going on television to say we are living a way beyond our means.  Indeed, there is scope to increase spending if the things that people might like to buy (such as new houses) were to be made available.

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