Wednesday, May 18, 2022

Ireland’s Burgeoning Current Account Surplus and the ‘Statistical Discrepancy’ in the National Accounts

The current account of the balance of payments is an important macroeconomic indicator.  As with many of Ireland’s macroeconomic statistics the underlying picture is distorted by the activities of MNCs.  The modified current account, CA*, is an attempt to overcome this and the CSO will publish the 2021 estimate over the coming weeks.

As with last year, we can look to the sector accounts to try and get a preliminary perspective on where the current account might be going.  Again, at this stage we will limit the analysis to the household and government sectors are these are the least impacted by the MNC distortions but have seen some significant pandemic-related changes in recent years.

Gross Savings minus Investment for Gov and HH 1999-2021

Over the twenty years shown, this paints a picture we are pretty familiar with.  More recently, the household sector has been running a large surplus as savings soared.  On the other hand the government has seen large deficits as spending increased in response to the pandemic.  The chart shows gross savings (income not used for consumption) minus investment (capital formation). 

The preliminary figures in the quarterly sector accounts are that for 2021 the combined household plus government sectors had a surplus of savings over investment of €14.6 billion.  This will contribute to a significant current account surplus for 2021.

For 2020, the equivalent figure for the two sectors was a surplus of €8.7 billion.  However, when the contribution of the other sectors of the economy (the corporate sectors) were added, the estimate of the modified current account for 2020 was €24.0 billion.

As was considered here after the results were published this seemed a bit excessive.  There is no doubt that Ireland is running a large current account surplus, but one this is equivalent to 11.5 per cent of national income?

We can use the 2020 Institutional Sector Accounts to get some insights into the sources of this surplus.

Gross Savings minus Investment for Domestic Sectors 2013-2020

Obviously 2020 was a tumultuous year but the increased deficit of the government sector was offset by the surplus of the household sector.  Given what was going on the changes for the domestic corporate sectors both non-financial and financial are relatively modest. 

In this chart, the category for foreign corporations/redomiciled PLCs is a residual that makes the breakout by sector consistent with the estimate of the modified current account.  Although positive, the contribution of this element to the current account fell in 2020 so doesn’t seem to tie in with efforts to explain a burgeoning current account surplus.

What may be worth looking at is the light grey segments of the bars.  This is the “not sectorised” part of the current account.  As set out here, this item arises in Ireland’s national accounts due to the discrepancy that typically exists between the income and expenditure estimates of GDP produced by the CSO.  The official estimate of Ireland’s GDP is essentially the average of the two approaches.  If the figures are close to each other this discrepancy will be small.  However, it is perhaps not a surprise that it can be large – and volatile.

The following table shows the estimates of GDP from the income and expenditure approaches for 2015 to 2020.  Start at the top of the table for the income approach (wages plus profit plus net product taxes).  And go from the bottom of the table for the expenditure approach (C + I + G + X – M).  The official GDP estimate is the midpoint of the two.

Income and Expenditure Approaches to GDP

As can be seen, for 2020, the income approach gave a GDP estimate of €369.7 billion while that for the expenditure approach was higher at €376.1 billion.  This €6.4 billion difference is resolved by a €3.2 billion “statistical discrepancy” on either side.

This position was the reverse of 2019 when the estimate of the income approach exceeded the estimate from the expenditure approach.  In overall terms, the income estimate went from being €4.0 billion more than the expenditure estimate in 2020 to being €6.4 billion less than it in 2020. All told, this resulted in a €10.4 billion swing in the impact of the “statistical discrepancy” between the two years.

In most instances, given the scale of the figures involved, the statistical discrepancy is not a significant factor.  However, as we work down the accounts and get to things like the current account then it can be significant relevant to the size of those outcomes.  And if we go further again and looked at a sectoral breakdown of the current account then these changes are certainly significant.  In the previous chart, the change in the contribution of “not sectorised” to the current account from 2019 to 2010 was the €10.4 billion referred to above.

Just because something is “not sectorised” doesn’t mean that it doesn’t exist; it’s just that the figures don’t give any insight into what it actually is.  There is some reason why the 2020 growth of the expenditure estimate (6.1 per cent) was much stronger.  It could be that there was an underestimate in 2019 and this is something that the statistical discrepancy allows for.

Or maybe there was something missing from the income approach estimate for 2020 that dragged down its growth rate (3.1 per cent).  Again, this is something that the statistical discrepancy allows for.

Of course, if it was known what was causing the divergence between the figures it would just be included.  The statistical discrepancy arises because it is not known what is causing it.  Have we any reason to put more weight on the income or expenditure estimates of GDP? Not from this remove at any rate.

What it does do is give pause for thought where there are references to a current account surplus of close to one-eighth of national income.  For sure, there is a current account surplus and it does give scope for additional spending (by who?) but maybe we should be looking at average over a number of years rather than being fixated on the estimate for any one year. 

Over the six years shown in the table above, the annual average for difference between the GDP estimates from the income and expenditure approaches is less than €300 million, or pretty much nothing in the context of a GDP number that now exceeds €400 billion. 

This may give some credence to a view that there is nothing systematic going on.  However, it should be noted that the preliminary 2021 figures in the quarterly national accounts show a statistical discrepancy of a similar magnitude and direction to 2020.

Gross Savings minus Investment for Not Sectorised 2005-2021

So, what we have seen for the household and government sectors and not sectorised all point to another large CA* estimate in the forthcoming release.  Of course, these are preliminary figures and may be revised when the full National Income and Expenditure results are published.  But if measurement issues aren’t enough to dispel any complacency, don’t forget the lurking impact that corporation tax revenues are having on the current account.

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