The past is a foreign country

We all like looking to the past for evidence and pointers to help understand the present.  A deterioration in the current of the balance of payments has been such a pointer for instances of economic mismanagement in Ireland. 

Following Honohan and Walsh (2002) we can see that in the last fifty years the Irish economy has gone through two loops of:

1. Imbalances building up via that deterioration of the current account,
2. Weaknesses being exposed and resulting in a shooting up of the unemployment rate,
3. A period of painful readjustment before,
4. Recoveries took hold.

These loops from 1975 to 1998 and from 2003 to 2018 are shown below using the unemployment rate (vertical axis) and the current account (horizontal axis).

The thing is though, these are not really useful for assessment the current position of the Irish economy.  2022 saw Ireland with an average unemployment rate of around 4.5 per cent while the surplus on the modified current account of the balance of payments (CA*) was equivalent to around 7.5 per cent of modified gross national income (GNI*). 

The economy had reached a near identical position in 2019 but then COVID19 reared its head.  Relative to the economic history of the State since its foundation, it is an unprecedented position: near full employment and large balance of payments surpluses. From a policy perspective, the unemployment rate could be a bigger constraint to achieving priorities. Sure, we should not forget the mistakes of the past, but they do things differently there.

Addendum: It is somewhat nonsensical but a further way of looking at it is to consider the sum of the unemployment rate and the current account deficit (thus a deficit is represented by a positive number).  This shows:

Again, we can see the imbalances building up after 1975 and 2003.  But the main thing is to highlight just how far 2022 is from even those starting points.  We know things can change quickly but we should also recognise where we are now is pretty much unprecedented.

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Still Waiting for US GDP to be Revised Up

We have been tracking the impact in Ireland’s national accounts of the structures of US MNCs for some time.  In recent years, many of those structures have changed leading to changes in several key metrics in Ireland such as the stock of intangible assets and the destination of outbound royalty payments. 

As a result of the changes in the destination of royalty payments we have been expecting revisions to US GDP.  See previous post here with an even earlier one here. 

The previous post goes through the impact of the changes introduced by Google and Facebook in 2020 when they ended their use of “double-irish” type structures.  We won’t repeat that detail here but will highlighted the updated position of the mismatch between the Balance of Payments figures for Ireland and the U.S.

One point we will reiterate is the changed nature of outbound royalty payments from Ireland.

Obviously the first thing to notice is the scale. These outbound payments are enormous. In the 12 months to the end of March they came to almost €140 billion.  What the chart also shows is the change in the destination of these royalties.

Up to 2020, most of the royalty payments from Ireland ended up in offshore financial centres such as Bermuda and the Cayman Islands, now the bulk of them are going to the US.  The non-US portion is still quite significant (€34 billion in the year to March) but due to suppressed data we don’t have direct insight into the destination of these. It looks like most of these payments are going to The Netherlands, Switzerland and Singapore (which would also be among the potential locations for US MNCs to locate their IP). 

Anyway our interest here is in the royalty payments from Ireland to the U.S. and these now exceed €100 billion in annual terms.

To see the mismatch (and avoid any classification issues) here are the balance of payments figures for services trade between Ireland and the US. What is shows are Eurostat figures for services imports by Ireland from the US and BEA figures for service exports from the US to Ireland. In principle these should correspond. Is that what we see? Hmmmm, no.

There is a few chart crimes going on there, most notable that the series are in different currencies, but the conversion from dollars to euro has nothing to do with the gap that has emerged since 2020 (and would actually only increase it).

We can see that Balance of Payments data on this side of the Atlantic is showing that, in 2022,  Ireland had almost $200 billion of services exports from the US.  Over on the other side of the pond, their Balance of Payments data shows that the US $85 billion of service exports to Ireland.  And as noted above, in principle these should be the same.

The chart is for all services so it cannot be a classification issue – unless the payments are accounted for by the BEA as goods exports or primary income, both of which are unlikely.

We cannot immediately assume that there is a GDP effect.  The trade could be in IP assets which, initially at least, would be GDP neutral.  There would be disinvestment (-) and exports (+) on the US side with investment (+) and imports (-) on the Irish side. 

But as might be expected given the contents of the post it is mainly a story of royalties.  Here are the royalties components from Eurostat and the BEA of the above overall services trade figures.

Mind the gap! Ireland reporting €102 billion of royalty imports from the US in Eurostat’s data becomes the US reporting just $16 billion of royalty exports to Ireland in the BEA’s data.  And as we started by looking at total services this cannot be explained by classification issues.  We have a difference of something approaching €90 billion.

For what it is worth, it can be noting that the revision to Ireland’s national accounts for 2015 (the 26% growth rate and all that) was of the order of €40 billion.  Some US commentators should perhaps be wary of skeletons in their own closets.

However, as the previous post goes through the likely GDP impact would not be the full difference shown above as a share of the royalty payments that previously went from Ireland to the like of Bermuda did subsequently flow on to the US as payments for R&D services exports.

Statements from Google and Facebook have confirmed that they are now licensing their technology directly from the US rather than offshore locations.  This should have led to a reduction in US R&D service exports and an increase in US royalty exports. 

The rise in royalty exports would be larger (reflecting the fall in profit reported in Bermuda etc.). It is possible there could be a GDP impact of $40-50 billion for 2022 – equivalent to around 0.2% of US GDP.  Not exactly headline grabbing.

Why the gap?

In part, the answer to this apparent puzzle comes down to scale. In a small economy like Ireland, the activities of companies such as Google and Facebook are relatively enormous. The Large Cases Unit (LCU) in the CSO will be in regular contact with these companies for filing updates and notice of any significant changes.  For an economy of the scale of the US, such companies are simply are not as important in and of themselves when it comes to the BEA’s production of their National and International Accounts.

In the BEA’s case they undertake “benchmark surveys” every few years of a wide number of market participants to get a deep understanding of what is going on.  Between these comprehensive “benchmark surveys” the BEA do quarterly surveys of a much smaller sample and extrapolate the data they publish from those.

The most recent benchmark survey for Transactions in Selected Services and Intellectual Property with Foreign Persons was carried out for 2017.  The data was collected in 2018 with the results published in 2019.  As it so happens, the BEA are in the process of collecting data for the latest such survey.  In this instance the benchmark year is 2022 with the data collected in 2023 and results not due until sometime in 2024.

So it looks like the significant changes implemented by US MNCs operating in Ireland fell in the middle of the gap between the BEA’s benchmark surveys that would have picked them up.  They were too early for the survey for 2017 and while they should be picked up by the ongoing survey for 2022 the results won’t be pulled together and incorporated in the BEA’s International Accounts until 2024.  It seems our wait for US GDP to be revised up will be going on for a while yet.

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Does Ireland have the lowest per capita consumption of housing in the EU?

A couple of years ago we asked “does Ireland have the lowest per capita consumption of housing in the EU15?”  As the title to this post suggests, that question can now be put in terms of the entire EU and now just the old EU15.

Here is the full data on the consumption of housing services (including water, electricity, gas and other fuels) in Eurostat’s data on Actual Individual Consumption (AIC).  Obviously there is too much here to be useful but it gives all the elements used to give the ranking in the final column.

The start point is the consumption of housing services in national currency from each country’s national accounts.  Using the exchange rate, population and a relative price index this is transformed into real expenditure per capita on which the volume index is based.

Here is Ireland’s consumption of housing services relative to the overall figure for the EU27.

Back in 2008 Ireland was pretty much at the level of the EU27 and ranked 12th of the 27 countries.  Since then Ireland’s relative consumption has fallen and the first estimates for 2022 put Ireland’s consumption of housing services at 70 per cent of the level of the EU27 and now ranked last (joint with Estonia) across the EU.

In terms of the data, the answer to the question at the top is, yes, Ireland has the lowest per capita consumption of housing services in the EU.  Why is this?

Here is the aggregate consumption of housing services in constant prices.

In line with the significant construction of new housing this rises up to 2009 and has been essentially unchanged since then.  Ireland and Luxembourg are the only EU countries that have not had growth in the per capita consumption of housing since 2008.

In 2008, Ireland’s per capita consumption of housing was almost twice that of Bulgaria. In the years since, Bulgaria has seen per capita growth of almost 130 per cent and is now around 25 per cent higher than Ireland.

That there hasn’t been growth over the last 15 years in the per capita consumption of housing services is a surprise. We haven’t built many new dwellings and the population has grown faster than the stock of housing. Census figures show that between 2011 and 2022 the housing stock grew by around six percent. Over the same period the population grew by 12 percent.

Ireland is below the level of the EU27 for many of the categories in Actual Individual Consumption.  This is in contrast to 2006 when Ireland was above the level of EU27 for almost all categories.  Some convergence might have been expected but the fall in Ireland’s relative position goes beyond that.

Ireland is significantly below the level of the EU27 for food, alcohol and tobacco but then is also one of the highest for consumption in restaurants and hotels (including pubs).  There are a number of categories where Ireland is close to but below the level of the EU27 including health, transport and communication. Ireland is higher for education as might be expected from our relatively younger population and higher participation in third-level.

For the public/private split of AIC, it can be seen that Ireland is at the level of the EU27 for government spending on individual consumption expenditure (and has been rising slightly relative to that over the past decade).

However, for the household component of real AIC per capita, Ireland is well below the level of the EU27.  Back in 2006, Ireland was 127 per cent of the level of the EU27; now this is just 84 per cent (though with a far, far higher household savings rate!)

Yes, there have been falls in a number of categories but by far the most significant is the one highlighted at the start of the post: consumption of housing services.

Communication has gone from 146 per cent of the level of the EU27 in 2006 to just 88 per cent now, but communication makes up only two per cent of AIC.  Housing on the other hand makes up 16 per cent of AIC. It is the largest of the above categories. 

15 years ago, Ireland was middle of the road for the consumption of housing services in the EU.  The convergence referred to earlier can be seen here. But rather than holding station in the middle Ireland can now be seen poking out at the bottom.

Ireland certainly has issues with housing. And the data says we have the lowest per capita consumption of housing in the EU. But is that really how we see it?

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An update on what was Ireland’s largest taxpayer

We previously identified Microsoft Ireland Research as a likely candidate for Ireland’s largest taxpayer.  Microsoft Ireland remains a very large taxpayer but may have been usurped for top billing. Here will be provide a short update on Microsoft Ireland Research’s latest accounts.

The company has seen enormous revenue growth in recent years.  Since 2017 (the first year the information is available for) turnover has pretty much quadrupled from $11.6 billion to $48.2 billion. Operating profit has grown commensurately going from $5.1 billion to $21.4 billion.

There is more details on the taxation of the company in the previous post. Here we note that the tax charged in the accounts continues to be around 12 per cent of operating profit plus interest received.

The amount of tax has also quadrupled going from nearly $630 million in 2017 to $2.6 billion in 2022.  This would make Microsoft Ireland Research alone responsible for around 10 per cent of current Corporation Tax receipts and around 2 per cent of general government revenue.

Microsoft Ireland Research’s staff count has grown at a slower pace. In 2017, the average number of persons employed during the year was 443. This rose to 524 in 2020 and reached 831 in 2022.  The total wages and salaries bill was €112.6 million (giving an average of €135,000 per person employed).  Additional social insurance, pension and share-based remuneration were also incurred.

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Ireland in the 2020 Country-by-Country Data for US MNCs

As a result of BEPS 1.0, large MNCs have been filing country-by-country reports with their home tax authority since 2016.  Using these tax authorities can publish aggregate statistics and the OECD itself has a partial database of these although it currently only goes up to 2018. For US MNCs, the IRS have now published data up to 2020.

These figures are not national accounts data and there is a number of issues with them but they are still useful. We will look at the 2020 figures published by the IRS and, in particular, the figures for Ireland. This is relevant given the very significant presence of US MNCs in Ireland.

First we will start with the payments of corporate income taxes.  Per the CbCR reports filed with the IRS the US MNCs covered paid $310 billion of corporate income taxes in 2020.  This is on a “cash basis”, i.e. net payments of tax to governments around the world. Unsurprisingly, the biggest share of these payments went to the U.S. itself.  The reporting companies made $192 billion of cash payments to corporate income taxes in the U.S.

Here are the top 25 recipients of corporate income taxes from US MNCs in the IRS CbCR data for 2020.

Across the EU, the US MNCs in the CbCR data made $35 billion of cash tax payments in 2020.  Ireland is by far the largest recipient of corporate taxes from US MNCs in the EU.  In 2020, Ireland received more corporate tax from US MNCs than the combined total for every country from Italy down in the following chart.

The nominal figures, of course, don’t tell the full story. In relative terms, $1 billion of tax payments in Ireland is very different to $1 billion of tax payments in, say, France.  Here are the corporate tax payments of US MNCs relative to the Net National Income (NNI) of each Member State.

Using NNI means we don’t have to do any adjustments for the distortions that can appear in GDP data.  All the above chart does is put the cash tax payments figures from the IRS as a percent of the net national income figures from Eurostat.  The tax payments are converted from dollars to euro using the average exchange rate for the year (1.142).

For the EU as a whole the corporate tax payments of EU MNCs are equivalent to 0.3 per cent of NNI. For Ireland the share is 5.5 per cent.  It exceeds 1.0 per cent in only one other country and the result for Luxembourg is only one-third of that for Ireland.

Putting them in per capita terms may be an easier concept to grasp.  For a population of 5 million the near €10 billion of tax payments from US MNCs is equivalent to near €2,000 per capita.  The equivalent figure for Germany is €67 while for France it is €46 with Italy at just €27.

The effective tax rates of US MNCs across the EU are shown next. In this instance, the analysis is limited to entities reporting positive profits to ensure that the effective rates are not artificially higher due to the inclusion of losses.

The effective tax rates faced by US MNCs vary from 29.5 per cent in France to 1.3 per cent in Luxembourg.  The effective rate in Ireland, 12.6 per cent, is at the lower end with eight EU countries have a lower rate in 2020.

As well as tax details, the country-by-country data also gives some insight into the substance US MNCs have around the world including employees and tangible assets.

The 1,750 or so US MNCs in the CbCR statistics had around 2.7 million employees in the EU in 2020.  Of this, the largest amounts were in Germany and France where they had 570,000 and 370,000 employees respectively.  The 172,000 employees in Ireland is the eighth-highest amount in the EU.  Of the 1,750 MNCs who filed country-by-country reports with the IRS, 660 included Ireland as a jurisdiction in which they operated.

The get an insight into the relative importance of employment in US MNCs in each Member State we can combine the IRS data above with total employment figures from Eurostat.  This shows that employment in US MNCs is just over one per cent of total employment in Germany and France.  For Ireland, the equivalent share is 7.5 per cent, the highest in the EU.  Next highest is Luxembourg where the 15,000 employees they have there is just over five per cent of total employment.

The second indicator of substance in the IRS data is the value of tangible assets, other than cash and cash equivalents, that US MNCs have in each country.  This assets would include factories, buildings, plant, equipment etc.

In 2020, US MNCs valued the tangible assets of their Irish entities at $110 billion.  This was the highest in the EU and is more than France, Italy and Spain combined.

Indeed, the tangible assets that US MNCs report for Ireland is one of the highest in the world.  The reporting groups indicated that they had a total of $8.6 trillion in tangible assets of which $6.2 trillion, 72 per cent, were located in the U.S. itself.  The following charts shows the highest jurisdictions excluding the U.S.

The amount of tangible assets reported for Ireland is the fourth-highest in the world, lower only than the U.S., the U.K. and Canada.  Indeed, the standalone figure for Ireland is more than twice the combined figure for the continent of Africa as a whole. 

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The last insight into Apple’s use of capital allowances?

As is well known Apple revised its international structure in 2015.  Since then we have been tracking the impact of this via the annual publication of the consolidated accounts for the group of subsidiaries headed by Apple’s central international holding subsidiary, Apple Operations International (AOI).

• AOI’s 2018 Accounts: Some insight into Apple’s use of capital allowances
• AOI’s 2019 Accounts: Further insight into Apple’s use of capital allowances
• AOI’s 2020 Accounts: The latest insight into Apple’s use of capital allowances
• AOI’s 2021 Accounts: The next insight into Apple’s use of capital allowances

As will be set out here, we may now have reached the last insight into Apple’s use of capital allowances.  The full picture is provided across by combining the previous posts as there are some elements in each that are not repeated here.

Where in the world is AOI?

One we will repeat is the location of AOI. As noted in the opening paragraph, the analysis deals with the consolidated accounts for the group of subsidiaries headed by AOI.  The accounts show that this group contains close to 80 subsidiaries, across Europe, Africa, the Middle East, Asia and Oceania. The accounts essentially cover all of Apple’s activities outside the Americas.

AOI is sometimes referred to as Apple’s main Irish subsidiary. AOI is at the top of the group of Apple’s subsidiaries outside the Americas.  And AOI is a company that was established in Ireland. But that does not mean that it is resident here.

We know from the 2012 US Senate investigation that under Apple’s previous structure, that though AOI’s functions were all carried out in the US, AOI itself was “stateless”; it did not have a tax residency.  Apple achieved this because AOI was not registered in the US where it was managed and controlled, and it was not managed and controlled in Ireland where it was registered.

When Apple revised it’s structure it eliminated AOI’s stateless nature.  Document leaks subsequently shows that AOI became a resident of Jersey in the Channel Island. See reporting here.  Jersey has a corporate income tax.  But the rate of that tax is zero percent.  Obviously, this is from a few years ago. But there has been nothing to indicate that AOI residency has changed since.

We know that Ireland is central to Apple’s current structure, but this happens in subsidiaries beneath AOI and not necessarily in AOI itself. AOI is the holding company for those, and, as noted, other worldwide subsidiaries.  The accounts show that the group headed by AOI had an average of 56,000 employees in 2022.  We would have to remove the first digit to get close to the number of those who are in Ireland.  So, all of the subsequent analysis refers to the overall performance of AOI and the group of nearly 80 worldwide subsidiaries beneath it.

How is the AOI group doing?

The AOI group is hugely profitable.  This is due to the cost-share agreement the group has with the US parent, Apple Inc, which grants the AOI group the rights to sell Apple’s products in markets outside the Americas.  The AOI groups gets this right by paying around half of Apple’s total R&D expense. In 2022, the AOI group had an R&D expense of $15.5bn most of which would have been paid to Apple Inc. which oversees the R&D the bulk of which is carried out in the US.

From that cost-share payment, the AOI group had sales of over $220 billion and generated an operating profit of close to $70 billion.  There is no way Apple Inc. would enter into a similar arrangement with a third party. 

How much tax does the AOI group pay?

We can see that the provision for income taxes has been around $11.0 to $11.5 billion in each of the past two years.  To repeat another point from the earlier posts, a company making a provision for taxes is not the same as a company paying taxes.  We can get a better indication of how much tax the AOI group pays from the cash flow statement.

In 2022, the AOI group made $7.7 billion of cash tax payments in the countries in which it operated.  That is lower than the provision for income taxes in the income statement but is a huge increase on the $1.4 billion of cash tax payments made in 2017. [We do not have access to AOI’s accounts for earlier years.]

Why are cash tax payments lower than the tax provision?

The earlier posts have gone through this. It is due to the AOI group having large amounts of deferred tax assets.  A significant amount of the tax provision does not result in a charge on cash it results in a charge on the deferred tax asset.

In the above, we can deferred tax assets reducing from $25.7 billion at the end of 2016 to $5.0 billion at the of 2022.

How much tax does the AOI group pay in Ireland?

As with the previous posts, there is no direct way of establishing this from the presentation of the accounts.  The likelihood is a lot but firm conclusions are difficult to reach.  Here is the tax reconciliation statement from the consolidated accounts for the AOI group.

First, we note that the reference rate used is 12.5 per cent, which suggests that AOI is the main tax jurisdiction for the group. But it is not the only one.  The largest item in this table is now the “difference in effective tax rates on overseas earnings”.  It is not clear how significant it is but in the latest accounts this item has become “effect of different tax rates”.  The $2,335m figure for 2021 is used with both descriptions.

This description shown above would imply that a significant portion of the group’s profit is taxed at higher rates in other countries, though this depends on the interpretation of “overseas earnings” (words which are now dropped).

For 2022, the adjustment was $3.3 billion above whatever would be in the baseline tax charge at the 12.5 per cent reference rate.  If the effective tax rate on the relevant was 25 per cent then there would have been around $6.5 billion of tax on $25 billion of profit.  But that depends on the actual effective tax rate on those profits.

As we did last year we can pick up this thread in the overall accounts for Apple in its 10K filing with the SEC.  Here is the breakdown of the company’s entire tax provision in its latest annual report.

In broad terms, the foreign (i.e. non-US) pre-tax earnings and the provision for foreign taxes align with those we see in the consolidated statements of the AOI group.  In the 10K accounts, foreign would also include activities in countries in the Americas excluding the US, whereas the AOI group covers Apple’s activities outside the Americas.

Anyway, reflecting what is in the AOI group’s accounts, we can see a large increase in the provision for foreign taxes in Apple’s overall taxes.  It rose from $6.5 billion in 2020 to around $12 billion in each of the last two years.  And this corresponds with the big jump in the adjustment for the “difference in effective tax rates on overseas earnings” or “the effect of different rates” in the AOI group’s accounts.

Something has happened in recent years that has led to a big jump in tax somewhere.  Looking at the 10K statement we can see that this is not the US: the increase shows there as an increase in the provision for foreign taxes.  While looking at the accounts for the AOI group suggests that this is not Ireland: the increase shows there as an increase in tax overseas earnings, assuming that “overseas” is outside Ireland.  We can really only be sure that it is outside the US.  We do not know what “overseas” means in the AOI group’s accounts.  And whatever has caused this seems to have gone under the radar.

We are now left with about $5 billion of the provision for taxes in the AOI group’s accounts that could be in Ireland.

What amount capital allowances are left?

The previous posts go through the 2015 acquisition of a now Irish-resident subsidiary in the AOI group that acquired the license to sell Apple’s products outside the Americas.  This huge acquisition, probably not far from $240 billion, resulted in a huge amount of expenditure that became eligible as a tax deduction. 

Under Section 291A of the Tax Consolidated Act this is achieved via capital allowances – the amount of the capital expenditure that can be deducted each year when taxable income is being determined.

A deferred tax asset of $30 billion ($240 billion of capital allowances multiplied by 12.5 per cent) was put on the balance sheet of a company in the AOI group when this transaction occurred.  Each year a large amount of the AOI group’s tax provision is charged against this deferred tax asset.  We can see the evolution of this in the following table.

We can’t go back to when the transaction occurred at the start of 2015, but we can see that at the end of the 2016 financial year, the AOI group had $22.6 billion of deferred tax assets from “Intra-Group Transactions” (which would describe one subsidiary buying a license from another subsidiary).

We can see that $4.4 billion were further used in 2017 and 2018 with $3.3 billion used in the four years since.  All told, the value of the capital allowances has declined from $30 billion with just $812 million remaining by the end of the 2022 financial year.  As this corresponds to around one-quarter of the recent annual usage, it will be the case that income generated in the first quarter of the 2023 financial year will fully exhaust the capital allowances.  This will expose all of the profit from the license held in Ireland to tax.

And we can already see evidence of this in Irish tax receipts.  Companies pay their Corporation Tax via preliminary payments made in months six and 11 of their financial year with their full tax return due nine months after the year ends.  For large companies these preliminary payments should correspond to 90 per cent of the final tax liability.  A company with a September year end will make its first preliminary payment in March with the second following in August.

Here are the month Corporation Tax receipts in March for recent years:

Prior to 2022, March was not a significant month for Corporation Tax revenues.  This has changed in the last two years and a link with Apple seems likely.  The increase in 2022 could be linked to the increase in the AOI group’s profits, with the profit of the Irish licensing subsidiary perhaps rising significantly above that which could be offset by capital allowances with the further increase in 2023 perhaps due to the exhaustion of those capital allowances now taking place. 

To date, there has been no evidence in Ireland of a significant Apple restructure. Absent that, we can expect to see strong August receipts in due course.  It is also possible we might see some changes in Ireland’s national accounts – due to the exhaustion of the capital allowances – and that is something we may return to.

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What to do with €30 billion of savings?

To paraphrase a former Taoiseach, as a community we are living away within our means. This can be represented using the recently published Q4 2022 update of the Institutional Sector Accounts.  Here we show gross savings minus gross capital formation [S-I] for the government and household sectors – this is equivalent to a sector’s contribution to the current account of the balance of payments. Here they are on a four-quarter sum basis:

There was an expectation that household savings would decline as the pandemic eased but savings remain significantly above pre-pandemic levels.  For the government sector there has been an improvement due to the reduction of Covid-related income and business supports and the government’s position has been further boosted by soaring Corporation Tax receipts.

Although, the quarterly figures are only preliminary, summing over the four quarters of 2022 shows the household sector to have had a surplus of savings over investment of €20.5 billion with the government showing a surplus of €9.5 billion on the same measure.  Combined they sum to €30 billion.

The evolution of the line in the above chart, as well as the composition between household and government sectors is as good a starting point as any to discuss the performance of the economy since the year 2000.  But reaching an unprecedented position of +€30 billion is as worthy of examination as the developments that led to the deterioration to –€20 billion during the credit bubble.

Ireland’s Savings in Comparative Terms

But where do we stand relative to other countries? Here is a set of EU countries selected as those which have the necessary data available from Eurostat. The data are scaled by Net National Income which mitigates, but doesn’t completely eliminate, the need to adjust the figures for Ireland. Apart from the calculations done to get the [S-I] figures, no adjustment is made to the Eurostat data.

We see that Ireland is also high in comparative terms with other countries, though for the household sector there is a relatively small difference to Germany, Czechia, Sweden, The Netherlands and France.  With most EU countries running government deficits it is Ireland’s government surplus that leads to most of the gap. Still, for the household sector one can query whether we are at a sufficiently mature stage to be savings on a par with households in Sweden, The Netherlands and Germany.

The post is titled “what to do with €30 billion of savings” but we do know what has been done with it.  Households have put most of their surplus on deposit and the government has started contributing to a National Surplus Reserve Fund. 

The increase in household sector deposits has been noted for sometime.  Irish households have been deleveraging for around 15 years now. Post-2008 this was mainly via a reduction in debts. This has now switched to being an increase in deposits.

In the financial accounts of the Central Bank of Ireland, the household sector had just over €150 billion of currency and deposit assets at the end of 2019.  By the end of 2021 this had increased to €185 billion with a further rise to €195 billion by the third quarter of 2022.

This increase in household sector deposits in Ireland has been one of the fastest in the EU14.

However, the level does not stand out, whether using a ratio of deposits to income or using a balance sheet measures such as a ratio of deposits to loans.

While there certainly is some interest in what households do with the near €200 billion of currency and deposits assets they now have (and knowing more about the distribution of those would be a useful step in that regard), a more pertinent issue is probably what happens to savings behaviour going forward. Will household saving continue at an elevated level? Should the government be running a budget surplus?

Macroeconomic Constraints: Real and Financial

The economy faces constraints but these are more real (resources) than financial (income).  The unemployment rate is below five percent while pressures in housing are well documented. But the domestic economy is running a very large balance of payments surplus – perhaps only second to Norway in European terms. Norway is benefitting from higher energy prices; Ireland from booming Corporation Tax revenues.

But in Ireland, it seems it is the household sector that is saving the largesse not the government sector.  Norway (population 5 million) added €100 billion to its sovereign wealth fund last year.

In response to the surge in inflation, the government introduced a large set of compensatory measures.  Some of these were targeted where they were needed but many were universal and seem only to have added to the burgeoning deposits of certain households.

If these measures are not repeated in 2023 then we may see some reduction in household savings. If not offset by spending elsewhere, this would see the government surplus rise (also aided by first quarter Corporation Tax receipts which have been particularly strong).

But what level of budget surplus is politically sustainable?  Should the government be increasing taxes aimed at households with elevated savings rates to recapture the benefits of the soaring Corporation Tax receipts or to ensure that those savings aren’t released into an economy already operating at close to capacity?  The need for increased housing supply is undeniable but should activity in other sectors be squeezed to try and create room for more construction activity? No solutions are offered here as we are merely pointing to the trade-offs faced.

The unusual position of the economy can be illustrated with a chart of the unemployment rate (representing an internal resource imbalance) and the current account of the balance of payments (representing an external income imbalance).  The two macroeconomic loops the Irish economy has experienced in the last 50 years are also highlighted (1975 to 1998 and 2003 to 2019).

The imbalances experienced by the Irish economy have typically been in the top left quadrant: high unemployment and a large balance of payments deficit.  The economy is now in the opposite position: low unemployment and a large balance of payments surplus. 

The economy certainly has the income capacity to increases spending but it does not seem as if there is the resource capacity to do so.  Higher spending may push up domestic inflationary pressures which heretofore has largely been driven by external factors. 

There is also the sustainability of the income.  In the textbook descriptions, taxation is viewed as a withdrawal from the circular flow of income that would not be considered, at least directly, to lead to an increase in national income. 

Ireland’s Corporation Tax revenues do not fit with the textbook analysis.  Four-fifths is paid by foreign-owned companies and the bulk of that arises from (U.S.) companies that have a presence in Ireland to service international markets.  Corporation Tax is an injection to national income and that injection is reaching ever higher levels.  In the 12 months to the end of March, Corporation Tax receipts reached €24 billion.

Conclusion

Ireland is in a position of wanting to do things (such as build houses) and having the income to finance this activity but not the resource capacity to undertake it. With the unemployment rate close to four percent an increase in spending would likely lead to a rise in inflation.

We could view building houses as something we want to do all the time – which we should – and not just when Corporation Tax receipts are booming. To that end we could increase taxes to provide a sustainable revenue source to fund public capital spending on housing.  This could also create the resource space in the economy to accommodate that activity.

However, that is an economic argument not a political one.  Tax increases while the government is running surpluses are unlikely to get much traction.  But political myopia to the trade-offs we face does not mean that they do not exist. We should have something to show for the ongoing boost to national income: but that something should not be a surge in domestic inflation.

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Do the Collisons have more wealth than half the population?

Around a month ago, Oxfam issued its annual missive on wealth inequality.  Each year it is designed to generate headlines and this year Oxfam Ireland did so by targeting the Collison brothers, John and Patrick.  The headline of the press release was:

 

A number of media outlets gave prominence to the claim (such as here, here, here, here, here, here, and here).  From Oxfam’s perspective this is achieving their objective and they certainly have no reason to change their approach.

The estimates of the wealth of individuals are taken from the Forbes Billionaires list. For the end of 2022, Forbes estimated that the net wealth of each of the Collison brothers was $9.5 billion.  This corresponds to the €15 billion figure in the headline.

There are a variety of sources that give estimates of the population-wide distribution of net wealth in Ireland.  In their recent reports Oxfam have used the estimates from the Credit Suisse Global Wealth Report. 

For 2021, the aggregate net wealth of Ireland’s adult population of 3.66 million adults aged over 20 is put at $920 billion (Table 2.2, page 110).  The wealth share of the bottom 50 percent is estimated to be 1.2 percent (Table 4.5, page 140).  Fairly straightforward arithmetic tells us that $11 billion is the estimated net wealth of the bottom 50 percent.  It also seems straightforward that the headline is correct.

But let’s look at the wealth estimates in a little more detail. First, by decile:

We can see that while the total for the bottom 50 percent is as Oxfam have stated, the result in very much dependent on the negative wealth share of the first decile.  Indeed, we get the somewhat contradictory outcome that although the Collison’s estimated net wealth is greater than the bottom 50 percent, it is significantly less than the net wealth of the those in the fifth decile alone (those between 40 percent and 50 percent of the wealth distribution).  For the aggregate total for the bottom 50 percent this wealth of the fifth decile is offset by the negative net wealth of the first decile.

While we might typically characterise the bottom 10 percent of the wealth distribution as the “poorest” this may not necessarily be the best descriptor.  Those with a negative net wealth have liabilities that exceed their assets.  It is likely that this is the result of borrowing used to acquire assets or borrowing that will help acquire assets in the future. 

Someone who has taken out loans to help them through third-level education may have a negative net wealth.  Someone who has taken out a loan to help start a business may have a negative net wealth.  A homeowner with a mortgage may have a negative net wealth if the value of the property drops below the amount owed on the mortgage.  In time, we would expect many in such circumstances to move up the wealth distribution.

Indeed, this would have happened to many homeowners who found themselves in negative equity following the 2008 crash.  And it appears that the estimation techniques used in the Credit Suisse reports have not fully factored in the reduction in negative equity of Irish homeowners.

For 2013, the Credit Suisse report puts the wealth share of the bottom 10 percent in Ireland at –3.5 percent. This was close to the nadir for house prices, but as shown above for 2021, the wealth share of the bottom 10 percent is only estimated to have improved to –2.8 percent in the Credit Suisse reports.

An alternative source of wealth distribution data for Ireland is the Household Finance and Consumption Survey (HFCS) undertaken by the CSO.  This actually is where the –3.5 percent net wealth share for the bottom decile in Ireland for 2013 comes from.  But the latest HFSC (for 2020) shows that the wealth share of the bottom 10 percent had increased to –0.6 percent.  In the 2018 HFCS, the CSO discussed the reasons for this:

In 2018, 8.0% of households in the first net wealth decile were owner occupied, compared to almost 80% in 2013. This large change is due to the increase in residential property prices over this time and the consequent movement of people out of negative equity. In 2013, 31.9% of all HMRs owned with a mortgage were in negative equity, whereas the 2018 rate is 4.1%. In 2013, just over three in four (75.8%) households in the bottom wealth decile were in negative equity, compared to 5.8% in 2018.

For 2020, the CSO estimate that the wealth share of the bottom 50 percent was +7.8 percent. Using this would give a very different result compared to the +1.2 percent used to give Oxfam its headline.  Per estimates from the CSO, the net wealth of the bottom 50 percent of the wealth distribution in Ireland is many multiple times the net wealth of the Collison brothers.

In the press release, Oxfam use the soundbite that “the rich are getting richer while the poor are getting even poorer” and also exhorts that “the very existence of billionaires while out-of-control inequality rises, is damning proof of policy failure.”

The wealth figures for the Collison brothers is based on the assumption that they each retain a 10 percent stake in the online payments firm they founded, Stripe.  In a 2020 funding round, investors provided $600 million to Stripe and in return received 0.63 percent of the company.  This gives a value of $95 billion for the overall company and the $9.5 billion figure used for respective net wealth of the Collison brothers.  Recent estimates suggest the value of the company has declined to around $60 billion – still a huge sum.

That the Collisons have set up a business that is valued at tens of billions has made no one poorer.  Indeed, Stripe has yet to even make a profit. People have collected more in payments from the company (such as wages etc.) than the company has generated in revenue.  Reporting on a recent note to investors Bloomberg said:

The payments giant forecast adjusted earnings before interest, taxes, depreciation and amortization of $100 million this year, according to people familiar with the matter. That compares with a loss of about $80 million in 2022, when Stripe processed $800 billion, the people said, asking not to be identified discussing internal financial information.

Although loss-making in 2020, Stripe was valued at close to $100 billion by investors because of the expectation it would make profits in the future.  No one is poorer now due to profits that Stripe might make in the future.  And even if the profit is $100 million in 2023, it shows that these expectations still have a long way to go. It will be a success if the Collisons can achieve it.

The role of expectations is significant in the wealth valuations of those who top various rich lists.  A prominent name on such lists is Jeff Bezos.  Bezos maintains an ownership of around 10 percent in Amazon, the online retailing company he founded.  Amazon’s market capitalisation hit $1 trillion for the first time in early 2020.  This pushed Bezos to top of the rich lists. 

But as with the Collisons much of this was based on expectations.  In the 20 years to the end of 2019, Amazon had earned a cumulative net profit of $30 billion. Not per annum, in total.  Jeff Bezos will have received some of this $30 billion in dividends over the years but it would have been an insignificant contributor, in relative terms of course, to the factors that pushed his net wealth to near $200 billion in 2021.

The key factor was further increases in Amazon’s share price.  By the middle of 2021, Amazon’s market capitalisation was $1.9 trillion.  Bezos’s 10 percent stake gets us the $200 billion headlines.  Of course, there has been a bit of a change in expectations in the interim and now Amazon’s market capitalisation is around $950 billion – a reduction of $1 trillion.  This reduction is greater than Credit Suisse’s estimate of the net wealth of the entire Irish population ($920 billion).

If Jeff Bezos’s wealth has fallen by $100 billion (10% of $1 trillion) who has benefitted from it? If the rich are getting poorer are the poorer getting richer?  Of course, it is nonsense to look for such transfers.  Jeff Bezo’s wealth has fallen because the expectation of the profits Amazon might make in the future has fallen.

It is typical to talk of “wealth accumulation” when referring to those at the top of the wealth distribution.  But while it is certain that neither Jeff Bezos or the Collison brothers are stuck for money it is not the case that they have accumulated the vast fortunes that have pushed them to the top of the global and Irish rich lists (can we still include them in Irish rich lists if they no longer live here?).  Their wealth is driven by the valuations other people put on the companies they have founded.

So, do the Collisons have more wealth than half the population? Errmm, No.  While supporting figures can be found in the Credit Suisse Wealth Report, estimates from the CSO tell us the claim is well wide of the mark.  And is the Collisons founding of a company that is valued at $60 billion “a damning proof of policy failure”? Again, no. But their doing it is a cheap way for others to get headlines.

This is not say there aren’t issues with inequality, there certainly are and Oxfam is absolutely correct to draw attention to world’s poorest.  But, as noted elsewhere,  the living conditions of the world’s poorest are not affected by whether the stock market valuation of Amazon is $1,900 billion or $900 billion, or whether a funding round for Stripe values it at $60 billion or $95 billion. While good for headlines in the media, the rich list valuations should not be the object of our outrage.

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