tag:blogger.com,1999:blog-28265316550421703442024-03-17T09:22:29.944+00:00Economic IncentivesShining a small light on economic reality.Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.comBlogger1009125tag:blogger.com,1999:blog-2826531655042170344.post-63853115351588140992024-01-09T14:48:00.004+00:002024-01-13T00:43:19.537+00:00Ireland’s growing population of young adults<p>Using the results of Census 2022, the CSO estimated that Ireland’s population in April 2023 of young adults aged 25 to 34 was 645,000.  If we go back five years to 2018, using Census 2016 as the benchmark, the CSO estimate that the population then of young adults aged 20 to 29 (the same cohort) was 575,000.  </p> <p>Between 2018 and 2023 the population of this cohort grew by 60,000, or a little over 10 per cent.</p> <p>Using the CSO’s estimates of the population by single year of age we can get the population of this group back to 1998 (when the youngest, now 25, would have been born).  After 1998, migration is the main driver of changes in the population of this cohort.</p> <div class="separator" style="text-align: center; clear: both;"><a href="https://drive.google.com/uc?id=1-ShKLXoM0dLkZuJ6G-KnEqbqEcTieD3x" target="_blank"><img title="Population of Cohort Aged 25 to 34 in 2023 1998-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Population of Cohort Aged 25 to 34 in 2023 1998-2023" src="https://drive.google.com/uc?id=1yVOddAx1P2T8H0bhpH8tQZDGUNujMKL2" width="548" height="343" /></a></div> <p>We can see that from 1998, the population of the cohort increased, likely as the parents of children moved to Ireland with them.  There was then a fall after the 2008 crash.  For the last ten years the size of the group has been increasing but this time, because the group is older, it is likely due to the autonomous decisions of young adults in their twenties.</p> <p>We can see this pattern if we look at the estimated annual change in the population of this cohort.</p> <p><a href="https://drive.google.com/uc?id=12WHAbFP_7hwxzVBOy5KwbHchWZWqHbyT" target="_blank"><img title="Population of Cohort Aged 25 to 34 in 2023 Annual Change 1998-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Population of Cohort Aged 25 to 34 in 2023 Annual Change 1998-2023" src="https://drive.google.com/uc?id=1W5NlsTzYrzcWDY_cNa1UB80QwFV-f_Zv" width="548" height="343" /></a></p> <p>In the years immediately preceding the pandemic, the size of this group was growing by an average of 10,000 per year.  Since then there has been volatility in the series due to COVID and, more recently, the war in Ukraine.</p> <p>Of course, these changes are the net outcome of inward and outward migration.  We don’t have published estimates of migration by single year of age but the CSO do provide migration flows by age group.  Here is what they show for people aged 15 to 24 and for those aged 25 to 44.</p> <p><a href="https://drive.google.com/uc?id=1zGbTx9KKVbjqbtfRjJI31BYpuTBBZkTh" target="_blank"><img title="Migration Flows of Population Aged 15-24 1987-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Migration Flows of Population Aged 15-24 1987-2023" src="https://drive.google.com/uc?id=1Mt7TmbjldVF0W38bbAriNQE_OTdyDWDe" width="548" height="343" /></a></p> <p><a href="https://drive.google.com/uc?id=1Xdreti_1ZovzKHJjzNZLYhpbt9Q5JEJR" target="_blank"><img title="Migration Flows of Population Aged 25-44 1987-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Migration Flows of Population Aged 25-44 1987-2023" src="https://drive.google.com/uc?id=19pCgoknyrHwEde0ywwgSSPw2Q6pApBYD" width="548" height="343" /></a></p> <p>In both cases, we that the estimated net flows in the past ten years have generally been positive.  Over the period since 1987 there is, though, a noticeable change in the age profile of migration.</p> <p>In the late 80s and early 90s, migration, which was mainly emigration, was larger in the younger age category.  In 1989, negative net migration of 15 to 24 year olds was more than twice as large as that of 25 to 44 year olds.  By the turn of the millennium there was very little emigration of 25 to 44 years olds, while immigration of this group had become much stronger.</p> <p>In the last 15 years, migration flows – both directions –  in the 25 to 44 age group have been larger than those in the 15 to 24 age group.  In the five years, pre-Covid, net migration of 25 to 44 year olds averaged +20,000 a year.  The impact of Covid and the war in Ukraine make identifying the underlying trends for the last couple of years difficult.</p> <p>To conclude here are two additional snapshots of Irish migration flows:</p> <ol> <li>Migration flows of Irish citizens (available from 2006)</li> <li>Migration flows with Australia (available from 2008)</li> </ol> <p><a href="https://drive.google.com/uc?id=17eLS2A9ZQzU7d9AWGCFYicVWxVqYFAys" target="_blank"><img title="Migration Flows of Irish Citizens 2006-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Migration Flows of Irish Citizens 2006-2023" src="https://drive.google.com/uc?id=1E8_VPuCeTimLymmKHrgDnsn7dUWpyUnX" width="548" height="343" /></a></p> <p><a href="https://drive.google.com/uc?id=1_jtlCnbBw5qxVC7qpoWCuNGVCJuE1NJu" target="_blank"><img title="Migration Flows with Australia 2008-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Migration Flows with Australia 2008-2023" src="https://drive.google.com/uc?id=1IXckE0fgP_p4IRmuWh_XXxgPAzGS0ZN1" width="548" height="343" /></a></p> <p>The estimated net migration of Irish citizens was positive from 2017 to 2021 and was negative in each of the last two years: –2.200 in 2022 and –900 in 2023.  And of the past eight years, Ireland has had one year (2022, -800) of negative net migration with Australia. </p> <p>Finally, we use the Census results to assess how Ireland’s population of young adults has changed in recent years.  From Census 2016 we have the population by nationality for the 20 to 29 age group.  We roll that forward six years for Census 2022 and get the population by citizenship for the 26 to 35 age group.</p> <p><a href="https://drive.google.com/uc?id=1eZ8dbmiPjqsko-lLzFQ2itfvBuiXJACB" target="_blank"><img title="Population of Young Adults by Citizenship 2016 and 2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Population of Young Adults by Citizenship 2016 and 2022" src="https://drive.google.com/uc?id=1ZNZndacAfCMVf4D7O50F_sC1hgP2NKR3" width="490" height="476" /></a></p> <p>There was a 76,500 increase in this cohort in the inter-censal period.  Census 2016 recorded 554,000 people aged 20 to 29, and six years later, in Census 2022, there was 630,500 people aged 26 to 35</p> <p>By country, the most significant change is for India, which shows an increase of 19,000 over the period.  No other country had a five-figure increase. The next largest increases were Brazil, Romania and Italy.  There were modest declines for Lithuania and the UK, with Poland showing the largest decline.</p> <p>Over the period we can see that the number for Ireland increased slightly over the period – unsurprising as these are the benchmark for the estimated migration flows shown above. </p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-15008731072815481782024-01-02T20:49:00.001+00:002024-01-08T12:31:32.418+00:00Just how expensive has housing become?<p><strong>Nominal House Prices</strong></p> <p>Back in October, the CSO produced <a href="https://www.cso.ie/en/releasesandpublications/ep/p-ieu50/irelandandtheeuat50/" target="_blank">a publication to mark 50 years of Ireland and the EU</a>.  Included in this was a series of <a href="https://www.cso.ie/en/releasesandpublications/ep/p-ieu50/irelandandtheeuat50/economy/residentialpropertyprices/#:~:text=Table%2012.1%3A%20Residential%20Property%20Prices" target="_blank">annual average house prices from 1970 to 2019</a>.  The values in the table are charted below and they show the average annual house price rising from €6,700 in 1970 (when converted to euro) to €295,700 in 2019.</p> <p><a href="https://drive.google.com/uc?id=1arGVxoJ4wM4Iizibzw2a4W01__rSJtfg" target="_blank"><img title="House Prices Nominal 1970-2023 CSO" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="House Prices Nominal 1970-2023 CSO" src="https://drive.google.com/uc?id=1iQWCIy2qiyu--vCA5GaCFQsjczM_lBc3" width="549" height="343" /></a></p> <p>The chart takes all the values as published by the CSO with the additional values for 2020 to 2022 taken from the CSO’s databank. The series closely follows other nominal house price series for Ireland (such as <a href="https://fred.stlouisfed.org/series/QIEN628BIS" target="_blank">Fred’s</a>) except for 2010 to 2015, with the chart above understating the post-2008 fall in house prices (which continued to 2012) shown by other indices – including <a href="https://www.cso.ie/en/releasesandpublications/ep/p-rppi/residentialpropertypriceindexoctober2023/" target="_blank">the CSO’s own Residential Property Price Index</a>.  </p> <p>The average for 2023 is likely to be around €370,000 and this estimated value is also shown above.  Here are the CSO’s notes on the original table:</p> <blockquote> <p><em>Note that 1970 – 2009 data is based on mortgage data whereas the 2010 – 2019 CSO data is based on Stamp Duty returns from Revenue. Figures for 1970 to 1977 are new prices only while all others are for new and second-hand properties in Euro or Euro equivalent.</em></p> </blockquote> <p>The methodological change in 2010 and the low level of transactions, impacting the composition, likely explain the larger nominal fall of around 60 per cent) shown elsewhere.  We will proceed with the values as given in the table.  Our primary interest is a comparison of current prices to what they were in the 1970s, 80s and 90s rather than to what they were in the depths of the post-2008 recession.</p> <p>In nominal terms, house prices are far higher than they were in the 1970s, 80s and 90s.  In simple nominal terms, at €370,000 houses prices now are almost ten times higher than the average price from 1970 to 1995 (€38,700).</p> <p>Indeed, the latest estimates are a record high for the series exceeding the previous peak of €350,000 from 2007.  The chart also shows that in the last 50 years, Ireland has had just one period of nominal house price declines: 2008 to 2012.</p> <p>But these numbers are of their time. Just how does €6,700 from 1970 compare to €370,000 in 2023?  The price of everything has changed in the interim. Just how can we tell which year had more expensive housing?</p> <p><strong>Inflation-Adjusted House Prices</strong></p> <p>We can try to put the prices in terms of other products. The CSO collect national average prices for a range of items. Since 1983, they have been publishing a national average prices for 567ml of draught stout in a licensed premises.  Using this, and some <a href="https://www.rte.ie/archives/2018/0717/979313-dublin-pub-prices/" target="_blank">additional</a> <a href="http://publin.ie/2015/the-price-of-a-pint-from-1928-2015-in-todays-money/" target="_blank">sources</a> to extend the series back to 1970, we can put the average house price in any given year in terms of the number of pints that could be bought that year for the same sum.</p> <p>In 1970, the average price of a pint was 21c and with an average house price of €6,700 the equivalent price of a house was 31,900 pints.  For 2023, the average price of a pint is put at €5.48 and our estimated average house price of €370,000 puts 2023 house prices as equivalent to 67,500 pints of stout.  Pint glasses mightn’t make good lenses but using them points to average house prices being about twice as high than they were 25 to 50 years years ago and not the ten times higher as the unadjusted nominal house prices suggest.</p> <p><a href="https://drive.google.com/uc?id=1ZyXP402CUawiTI95Jm5IH98iXrhwD0ol" target="_blank"><img title="House Prices Pints of Stout Equivalent 1970-2023 CSO" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="House Prices Pints of Stout Equivalent 1970-2023 CSO" src="https://drive.google.com/uc?id=13drSbtsM4Q8EeDS2tfIbv9a63l3Y9Cam" width="549" height="343" /></a></p> <p>Using pints, we can see that houses were at their most expensive in 2006/7 – equivalent to over 90,000 pints.  And the pints equivalent for 2023 is pretty much where it was back in 2002.  Nominal house prices are well up on where they were in 2002 (€213,000 versus €370,000) but so too is the price of a pint (€3.21 versus €5.48).  The current level is about twice as high as the 34,700 it averaged from 1970 to 1995.</p> <p>Now maybe recent house prices are flattered by putting them in pints equivalent – due maybe to the impact of Excise increases. The CSO’s 50 years in the EU publication also <a href="https://www.cso.ie/en/releasesandpublications/ep/p-ieu50/irelandandtheeuat50/economy/consumerprices/#:~:text=Changing%20Consumer%20Prices" target="_blank">gives us some other prices to use</a>.</p> <p>For example, a white sliced pan was 15c in 1973 and is €1.66 now.  Taking the same approach as above shows that average house prices have gone from the equivalent of 60,100 sliced pans in 1973 to an estimated 222,400 now.</p> <p><a href="https://drive.google.com/uc?id=1KcC1yAjYMXG6xVPGkPhwmmzXAFrBRQSd" target="_blank"><img title="House Prices Sliced Pan Equivalent 1970-2023 CSO" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="House Prices Sliced Pan Equivalent 1970-2023 CSO" src="https://drive.google.com/uc?id=17OTGUclaCDQm6tzb96bLXhcEijVGKhBo" width="549" height="343" /></a></p> <p>Perhaps for reasons for interest, it is harder to track down the full series for the national average price of a sliced pan.  The pattern is as before and again we see that the peak level was seen back in 2006 – when the average house price was equivalent to over 300,000 sliced pans.</p> <p><strong>Real House Prices</strong></p> <p>While messing about with pints and sliced pans is useful for showing that nominal prices now are not the same thing are nominal prices from the past, it is whimsical at best.  A much better approach would be to take a much broader set of prices such as the Consumer Price Index (CPI).</p> <p>Figures from the CSO, show that prices as measured by the CPI in 2023 are around 1,420 per cent higher than they were in 1970.  This means that spending €6,700 in 1970 (the nominal average house price) would be equivalent to spending 6,700 x 15.2 =101,900 if faced with the 2023 prices in the CPI.</p> <p>We can use this to convert the nominal house price series into real prices using a constant price deflator.  We can choose any year as the base. We will use 2023, thus the 2023 nominal and real figures are the same.  The real figures for all other years are found by determining what the nominal house price for that year would be equivalent to if faced with the 2023 prices in the CPI. </p> <p><a href="https://drive.google.com/uc?id=1akcxPs5kRuUjOuIhj7oFJSaxU6rNPK6B" target="_blank"><img title="House Prices Real CPI Deflated 1970-2023 CSO" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="House Prices Real CPI Deflated 1970-2023 CSO" src="https://drive.google.com/uc?id=1ODA2QWuVQFaHGWmjlVRSs04AJsKGGHSy" width="549" height="343" /></a></p> <p>The general pattern is roughly in line with what we got using pints and sliced pans.  As expected using pints flatters current house prices: the price of a pint is around 26 times higher than it was in 1970 compared to a 15 times increase for the CPI.  Sliced pans did the opposite as their price is around 11 times higher.</p> <p>Anyway, using the CPI-deflated house prices we can see that Ireland had two sustained periods of real house price declines: the first from 1978 through to 1986 and the second from 2007 to 2012.  Again 2006/07 shows as the peak.</p> <p>Thinking in constant price terms isn’t always that intuitive and the numbers can be a bit messy.  A better way to present real house prices is as an index: select a base year – typically set to 100 – and get values for all other years relative to that.</p> <p><a href="https://drive.google.com/uc?id=1DB_nFYg_cN1DgSeYhTVp6ki8PKhFmLSl" target="_blank"><img title="House Prices Real Index CPI Deflated 1970-2023 CSO" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="House Prices Real Index CPI Deflated 1970-2023 CSO" src="https://drive.google.com/uc?id=1pkHyb4Vhp8-BZd8GW_ihZNKFjpepWz9s" width="549" height="343" /></a></p> <p>The shape of the charts are exactly the same.  There was an extraordinary run-up in real houses from 1996 to 2006 when they more than trebled.  When CPI adjusted, house prices in Ireland now are just over three times higher than what they averaged from 1970 to 1995.  Why is this?</p> <p>There are lots of reasons.  One reason is that buying a capital good such as housing is not the same as buying consumption goods.  Income may play a different role in the demand for housing compared to the demand for individual goods for consumption.</p> <p><strong>House Price to Income Ratios</strong></p> <p>To see whether house prices have become more expensive we can check how they have changed relative to income.  Again, we can turn to some long-term series provided by the CSO.  One such  is <a href="https://www.cso.ie/en/releasesandpublications/ep/p-hes/hes2015/aiw/" target="_blank">the historical series published for the Average Industrial Wage (AIW)</a> which goes all the way back to 1938.  </p> <p>We just need it from 1970 and this shows that the AIW now (€856 per week) is 22 times higher than what it was in 1970 (€23.20 per week).  One simple thing we can do is divide the average nominal house price for each year by the annual Average Industrial Wage for that year. This gives:</p> <p><a href="https://drive.google.com/uc?id=1v5cuHzWLLj-t5C4_-5Rc0jau1I95Tcvl" target="_blank"><img title="House Prices Real AIW Equivalents 1970-2023 CSO" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="House Prices Real AIW Equivalents 1970-2023 CSO" src="https://drive.google.com/uc?id=1SzCdNldGWn47h60gkFewWTT5py2QEecf" width="549" height="343" /></a></p> <p>In 1970, average house prices were around 5.5 times the annual average industrial wage.  By the depths of the recession of the 1980s this has fallen to 3.6 in 1987.  It remained around four up to 1994 and then exploded, with average house prices reaching almost 11 times the annual industrial wage in 2006 and 2007.  It has remained on a rollercoaster and recent figures put average house prices at over eight times the AIW.</p> <ul> <li>1970: €23.28 x 52 = €1,210           ;            €6,700 / €1,210 = 5.5</li> <li>1990: €286 x 52 = €14,866           ;            €63,900 / €14,866 = 4.3</li> <li>2006: €601 x 52 = €31,262           ;            €339,500 / €31,262 = 10.9 </li> <li>2023: €856 x 52 = €44,512           ;             €370,000 / €44,512 = 8.3</li> </ul> <p>Relative to consumer prices, we saw that house prices in 2023 were around three times higher than what they averaged from 1970 to 1995.  Relative to the average industrial wage, we see that house prices are around two times higher than what they averaged over the same period.</p> <p>Before moving away from income we note two things:</p> <ol> <li>The share of workers earning the AIW has declined </li> <li>Housing is bought by households, not earners.</li> </ol> <p>The AIW is useful because we have a long-run series for it.  However, the weekly earnings of “production, transport, craft and other manual workers” in industry sectors (NACE B to E) may not be as representative of earnings as they previously were.  Workers in many services sectors will earn less than the AIW.  The share of workers earning more may have also have increased.</p> <p>We also note that recent decades have seen a significant shift to more dual-income households.  Thus a measure of household income may be more appropriate than the individual-level earnings data.</p> <p>To get household income we turn to the national accounts. Definitions matter but here we will just note that we are using Gross Household Disposable Income. In national accounts, ‘gross’  means it is before depreciation and ‘disposable’ means after taxes and transfers.  Data from 1995 on is available from the CSO and we will use the nominal growth rates in <a href="http://www.tara.tcd.ie/bitstream/handle/2262/82169/3stuart.pdf?sequence=1&isAllowed=y" target="_blank">Stuart (2017)</a> to extend the series back to 1970.  We also need the number of households and these are taken from the Census and interpolated for the intra-Census years.  This gives us figures for disposable income per household.</p> <p>For 2022, CSO data puts gross household disposable income at €138.2 billion.  With the Census reporting 1,841,152 households for the same year that gives us a figure of just over €75,000 for disposable income per household.  With an average house price of €357,000 in 2022, the ratio of house prices to household disposable income is €357,000 / €75,050 = 4.76.</p> <p>We can do this for all years since 1970 to get the following:</p> <p><a href="https://drive.google.com/uc?id=1QdxlGuKOkYfnaX8ddNg-SFbDUAk7k3-S" target="_blank"><img title="House Prices To Household Income 1970-2023 CSO" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="House Prices To Household Income 1970-2023 CSO" src="https://drive.google.com/uc?id=1IfNXH3HgeV0IRwkM98Qt8TScdKqBp-cV" width="549" height="343" /></a></p> <p>Again, we see the peak was reached in 2006, when average house prices were almost six times average household disposable income.  It is likely to come in around 4.6 times for 2023, which is around where it was in 2002.</p> <p>For our long-term comparison, this ratio of price to income averaged 2.6 from 1970 to 1995.  The means the ratio is now 1.75 times than what it was over that period.  The increase is lower than what was shown using individual earnings but not hugely so.</p> <p><strong>Mortgages: Rates, Repayments and Deposits</strong></p> <p>Before concluding that housing is far more expensive than it was 25 years ago we must look at how most households pay for housing: mortgages.  This introduces interest rates which are hugely important for determining mortgage payments.  Consider two 25-year mortgages for €100,000 which only differ by the interest rate charged. Let the first have a rate of 4 per cent and the second a rate of 12 per cent. What will be monthly repayments be?</p> <ul> <li>€100,000 25-year mortgage at 4% interest = €527.84</li> <li>€100,000 25-year mortgage at 12% interest = €1,053.22</li> </ul> <p>The difference in the interest rate leads to a monthly mortgage payment that is almost twice as high.  Interest rates matter!  And in Ireland mortgage interest rates have varied a lot.</p> <p>The CSO have long-term data on average mortgage interest rates – see Table 10 of <a href="https://www.cso.ie/en/media/csoie/releasespublications/documents/statisticalyearbook/2004/ireland&theeu.pdf" target="_blank">this 2003 publication marking 30 years of Ireland’s EU membership</a>.  Data for recent years are taken from the <a href="https://www.centralbank.ie/statistics/data-and-analysis/credit-and-banking-statistics/retail-interest-rates" target="_blank">interest rate statistics of the Central Bank of Ireland</a>.  They give the following series of annual averages:</p> <p><a href="https://drive.google.com/uc?id=1JkM4ajAPU0BVBsTa-6vGUehWgNHawYtG" target="_blank"><img title="House Prices Mortgage Interest Rates 1970-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="House Prices Mortgage Interest Rates 1970-2023" src="https://drive.google.com/uc?id=1Q8uTIbb6SZcOuFkgsi3lA7QOYvHeklTK" width="549" height="343" /></a></p> <p>From 1970 to 1995, mortgage interest rates averaged 11.4 per cent. They are now around 3.6 per cent (though rising).</p> <p>We can get indicative monthly mortgage payments with three parameters:</p> <ol> <li>The initial amount borrowed </li> <li>The length of the mortgage</li> <li>The interest rate charged</li> </ol> <p>To make a comparison we will assume that the initial amount borrowed is 90 per cent of the average house price in each year.  We will use a term of 25 years in all cases and apply the interest rate for each year as shown above.  With these, we can get an indicative monthly mortgage payment and we will put that as a share of monthly average household disposable income. And this shows:</p> <p><a href="https://drive.google.com/uc?id=18gQfyBlq4gCo57vBK4uOjZpLI680hv6E" target="_blank"><img title="House Prices Mortgage Payment To Household Income 1970-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="House Prices Mortgage Payment To Household Income 1970-2023" src="https://drive.google.com/uc?id=1vVARb_afDuLqADhSFltzE1cszUgMv1kV" width="549" height="343" /></a></p> <p>From 1970 to 1995, the indicative monthly mortgage payments averaged 29 per cent of household disposable income.  This is higher than the current estimate which is around 25 per cent of household disposable income.</p> <p>The above shows that the peak for mortgage payments to income was 41 per cent back in 1982, exceeding the local maximum of 37 per cent from 2007.  As we have seen 2007 corresponds to the peak of real house prices. 1982 corresponds to the peak of mortgage interest rates which averaged 16 per cent over the year (which is also shown in <a href="https://www.centralbank.ie/news-media/press-releases/blog-monetary-policy-and-interest-rates-in-ireland#:~:text=Figure%202%3A%20Interest%20Rates%20in%20Ireland%20over%20time" target="_blank">this blog post from the Governor of the Central Bank</a>).</p> <p>It should be pointed out that this is very much a point-in-time assessment of mortgage payments to income.  Of the three parameters used, only one remains unchanged: the initial amount borrowed.  Key for determining the payment-to-income-ratio are the interest rate charged and the household’s disposable income.  Both of these will change over time for borrowers.  Interest rates trended down through the 80s and 90s while household income has trended up.  For individual borrowers this will reduce the ratio of the monthly mortgage payment to household income.</p> <p>The point-in-time assessment is useful, though, for the initial payment burdens faced by prospective purchasers.  And as we have seen, this burden is now slightly lower than what it averaged over the period 1970 to 1995.</p> <p>And this is before increased life expectancy and longer duration mortgages are taken into account.  The above analysis assumed a 25-year term for all mortgages.  In the last 20 years, mortgages with terms of 35 years <a href="https://www.irishexaminer.com/business/arid-30873151.html" target="_blank">have become prevalent</a>. </p> <p>Although the age of first-time buyers has increased this has been somewhat offset by increased life expectancy.  <a href="https://www.cso.ie/en/releasesandpublications/er/ilt/irishlifetablesno172015-2017/#:~:text=Table%203%20Period%20life%20expectancy%20by%20age%2C%201871%2D2016" target="_blank">In the early 1970s</a>, an Irish male aged 25 had a life expectancy of a further 46 years (i.e. to 71).  The detailed results based on Census 2016 give an Irish male aged 25 a life expectancy of a further 55 years (i.e. to 80).  It is likely to be now another year or two higher again.</p> <p>It is not all a one-way street from lower interest rates though.  Present-day borrowers may benefit from lower interest rates but higher prices means they are required to have a bigger deposit.  </p> <p>From 1970 to 1995, a ten percent deposit based on the average house price was 26 per cent of average annual household disposable income.  In 2023, a ten percent deposit is equivalent to 46 percent of average annual household disposable income.  Prospective buyers may also need even higher deposits due to the Central Bank’s macro-prudential rules on mortgage lending.  And that is what the evidence would appear to bear out.</p> <p><a href="https://drive.google.com/uc?id=18VV-LKOzvqAUTFVNbboT0ong2wtJ9tSZ" target="_blank"><img title="Central Bank Household Credit Report H1 2019" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Central Bank Household Credit Report H1 2019" src="https://drive.google.com/uc?id=104bflO71nQL2u4R4ju2fnC3vs_wNGa56" width="577" height="438" /></a></p> <p>The overview of new lending from <a href="https://www.centralbank.ie/publication/household-credit-market-report" target="_blank">the 2019 Household Credit Market Report</a> shows that the deposits of FTBs in Dublin were just under 90 per cent of household income and they were 72 percent for Non-Dublin FTBs.  Higher deposits means it is harder to access those lower interest rates. And we haven’t even mentioned ever-increasing private rents which further add to the difficulty of gathering that deposit.</p> <p><strong>Summary</strong></p> <p>Here is a summary of the indicators presented:</p> <p><a href="https://drive.google.com/uc?id=1xNzZpKlfbzfL3HY-RKv82gF7RBt6t7Ll" target="_blank"><img title="House Prices Summary Indicators 1970-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="House Prices Summary Indicators 1970-2023" src="https://drive.google.com/uc?id=13kGVNVKO5tbDun-8TxcqJ5I1JIMevZqm" width="493" height="343" /></a></p> <p>By most metrics housing is more expensive than it was 25 to 50 years. Nominal prices are almost ten times higher compared to what they averaged from 1970 to 1995.  When adjusted for the general increase in the price level, real house prices are around three times higher now than the 1970-1995 average.  Using income we see that house prices are under two times higher than that average. </p> <p>When looking at mortgages we see that the measures are lower. Mortgage rates now are around one-third of their level from 1970 and 1995 and though, house prices have increased, an indicative monthly mortgage repayment is now a lower share of average household income.  Moving in the other direction is the deposit required which is now almost twice as large as a share of average household income compared to what it was in the 70s, 80s and early 90s.</p> <p>Compared to 2003, most of the indicators are actually little different.  Inflation-adjusted house prices and price-to-income ratios did rise, fall and rise again over the period but are back close to 2003 levels. Mortgage interest rates and the payment-to-income ratio are also close to 2003 levels.</p> <p>The ratio of a 10 per cent deposit to income is also similar but the lending environment is much different. Back in 2003, borrowers were more likely to be lent more than 90 per cent of the purchase price and factors like parental guarantees were much more widespread. The Central Bank’s macro-prudential lending rules now restrict these with a greater requirement for borrowers to have the deposit to hand.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-76289935533244827632023-12-20T10:43:00.001+00:002023-12-20T10:43:39.416+00:00The Ongoing Trickle of Repossessions<p>The latest mortgage arrears statistics from the Central Bank provide an update for the end of September (Q3) 2023. They show there continues to be a trickle of repossessions.</p> <p><a href="https://drive.google.com/uc?id=1cSpDnZpBUId1WR9xiLibkPvyHKcIsaur" target="_blank"><img title="PDH Repossessions to Q3 2023 - AREA " style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="PDH Repossessions to Q3 2023 - AREA " src="https://drive.google.com/uc?id=13lOiQOXI__U6aSUqGypOv4F99T6MrczN" width="549" height="343" /></a></p> <p>During the third quarter of 2023, there were ten court-ordered repossessions and ten abandonments/voluntary surrenders of primary dwelling houses.  During 2023, court-ordered repossessions have been occurring at a rate of around one per week.</p> <p>We are now also provided with a more complete breakdown of repossession activity.  The number of repossessions shown above can be broken down into those carried out by banks and non-banks. Non-banks include regulated lenders such as Pepper and Start and also unregulated loan owners.  The chart below shows a split out of the maroon area in the opening chart.</p> <p><a href="https://drive.google.com/uc?id=1FUfkrHU7rbkVy7iX6BIRe4B_M39G9hsL" target="_blank"><img title="PDH Repossessions by Banks and Non Banks to Q3 2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="PDH Repossessions by Banks and Non Banks to Q3 2023" src="https://drive.google.com/uc?id=1iqCRAPheMLoBTiQgLL7_bSSFi7a0pSP7" width="549" height="343" /></a></p> <p>In the last 15 years, there has been a total of 3,400 court-ordered PDH repossessions. Of these around 70 per cent have been undertaken for banks. However, the banks stalled their execution of repossession orders in early 2020 (likely pandemic related) and there has been no increase since.  In the year to the end of September, there were 57 court-ordered repossessions and 42 (nearly 75 per cent) were carried out for non-banks.</p> <p>Figures on legal proceedings suggest that the banks have pretty much ceased using legal proceedings to obtain repossessions orders.  Here is the number of accounts with legal proceedings in progress.</p> <p><a href="https://drive.google.com/uc?id=1-rQQKayTxPcjX_Ip5nTj1kn59KHb2Hm6" target="_blank"><img title="PDH Legal Proceedings by Banks and Non Banks to Q3 2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="PDH Legal Proceedings by Banks and Non Banks to Q3 2023" src="https://drive.google.com/uc?id=17COcAGkJ3NpzO6DFcs-a52WEwXOfAc_6" width="549" height="343" /></a></p> <p>In early 2016, the banks had almost 12,000 PDH mortgage accounts with legal proceedings in progress. The last figures show that this had fallen to just 1,100 by the end of September. This is 0.2 per cent (1 in 500) of the 594,000 PDH mortgage accounts held by the banks.</p> <p>Some of the reduction, of course, came about as the non-performing loans were sold to non-bank entities but the fall in the overall total is very clear. And it can be seen that the level of non-banks has been stable in recent years. In Q1 2019, non-banks had 4,400 PDH accounts with ongoing legal proceedings. The latest figure for these entities is 4,300.</p> <p>That is not to say there has been an improvement in the mortgage accounts held by non-banks.  The arrears on these accounts is still very high.</p> <p><a href="https://drive.google.com/uc?id=1N0BPV_MKB5psyMGIkmeKa2tXtRAomVFf" target="_blank"><img title="PDH Mortgage Accounts with Non Bank Entities Q3 2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="PDH Mortgage Accounts with Non Bank Entities Q3 2023" src="https://drive.google.com/uc?id=1cKXoE4vCXMuf3QWqbgPO-B_5efnvt6E7" width="550" height="252" /></a></p> <p>Of the 710,000 or so PDH mortgage accounts in the latest update, almost 115,000 (16 per cent) were held  by non-bank entities.  And of those almost a quarter (27,300) were in some form of arrears.</p> <p>The arrears ranged from relatively small (less than 90 days arrears) to incredibly large (over 10 years arrears).  It is bizarre that we have to produce figures for such significant arrears.  Non-bank entities had 21,000 PDH mortgage accounts that were more than 90 days in arrears.</p> <p>Included in that are 4,500 accounts that are more than ten years in arrears.  The total balance outstanding on these loans is €1.3 billion, giving an average balance of €280,000.  There have been €833 million of missed payments on these giving an average level of arrears of just under €185,000.   That is an incredible amount of missing payments.</p> <p>It is worth noting again that arrears is not a good measure of current loan distress. It does not tell us when the payments were missed.  An account that had two years of missed payments a decade ago but has had every payment made since will be counted as being two years in arrears.</p> <p>Also, the measurement of arrears in terms of days past due is impacted by the repayment required.  If an account has had €6,000 of historical missed payments and the required monthly payment is €1,000 then that account will be 180 days (six months) in arrears.  If the required monthly payment rises to €1,200 – due to. say, interest rate increases – and there is no new arrears, then the €6,000 of historical arrears becomes the equivalent of 150 days (five months) of arrears.  </p> <p>This measurement issue won’t impact a count of the total number of accounts in arrears.  There has been no rise in the total number of accounts in arrears.</p> <p><a href="https://drive.google.com/uc?id=1SdrO8YrYsjFQzae-gUyag2MpC-t-H-XS" target="_blank"><img title="PDH Mortgage Accounts in Arrears Q3 2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="PDH Mortgage Accounts in Arrears Q3 2023" src="https://drive.google.com/uc?id=12VkLE22TaoYho0YUQOC7u96k7i5Jl410" width="549" height="343" /></a></p> <p>As shown above, there remains around 29,000 PDH mortgage accounts which are more than 90 days in arrears.  Of these 21,000 are held by non-bank entities.  The banks have 8,000 such accounts but this represents just 1.3 per cent of the total PDH mortgages they hold (594,000).  The banks do not have a problem with a long-term mortgage arrears.</p> <p>In some cases this will have occurred with the borrower getting back in track either with or without a cure or modification. In other cases it is because the banks have simply sold the loans.  There were plenty of claims that these sales would lead to a surge in repossessions. All we have seen so far is a trickle.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-78828794080785664312023-12-06T13:16:00.001+00:002023-12-06T20:52:30.002+00:00No Surprise in November CT Receipts<p>When the June figures were published the €4.2 billion of Corporation Tax collected in the month <a href="https://economic-incentives.blogspot.com/2023/10/corporation-tax-motors-along.html" target="_blank">pointed to</a> receipts of around €6 billion in November.  The year-on-year declines for August, September and October <a href="https://economic-incentives.blogspot.com/2023/11/volatility-to-fore-in-corporation-tax.html" target="_blank">were attributed to largely idiosyncratic volatility</a> in such a concentrated source of tax revenue.  </p> <p>And so it proved, with the monthly receipts for November coming in broadly in line with expectations at €6.3 billion or five percent above the crude projection based on the June figure.  With November being the most important month of the year for Corporation Tax, November 2023 was a record month, surpassing the €5.0 billion collected in the same month last year.</p> <p><a href="https://drive.google.com/uc?id=1NAR2as9ftpkQhaHBel1GfrTkGbQXam-a" target="_blank"><img title="November CT" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="November CT" src="https://drive.google.com/uc?id=1y3TnJ9bGjWvh3I5Bg2WOylBsXDQ-CLMQ" width="548" height="343" /></a></p> <p>In year-to-date terms, November was enough to push 2023 back up above the equivalent total for 2022.  The difference looks small on the chart but the €22 billion collected so far in 2023 is almost €1 billion higher than what was collected in the same period last year.  The difference to 2014 is staggering.</p> <p><a href="https://drive.google.com/uc?id=1i0B2O048pxorSPZX_wiZRv4lqj60EAPg" target="_blank"><img title="CT Cumulative" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="CT Cumulative" src="https://drive.google.com/uc?id=1rn8mdXFS-xZgklqJA0MKf3PTU9VRS3kB" width="548" height="343" /></a></p> <p>The recent volatility in the receipts can be seen with the 12-month sum.  If December 2023 just matches what was collected last December then the total for the year will be €23.5 billion, up on the €22.6 billion from last year.</p> <p><a href="https://drive.google.com/uc?id=10-SMfL0fvdMx7lGuGv8d_Mt9_T3cHL9G" target="_blank"><img title="CT 12 Month Sum" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="CT 12 Month Sum" src="https://drive.google.com/uc?id=1XpevcGMP2XlG-Yq9hnHvNj-qmDLffQcD" width="548" height="343" /></a></p> <p>The volatility is highlighted in the annual changes from the above chart.  This shows some extraordinary changes.  </p> <p><a href="https://drive.google.com/uc?id=1_0bhZzTyx1VMVPyH2eBRnb7zeC4frYoo" target="_blank"><img title="CT 12 Month Sum Change" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="CT 12 Month Sum Change" src="https://drive.google.com/uc?id=1_XXTUkvfwztwgdO-7GwjWWI4GA15RRLC" width="548" height="343" /></a></p> <p>Towards the end of 2022, CT was growing at an annual rate of over 60 per cent – exhilarating but unsustainable. This growth plummeted during 2023 and approached zero in October. The November numbers mean that the annual change in the 12-month sum rebounded a little and rose to 2.8 per cent – and such is the scale of these receipts now that even such a small relative increase is a pretty significant sum.</p> <p>It is hard to say if the December returns will garner much attention, and as a standalone month there is no discernible pattern.  2022 was a boom year for CT but December 2022 was actually lower than December 2021 – that volatility thing again.</p> <p><a href="https://drive.google.com/uc?id=1Z_exwJS7-of25gpL95dJrHNKS_9Qk8gD" target="_blank"><img title="December CT" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="December CT" src="https://drive.google.com/uc?id=1nHpdIHwEaoMNZ56PmsZQpazT_H64t5Fl" width="548" height="343" /></a></p> <p>Corporation Tax is a highly volatile source of revenue. While there can be some information in the monthly changes there is also an awful lot of noise.  Here the year-on-year comparisons of monthly CT receipts since January 2016 – and note that the chart excludes some of the volatility as the vertical axis is cut off at +100.  The final point shown is November 2023 which was was 27 per higher than November 2022.  Missing values are used when the calculation of the annual change involved a negative number (three instances since 2016: January 2019, April 2019 and April 2021).</p> <p><a href="https://drive.google.com/uc?id=1_b1S0TGuK2Hzj5rHT0pied251ER8yFMc" target="_blank"><img title="CT YonY by Month" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="CT YonY by Month" src="https://drive.google.com/uc?id=1PBsF-3OHLo9s5ObAboMv-IcRc8iO5UJj" width="549" height="343" /></a></p> <p>Monthly figures that are lower than the same month of the previous year are not uncommon, though some occur in months that are not important from a CT perspective. Around one-third of months in the chart above have negative values – and this was a period when aggregate CT revenues grew at an extraordinary rate.</p> <p>Four of the six months from December 2022 to May 2023 were negative in year-on-year terms.  The run of three negative figures in a row that was seen from August to October this year was a bit unusual – we have to go back to early 2021 to see such a run, when the pandemic would have had an impact, and the only other instance shown of three negative values in a row was in early 2017.  </p> <p>The proximity of the recent three-month negative run to the key month of November also likely contributed to the focus. Those negative outturns will also have been seen as an opportunity to try and dampen expectations. Who knows what December will bring. Probably more volatility but structural shifts remain absent for now.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-16065272708228374002023-11-04T15:02:00.001+00:002023-12-06T20:51:01.778+00:00Volatility to the fore in Corporation Tax revenues<p>For almost a decade now, the year-to-date revenues from Corporation Tax have exceeded the equivalent amount from the previous year (with early 2021 being the only minor exception).  We can see below that the 2023 year-to-date figure for October has dipped below the 2022 line.  The €15.7 billion collected so far in 2023 is €0.4 billion (3%) below the amount collected to October 2022.</p> <p><a href="https://drive.google.com/uc?id=1YsDyZ8Arj_bfqIp1pjmevBBY838dndcN" target="_blank"><img title="Exchequer Corporation Tax Cumulative by Year 2014-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Exchequer Corporation Tax Cumulative by Year 2014-2023" src="https://drive.google.com/uc?id=1Lz-71--Qg57GisXwYjrKg71TnMJnyiRP" width="548" height="343" /></a></p> <p>We can also see that this is a reversal of the position seen only a few months ago. By July, 2023 was running nearly €2 billion ahead of 2022 (€10.9 billion versus €9.0 billion).  The reversal since means that this year’s Corporation Tax receipts for August, September and October have been around €2.3 billion lower than the equivalent months from last year.</p> <p>These three months last year saw €7.2 billion of Corporation Tax collected, this year they brought in €4.8 billion - a fall of one-third, which does appear to be dramatic.  </p> <p><a href="https://drive.google.com/uc?id=1X5KtP7RmexmaM0yZr8s6KNtgZbOJffSd" target="_blank"><img title="Exchequer Corporation Tax August to October 2009-23" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Exchequer Corporation Tax August to October 2009-23" src="https://drive.google.com/uc?id=189azXSAcsE7P79YI7gtgHAb45dOyUHce" width="548" height="343" /></a></p> <p>As seen above, this year was still the second-highest on record for these three months but is the fall just volatility that can be expected in such a concentrated revenue source or a harbinger of a more systematic decline?  For the time being volatility seems the more likely landing spot.</p> <p>To put the recent declines in context we can look at the 12-month rolling sum of receipts.</p> <p><a href="https://drive.google.com/uc?id=1o7Y7fLw6Ou-U3FbclBrB2mYMgg5poKQW" target="_blank"><img title="Exchequer Corporation Tax 12-Month Rolling 2012-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Exchequer Corporation Tax 12-Month Rolling 2012-2023" src="https://drive.google.com/uc?id=1bWYUbdikY08lWXLg4vyMAhODpF05N8Tx" width="548" height="343" /></a></p> <p>The change in direction in the past three months is pretty clear.  November is the most important individual month for Corporation Tax and a one-third drop there relative to November 2022 certainly would be alarming.</p> <p>The recent falls have put the 12-month sum back close to where it was this time last year, with the annual change in the 12-month sum having plummeted towards zero in recent months. Annual growth rates of 40 per cent plus while exhilarating are not sustainable.</p> <p><a href="https://drive.google.com/uc?id=1zjlS_EECkrKkmRaEO7KoEQXvep7Z2wvJ" target="_blank"><img title="Exchequer Corporation Tax 12-Month Rolling Annual Change" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Exchequer Corporation Tax 12-Month Rolling Annual Change" src="https://drive.google.com/uc?id=10eTYZzO-WBBCoUiGdwnpAvs0S71KIjKM" width="548" height="343" /></a></p> <p>In the 12-months to October 2022, €21.9 billion of Corporation Tax was collected. The 12 months to October 2023 have seen revenues of €22.2 billion – an increase of 1.25 per cent.</p> <p>To assess the concern that could be raised after the falls in recent months we go back to the <a href="https://www.revenue.ie/en/companies-and-charities/corporation-tax-for-companies/corporation-tax-payment-and-filing/when-is-preliminary-ct-due.aspx" target="_blank">Revenue Commissioners guidance</a> on when large companies need to pay their Corporation Tax.</p> <blockquote> <h5><font size="2">Large companies</font></h5> <p>Large companies can pay their preliminary CT in two instalments when their accounting period is longer than seven months.</p> <p>The first instalment is due on the 23rd <font size="2">of <strong>the sixth month</strong> of the accounting period. The amount due is either:</font></p> <ul> <li>50% of the CT liability for the previous accounting period </li> <li>45% of the CT liability for the current accounting period.</li> </ul> <p>The second instalment is due on the 23rd <font size="2">of <strong>the eleventh month</strong>. This will bring the preliminary tax up to 90% of the final tax due for the current accounting period.</font></p> </blockquote> <p>The key months are month six and month 11 of the company’s financial year, by which time 90 per cent of the estimated tax due for the current year must be paid.  Any remaining tax due will be paid when the company files it tax return.</p> <blockquote> <p>A company must file its return and pay any tax due nine months after the end of the accounting period. The company must make this payment on or before the 23rd of the ninth month.</p> </blockquote> <p>Clearly any individual month can be any of these deadlines: month six, month 11 or month plus nine.  The likely candidates for the months we are looking at are:</p> <ul> <li>August: month 11 for companies with a September year-end</li> <li>September: month +9 for companies with a December year-end</li> <li>October: month 11 for companies with a November year-end</li> </ul> <p><strong>August</strong></p> <p>Here are the monthly receipts for August since 2009.  There was an exceptional increase in August 2022 which was up 167 per cent on August 2021.  Some of this was reversed in 2023 but August 2023 was still significantly higher than all years prior to 2022.</p> <p><a href="https://drive.google.com/uc?id=1GG4evk13X-dcRpPczPHtr3BHkMx93xjC" target="_blank"><img title="Corporation Tax August Receipts 2009-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Corporation Tax August Receipts 2009-2023" src="https://drive.google.com/uc?id=17kkkyUvcschuZCJ3gxqOWRte11oXW0FM" width="549" height="343" /></a></p> <p>The impact of payment timings can be seen if we combine the receipts for March and August – month six and month 11 for companies with a September year end.</p> <p><a href="https://drive.google.com/uc?id=1wAUu-TCztYWvjsYiSD-lcGVcxLqLyqAp" target="_blank"><img title="Corporation Tax March and August Receipts 2009-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Corporation Tax March and August Receipts 2009-2023" src="https://drive.google.com/uc?id=1t1JC1o8m9eBVJQu124pRYEOFiKZlm0p4" width="548" height="343" /></a></p> <p>Across the two months of March and August there was no fall at all in 2023.  This points to a company having a large increase in its tax liability in 2022 and paying most of this in August 2022 (when it needed to have 90 per cent of its preliminary tax paid).  For 2023, the payments were more balanced as the March payment would have been based on 50 per cent of the 2022 liability with a smaller amount due in August this year to bring the payments up to the required 90 per cent.</p> <p>The fall in August 2023 seems mainly volatility due to concentration and the timing of payments.</p> <p><strong>September</strong> </p> <p>The fall in September was small which also points to volatility. </p> <p><a href="https://drive.google.com/uc?id=1rImWpJqKtVbm4yR4OjgnK-eZSHnJLfTU" target="_blank"><img title="Corporation Tax September Receipts 2009-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Corporation Tax September Receipts 2009-2023" src="https://drive.google.com/uc?id=1wuyyChR9cXzg0XoOS3-hM6tGZtNVGvz_" width="549" height="343" /></a></p> <p>September 2022 was pretty much double September 2021 (€2 billion versus €1 billion). Some of this increase was reversed in 2023 but it is hard to point to anything systematic that might be going on.  </p> <p>It could just be that companies with December year-ends that filed their 2021 tax returns in September 2022 had more of their final tax payment outstanding than when they filed their 2022 tax returns in September 2023. With lots of companies having December year-ends we can’t point to any company-specific factors but it could be just a general timing issue.</p> <p><strong>October</strong></p> <p>The monthly figures for October seem particularly volatile and it is hard to discern anything that might be going on.  </p> <p><strong><a href="https://drive.google.com/uc?id=1csMFGHzaVptBvRo4gFgRA-_goqYLTSjw" target="_blank"><img title="Corporation Tax October Receipts 2009-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Corporation Tax October Receipts 2009-2023" src="https://drive.google.com/uc?id=1ILA4A5x0F2oizNmDGJq-JdCUz9781xIE" width="549" height="343" /></a></strong></p> <p>There was a local peak in October 2018 of €1.6 billion.  This fell to €1.0 billion in 2019 and pretty much collapsed to just €200 million in 2020.  This put October 2020 as one of the lowest Octobers in the last 15 years.  </p> <p>There was a strong bounceback in 2021 and a further increase to €2.3 billion in 2022.  Relative to that there was a large fall in 2023, back to €1.3 billion (which was also lower than both 2018 and 2021).  </p> <p>It is because of this fall in the October receipts that the year-to-date total for 2023 is running behind the 2022 level.  As we have seen, the August fall was offset by a rise in March, and the September fall was pretty modest.  So, the October fall could be significant – if we could link it to something.</p> <p>We could try to link the October payments to those made the previous May, which are month 11 and month six for companies with November year ends, but that doesn’t reveal a lot.  May is also also month 11 for companies with a June year end.</p> <p><a href="https://drive.google.com/uc?id=1mfXCBWwpse3ZqmK1w7SSzq3yn6s0tZro" target="_blank"><img title="Corporation Tax May and October Receipts 2009-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Corporation Tax May and October Receipts 2009-2023" src="https://drive.google.com/uc?id=1McbWkDDhqk1d4TuPRRDaMHI6huDESsj5" width="548" height="343" /></a></p> <p>The monthly receipts for May have actually been pretty stable over the past four years.  This could mean rising payments from companies with June year ends and falling payments from companies with November year ends but there is no way of telling that.  </p> <p>For companies with November year ends we can see the October (month 11) payments but as noted above, outside of being especially volatile, there is no discernible pattern.  It is possible that a company with a November year end (for the purposes of paying Irish Corporation Tax) has had volatile profits over the last few years and this has likely been driving the volatility in the October Corporation Tax receipts.</p> <p>This again points to the concentrated and volatile nature of these Corporation Tax receipts with a company-specific factor driving changes in the aggregate figures.  It does not point to a structural shift in the overall pattern of receipts.</p> <p><strong>November</strong></p> <p>November is a month that could be a bell-weather for such structural changes.  It is the most important month for Corporation Tax.  November is month 11 for the most common year-end: December. Last November saw €5 billion of Corporation Tax collected – the highest monthly total ever, and higher than the annual total for 2014.  </p> <p>The data back to 2009, show a strong relationship between the June and November receipts.</p> <p><a href="https://drive.google.com/uc?id=1oZha0RE4IIHUIdXFhPMhUyUZSX9D4K1t" target="_blank"><img title="Corporation Tax June and November Predicted 2009-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Corporation Tax June and November Predicted 2009-2022" src="https://drive.google.com/uc?id=1-t4pfk8W4N9ftUVY_uYLGAoGX3YEQk6E" width="549" height="343" /></a></p> <p>June 2023 was the highest June ever with receipts of €4.3 billion.  If the above relationship holds, this points to record receipts again in November, this time to the tune of €6 billion.</p> <p>One aggravating factor could be the rise shown above for receipts in August.  August is month 11 for companies with September year ends.  These companies’ tax returns and their final payments will be due nine months later – the following June.</p> <p><a href="https://drive.google.com/uc?id=1kamjbE00flPDVugYyMaer88uMhbRTIqX" target="_blank"><img title="Corporation Tax June Receips 2009-2023" style="border-width: 0px; margin: 0px auto; float: none; display: block; background-image: none;" border="0" alt="Corporation Tax June Receips 2009-2023" src="https://drive.google.com/uc?id=1fHAIp_K1F1Blys0Nb8eey8FTvanE1jfu" width="549" height="343" /></a></p> <p>Up to recently, very little Corporation Tax was collected in August (and also in March).  This would translate into very little final tax due the following June.  Now however, the combined receipts for March and August exceed €4 billion.  This can be expected to lead to additional tax payments the following June when companies with September year ends file their tax return and make their final payments.  </p> <p>The above relationship between June and November was almost exclusively based on the June payments been the first preliminary payments for companies with December year ends so they were a strong predictor of the second preliminary payment in November.  This relationship may no longer be as clear cut as more of the June receipts could be due to companies with September year ends.  </p> <p>Even with this we would still expect this November’s receipts to be strong. Talk of structural decline in Ireland’s booming Corporation Tax seems premature – for now. But we can certainly expect them to be volatile.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com2tag:blogger.com,1999:blog-2826531655042170344.post-62633206331555193852023-10-28T12:26:00.001+01:002023-10-28T12:26:01.533+01:00Numbers of FTBs continue to edge up<p>A couple of indicators during the week show that the number of first-time buyers (FTBs) continues to rise. First, the volume of market transactions tagged as FTBs in the CSO’s residential property price index.  This is updated monthly and the volume of transactions is shown here on a 12-month basis.</p> <p><a href="https://drive.google.com/uc?id=1BN9KuCaQ5o4t_WB8vKYEeVSUTZWexxS6" target="_blank"><img title="Volume of Dwellings Purchased by FTBs 2011-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Volume of Dwellings Purchased by FTBs 2011-2023" src="https://drive.google.com/uc?id=1_ST7JxVj5SZIrQUJhYhNAz2mwzQ2cSsD" width="560" height="350" /></a></p> <p>There were 17,500 stamp duty filings tagged as FTBs made in the 12 months to the end of August.  Of these, 12,500 were for existing properties and 5,000 were for new properties.  The increase in the last year has been exclusively in existing properties.  </p> <p>The volume of FTB transactions has been rising for more than ten years and the total is now pretty much back on the increasing trend evident up to the onset of COVID.  </p> <p>The second source is the mortgage drawdown data from the Banking and Payments Federation.  This is available quarterly with this week’s update giving figures for Q3 2023.  Again, the figures are presented on an annual basis.  One plus of the mortgage data is that it is available back to 2004 (though the new/existing split is only available from 2006).</p> <p><a href="https://drive.google.com/uc?id=1QmwjbR9BwMvW6CxX1mfy_uSmBO7bYYkH" target="_blank"><img title="Mortgage Drawdowns by FTB to Q3 2023 Full" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Mortgage Drawdowns by FTB to Q3 2023 Full" src="https://drive.google.com/uc?id=1yKOLJ0zYzoYH8G4c2MkB5aHmERmFVddg" width="561" height="350" /></a></p> <p>The pattern in the mortgage series from the BPF matches that in the volume series from the CSO.  In the year to the end of Q3, there were just over 25,000 mortgage loan drawdowns by FTBs in the BPF data.  This is around 60 per cent of the levels seen during the height of the credit bubble.</p> <p>There are a number of reasons why the level is higher in the BPF data compared to the CSO (25,000 versus 17,500).  Most of it is likely because they are counting different things: mortgage loan drawdowns versus market transactions.</p> <p>People who self-build can draw down an FTB mortgage, but obviously there is no market transaction to be included in the CSO data.  FTB mortgages can be drawn down for non-market transactions, such as family transfers or someone may take out a mortgage to renovate a property they received as a bequest.  It may also be that a mortgage drawn down in stages is represented by multiple drawdowns in the BPF data.</p> <p>With these in mind it could be taken that the CSO figure gives the lower limit for the number of FTBs with the BPF figure giving an upper limit.  The true number of FTBs may be closer to the upper limit.  Whatever about those differences, the trends match, and show both rising.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-39869799559305333012023-10-17T11:54:00.001+01:002023-10-17T11:54:42.465+01:00The Household Sector in the first half of 2023<p>A few weeks ago, the CSO published <a href="https://www.cso.ie/en/releasesandpublications/ep/p-isanf/institutionalsectoraccountsnon-financialquarter22023/" target="_blank">the Q2 2023 update of the non-financial institutional sector accounts</a>. We will use those to check in on the status of the household sector for the first six months of this year (H1) and how it compares to last year and to 2008.</p> <p>First, the current account.  In the prevailing environment, it is important to note that the figures in the table below are in nominal terms, i.e. not inflation adjusted.  We will look at some of the aggregates in constant prices towards the end of the post.</p> <p>The start point of the current account here is Gross Domestic Product. For the household sector this is the value added produced, a large share of which is due to the imputed rents attributed to owner-occupier households with the remainder arising from the activities of the self-employed.</p> <p>From there the account proceeds through a series of inflows and outflows until the bottom line is reached, Gross Savings, which is disposable income not used for consumption.</p> <p><a href="https://drive.google.com/uc?id=11V-Le6yxu_4qHXF_qbLaXedwggEe6LpZ" target="_blank"><img title="Household Sector Current Account H1 2019-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Household Sector Current Account H1 2019-2023" src="https://drive.google.com/uc?id=1GIaQAUnZaAuPgbW6aQA2mdCpRyLT7Qz5" width="565" height="567" /></a></p> <p>Most of the items in the table show an increase for H1 2023 over H1 2022.  One of the most significant is the continued growth of compensation of employees received.  This is up 7.3 per cent (remember in nominal terms) and stood at €64.6 billion for the first six months of the year.  Non-financial corporations are the most important source of COE and their pay outlays are up 8.0 per cent in year-on-year terms.</p> <p>The largest relative changes are for the interest flows. Both interest paid and interest received are up almost 60 per cent in 2023. Taxes on income and social contributions, particularly those paid to the government sector, rose in line with the rise in income.  Social benefits received rose slightly for H1 2023 but remain lower than they were in 2020 and 2021 as COVID-19 supports were withdrawn.</p> <p>All told, the national accounts estimate of household disposable income for H1 2023 was €73.8 billion.  With consumption expenditure of €64.8 billion and a €1.8 billion adjustment for the excess of contributions to private pensions over benefits received from them, the gross saving of the household sector is put at €10.6 billion for the first six months of the year.  </p> <p>This is lower than each of the previous three years and gives a savings rate of 14.5 per cent for H1 2023, which remains slightly higher than the 12.1 per cent recorded for H1 2019 in pre-COVID times.</p> <p>To see how that saving might be used we can turn to the capital account.</p> <p><a href="https://drive.google.com/uc?id=1zLcBAp0-mG6qmj6CwV_DBZkg-jMIsCli" target="_blank"><img title="Household Sector Capital Account H1 2019-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Household Sector Capital Account H1 2019-2023" src="https://drive.google.com/uc?id=1IAqFh8TPjx73ucrViootJyUDrlOf7qTB" width="573" height="318" /></a></p> <p>Again, the figures are in nominal terms.  The key figures in the capital account are the amount Gross Savings taken from the current account and the amount of Gross Capital Formation (investment in new capital assets) undertaken by households.  These are the main items that give rise to the net borrowing/lending of the household sector.  There are some other minor flows for capital taxes paid, investment grants received and other capital transfers.</p> <p>With gross savings of €10.6 billion and with the household sector “only” undertaking €4.5 billion of gross capital formation, the household sector had €6.6 billion available for net lending. This goes on the financial balance sheet.</p> <p>The CSO don’t do quarterly updates of their financial institutional sector accounts but <a href="https://www.centralbank.ie/statistics/data-and-analysis/financial-accounts" target="_blank">the Central Bank do</a> with estimates for Q1 2023 the latest available.  These show the household sector adding a further €2.7 billion to their burgeoning deposit balances. Between currency and deposits, the Central Bank estimate that the household sector had €198 billion on hand in Q1 2023, up from €154 billion in Q1 2020.  Households also used savings to make the contributions to private pensions referenced above.</p> <p>On the liability side there was very little movement in Q1.  Repayments on existing loans were pretty much equivalent to drawdowns of new loans, with a net increase in loan liabilities of just €36 million in Q1.  Though it should be noted that repayments have exceeded drawdowns for the past 15 years or so.</p> <p>All told, the Central Bank estimate that the household sector had €507 billion of financial assets at the end of Q1 2023, with an offsetting amount of liabilities of €143 billion.</p> <p><strong>Some Constant Price Series</strong></p> <p>The CSO also some of the main aggregates using constant prices. These series are also seasonally adjusted.  Here are the series for Disposable Income and Consumption Expenditure.</p> <p><a href="https://drive.google.com/uc?id=19OlhmFcUCmIGLnogGdAIQRlMtprrSM2g" target="_blank"><img title="Household Sector Disposable Income and Consumption 2000-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Household Sector Disposable Income and Consumption 2000-2023" src="https://drive.google.com/uc?id=1OUHG4gIVgdnwN6Vi0qzyWF8e18l4BaOj" width="567" height="354" /></a></p> <p>It can readily be seen that the income increase shown in the table for the current account in nominal terms is eliminated with the adjustment to constant prices. In real terms, aggregate household disposable income has been declining in recent quarters.  Real consumption has continued to rise and is not far off its pre-COVID trend.  In aggregate terms, both series are well ahead of the previous peaks reached in 2008.</p> <p>To conclude, we make one additional adjustment to the CSO constant price series – put them in per capita terms.</p> <p><a href="https://drive.google.com/uc?id=1MysN5DaiRJcfFP3yRRg2SNSavLhInef5" target="_blank"><img title="Household Sector Per Capita Disposable Income and Consumption 2000-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Household Sector Per Capita Disposable Income and Consumption 2000-2023" src="https://drive.google.com/uc?id=1-VNt5E-Ym4lp0pG8fqNsn4rbO8P8J5x7" width="560" height="350" /></a></p> <p>As the population is growing fairly rapidly this shows that the decline in per capita income is more pronounced than that shown by the aggregate figures, and that per capita real consumption has essentially been flat for the past year or so.</p> <p>It is also interesting to make comparisons back to the previous local maxima for each series from 2008.  Both the disposable income and consumption series are actually little different to their peaks in early 2008 – the latest readings put both series about 2 per cent above those 2008 peaks.</p> <p>This might suggest a “lost 15 years”.  However, the environment on which each were achieved are wholly different.  We can see this by looking at the ‘Saving minus Investment’ of the household and government sectors.  This is each sector’s contribution to the current account of the Balance of Payments and is the Net Lending/(Borrowing) of a sector excluding capital taxes, investment grants and capital transfers.  For this we return to nominal figures and annualise them by looking at their four-quarter moving sum.</p> <p><a href="https://drive.google.com/uc?id=19fqHk80cQc1ZglQVe1cZMbgTQXOBKT-k" target="_blank"><img title="Savings minus Investment for HH and Gov" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Savings minus Investment for HH and Gov" src="https://drive.google.com/uc?id=198T_v95m94qM4uAZ3jcrOCLZbGU_cMey" width="548" height="343" /></a></p> <p>The difference between 2008 and 2023 is huge. In 2008, the household sector was in deficit to the tune of €20 billion.  Via the circular flow, this borrowing was contributing to household income.  When the crash came the borrowing was taken over by the government as tax revenues collapsed and spending on income supports increased.  Without this borrowing, income (and consumption) would have been much lower.</p> <p>For 2023, there is a combined surplus of €20 billion.  There is a €40 billion difference between the positions of 2008 and that of 2023.  Now both the household and government sectors have an excess of disposable income over their consumption and capital formation expenditure.  In terms of GNI*, it is equivalent to going from borrowing 12 per cent of national income to lending 8 per cent of national income.  Simply comparing the income and consumption outcomes misses the scale of the turnaround in the borrowing/(lending) position of the economy.</p> <p>We are in an income position to spend more – Corporation Tax concerns aside! But do we have the resource capacity to produce the things that we would like to buy, such as new housing units?</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-38636010724539445802023-10-09T10:07:00.001+01:002023-10-09T10:07:34.618+01:00The aggregate Corporate Tax calculation enters an unsettled spell<p>In recent years <a href="http://economic-incentives.blogspot.com/2022/07/continued-calm-in-aggregate-corporation.html" target="_blank">when looking at the annual update</a> from the Revenue Commissioners of the aggregate corporate tax calculation we noted that things were relatively calm, albeit it with elevated levels of receipts.  These were for tax returns filed for financial years ending during the 2018, 2019 and 2020 calendar years. </p> <p>We now have the update for tax returns filed filed for financial years ending during 2021 (the last of these returns would have been filed in September 2022).  The 2015 upheaval is a well-worn track so we will just focus on the five most recent years.</p> <p><strong>The Determination of Taxable Income</strong></p> <p>We’ll start with the determination of taxable income.</p> <p><a href="https://drive.google.com/uc?id=1GBTXRPbotNUBa5xSzK0SzypM2zlw-OWt" target="_blank"><img title="Aggregate CT Calculation for Taxable Income 2017-2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Aggregate CT Calculation for Taxable Income 2017-2021" src="https://drive.google.com/uc?id=1j8PewvibPGy6E_oJpbFA12TXP-hfb76A" width="529" height="505" /></a></p> <p>Right from the top we can see big changes for 2021.  There an increase of over €55 billion in gross trading profits recorded on tax returns for the year, reaching €250 billion.  This carries right the way down the table with the end showing that taxable income increased by over €40 billion.</p> <p>However, there are some significant changes along the way. Early on, we see that after being relatively stable from 2018 to 2020 the amount of capital allowances used jumped again in 2021, coming in at just under €100 billion as a result of a €23 billion increase.</p> <p>Next we see a large increase in foreign income included in the tax returns of Irish-resident companies.  For 2021, this exceeded €20 billion for the first time and was close to €10 billion more than the next highest year.  The next part of the table will show the impact of this on tax payments (answer: very little).  </p> <p>Other income also saw a jump in the amount of capital gains included to reach €5 billion in 2021. This is actually a regrossed amount.  The applicable CGT rate is 33% but the gains are included in the tax return to be taxed at 12.5 per cent. Hence, the gains are regrossed and multiplied by 2.64 (= 33/12.5) to get the amount to give the necessary amount of tax.</p> <p>In charges and deduction we see that trade charges, mainly certain royalty expenses, rose back to levels seen up to 2019.  This was the largest change among these items.</p> <p>All told, the CT returns filed for years ending during 2021 had just over €150 billion of taxable income with €6 billion of that subject to tax at 25 per cent.  We now turn to the calculation of tax due.</p> <p><strong>The Determination of Tax Due</strong></p> <p>The starting point of this part of the calculation, Gross Tax Due is simply the amount of taxable income multiplied by the applicable rates (either 12.5 or 25 per cent).</p> <p><a href="https://drive.google.com/uc?id=1B45PkehTdLscMId9v9XSObdI07nQSjuv" target="_blank"><img title="Aggregate CT Calculation for Tax Due 2017-2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Aggregate CT Calculation for Tax Due 2017-2021" src="https://drive.google.com/uc?id=1hiWEvCTC56LjyMFzaF878NfqslIJqGPY" width="512" height="359" /></a></p> <p>The relative simplicity of the Irish CT regime means there isn’t a whole lot going on here.  The biggest reason for the reduction of gross tax due is because of tax already paid.  </p> <p>The largest single item in the above table is double taxation relief and this was almost €3 billion in 2021.  The additional foreign tax credit of nearly €450 million can be added to this.  These reflection the foreign corporate taxes paid on the €23.5 billion of foreign income included in the top half of the table.  Little additional Irish tax is due as the amount already paid, albeit abroad, covers the gross tax due in Ireland.</p> <p>The item for gross withholding tax on fees is somewhat similar but in this case it is Irish tax that has already been paid.  In some circumstances, when the buyer of services is paying them they will pay 80 per cent of the invoiced amount to the supplier and 20 per cent to the Revenue Commissioners.  The 20 per cent represents a withholding tax at the standard rate of Income Tax.  When filing their tax returns, companies will record any service fees that have been withheld from them and reduce their tax due figure accordingly.  The Revenue Commissioners will already have received the amount.</p> <p>The most significant item in the table that actually reduces companies’ tax bills is the R&D tac credit.  Between the R&D credit used and the excess R&D credit refunded the total cost was just over €750 million in 2021, a slight increase on the outturn for 2021.</p> <p>All told, the bottom line is a tax due figure of €15.1 billion for tax returns filed for periods ending during 2021.  There are some timing differences but we can that, in recent years, the tax due figure from the aggregate CT calculation, closely matches the CT receipts collected for the Exchequer.</p> <p>We will conclude with a look at some of the tumult in the aggregate figures, with most of this seeming to concern capital allowances, in particular those for intangible assets.</p> <p><strong>Snowballing Claims for Capital Allowances</strong></p> <p>As before we will look at the total amount of capital allowances claimed, the total amount used (that is, actually offset against gross profit) and the consumption of fixed capital from the National Accounts.</p> <p><a href="https://drive.google.com/uc?id=1szUTZI7jP5KHr0snpnZn4rzm6Gyu3b7p" target="_blank"><img title="Aggregate CT Calculation Capital Allowances Used and Claimed 2013-2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Aggregate CT Calculation Capital Allowances Used and Claimed 2013-2021" src="https://drive.google.com/uc?id=1dL0MBvnfGxUYHuR8WjegaPvXRyGuoR6T" width="563" height="254" /></a></p> <p>Up to 2019, the most significant feature was the growth in the figures. he ratios shown were relatively stable.  Up to 2019, capital allowances used were just over 90 per cent of the amount claimed, and consumption of fixed capital (depreciation) in the National Accounts was just under 90 per cent of the amount claimed.  This stability did not continued into 2020.</p> <p>In 2020, we can see that capital allowances used fell to just over 50 per cent of the amount claimed.  We also see a break in the link between capital allowances claimed and consumption for fixed capital in the national accounts.</p> <p>The break of this link is interesting as it suggests that the increase in capital allowances claimed is not fully linked to assets that would be included in the capital stock for National Accounts purposes.  In the last two years, capital allowances claimed in the aggregate CT calculation have risen by over €80 billion (from €86 billion to €173 billion) while consumption of fixed capital for NFCs in the national accounts has increased by “just” €20 billion (from €78 billion to €98 billion).</p> <p>A second pointer comes from looking at how the unused capital allowances, which came to almost €75 billion in 2021, show up elsewhere in the CT stats.  Typically, we might expect an increase in unused capital allowances to result in an increase in loss carried forward.  In most situations, unused capital allowances from one period are carried forward as a loss to use against income in a subsequent period.</p> <p>However, changes in losses carried forward were nowhere near large enough to accommodate the scale of unused capital allowances in the above table.  The are lots of losses forward sloshing around the Irish CT system and lots of them are the result of unused capital allowances but the changes in 2021 (+€7 billion in losses forward) are of little help in explaining what is going on with capital allowances.</p> <p>Of little help except it tells us where to look.  There is one instance where unused capital allowances are not carried forward as a loss but as capital allowances to be claimed again in subsequent periods (until they are eventually used).  And those are capital allowances for intangible assets.  And perhaps, unsurprisingly, this is where there have been the largest changes in recent years.</p> <p>Unfortunately, the Revenue do not provide figures for capital allowances for intangible assets used but we do have figures for such capital allowances claimed.  Here they are by sector for recent years with very large growth recorded for a number of sectors notably manufacturing, wholesale and retail, and ICT.</p> <p><a href="https://drive.google.com/uc?id=1m-KW1wbkvIWsVe1PEKBR-_lj_wiZzs1G" target="_blank"><img title="Aggregate CT Calculation Intangible Capital Allowances Claimed by Sector 2018-2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Aggregate CT Calculation Intangible Capital Allowances Claimed by Sector 2018-2021" src="https://drive.google.com/uc?id=1_1UnzMaNB9EVqwpr4rQIssImvFjXef3_" width="561" height="207" /></a></p> <p>We can see from the total (€131 billion in 2021) that, on their own, capital allowances claimed for intangible assets significantly exceed the total amount of all types of capital allowances used in 2021 (€99 billion).  We can safely conclude that capital allowances for intangible assets are the reason those ratios broke down in the previous table.</p> <p>Is there cause for concern? It is hard to know.  We know that there were significant onshoring of IP assets to Ireland in 2021 and 2022.  This would have increased the amount of capital allowances claimed.  And we know that there are now legislative restrictions on the amount of such capital allowances that can be used.</p> <p>Since October 2017, new claims for capital allowances for intangible assets have been restricted to offsetting 80 per cent of the profit (before deduction of interest and these capital allowances) by such capital allowances.  Prior to this the cap was 100 per cent.  Any available capital allowances above this amount cannot be used in the current year and are carried forward to be claimed as a capital allowances in subsequent years.</p> <p>The reason for the cap on capital allowances for intangible assets is to ensure that losses cannot be artificially generated for use elsewhere by a company or group.  Capital allowances for intangible assets are ringfenced for use only against profits generated by the acquired intangible asset.  If unused capital allowances could be carried forward as a loss they could be used against any profits.  All that has changed in recent years is the cut-off for the cap.</p> <p>The cap will likely result in a “snowball effect”, at least initially, increasing the gap between the capital allowances claimed in any year and the amount used.  In the early years a company will have capital allowances that they can claim each year (following either the accounts or fixed rate approaches).  The cap may mean they cannot use all of these in the current year.</p> <p>Then they may also have unused capital allowances from previous periods that they will also claim in the current year.  These will also be unused in the current year.  Thus the amount of unused capital allowances to be carried forward grows.  This could continue until they are no new capital allowances to be claimed and the unused capital allowances carried forward will be unwound until they are fully exhausted.</p> <p>We don’t have precise figures but maybe a bit of guesswork can put us in the ballpark.  Claims for capital allowances for intangible assets have skyrocketed in recent years.  For the sake of exposition, let’s say the cap means that €10 billion of the amount claimed cannot be used.  That would mean that €10 billion would be carried forward to be claimed in the next period.</p> <p>In the next period let’s assume that the cap again means that €10 billion of the amount claimed for that year cannot be used.  We than also have the €10 billion from the previous period that is brought forward and again claimed.  This means there are now €20 billion of unused capital allowances.</p> <p>In the next period there’s another €10 billion of that year’s claim that can’t be used and this is added to the €20 billion from previous periods that are brought forward claimed again.  We are now up to €30 billion to be carried forward and so on.</p> <p>We cannot say that this is the only thing that is going on but it does seem likely to be a large part of the story. And for the IP that was onshored in 2020 and 2021 this will go on for a few years yet. The gap between the amount of capital allowances claimed and the amount used will grow ever larger.  Down the line the full amount of the capital allowances will have been claimed and the amount available in any subsequent year will only be those which have been carried forward and these will eventually be fully exhausted.</p> <p>The figures are so large that there may be something else going on but it is hard to make out. What we can see are the growing claims for capital allowances for intangible assets.  Due to the snowball effect outlined above this is likely to continue. It could be some time before calm returns to the aggregate CT calculation.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com1tag:blogger.com,1999:blog-2826531655042170344.post-20819113740193971132023-10-04T13:12:00.001+01:002023-12-06T13:23:42.331+00:00Corporation Tax motors along<p>Corporation Tax receipts continue to pour in for the Exchequer. 2023 seems set to extend the decade long run of each year exceeding the previous year – though the gap to last year has narrowed.</p> <p><a href="https://drive.google.com/uc?id=1QapsRPGrQrIkBvpk9ljBRr1tLfPnHERJ" target="_blank"><img title="Exchequer Corporation Tax Cumulative by Year 2014-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Exchequer Corporation Tax Cumulative by Year 2014-2023" src="https://drive.google.com/uc?id=1sq7y670T9sC2MwxlvL_cwWdCLOm962xn" width="548" height="343" /></a></p> <p>In July, CT receipts for 2023 were running about €1.5 billion ahead of those for 2022.  August and September weren’t as strong as last year reducing the gap to €600 million.  </p> <p>August seems to have been affected by some firm-specific idiosyncrasies that will wash out, while there is little to be taken from the September figure.  September is month T+9 for firms with a December year-end and is when they file their tax return and make their final tax payment for the previous year.</p> <p><a href="https://drive.google.com/uc?id=1BbnTHZgkEpdWidZY-F8Gm3lMb8zux7Ob" target="_blank"><img title="Corporation Tax September Receips 2009-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Corporation Tax September Receips 2009-2023" src="https://drive.google.com/uc?id=1q5fH6hmmLqwhYsEnW5Mv1p3zS85M1zmt" width="548" height="343" /></a></p> <p>On a 12-month basis, CT receipts seem to have plateaued around €24 billion which is an extraordinary amount.</p> <p><a href="https://drive.google.com/uc?id=1LkVRmITzSz7kUBgfp84gRSiZggVREuKZ" target="_blank"><img title="Exchequer Corporation Tax 12-Month Rolling 2012-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Exchequer Corporation Tax 12-Month Rolling 2012-2023" src="https://drive.google.com/uc?id=1iOIdkikyXYDhZFiJymGSxMo_CRmVp5ie" width="548" height="343" /></a></p> <p>Which means that the growth of the 12-month sum has also eased considerably.</p> <p><a href="https://drive.google.com/uc?id=19U2mx35bF_9BQjqR4QiQ_AW6jyRseKcy" target="_blank"><img title="Exchequer Corporation Tax 12-Month Rolling Annual Change" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Exchequer Corporation Tax 12-Month Rolling Annual Change" src="https://drive.google.com/uc?id=1WsGmkY45Pf7AcYuxbIt2OcBP_FjHH3nX" width="548" height="343" /></a></p> <p>Optimism for the remainder of 2023 is mainly due to the strength seen in June. Companies with December year ends pay the bulk of the CT in June and November (corresponding to month 6 and month 11 of their financial year).</p> <p>The €4.2 billion collected in June of this year points to November receipts of around €6 billion, which would be €1 billion more than the same month last year.</p> <p><a href="https://drive.google.com/uc?id=1Jcd6Phr_1S34ufuMsJoq7qSWr0rTp6Di" target="_blank"><img title="Corporation Tax June and November Predicted 2009-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Corporation Tax June and November Predicted 2009-2022" src="https://drive.google.com/uc?id=1wHsyoDRb4iICuDLzGGxiPmY8fgMsebI5" width="549" height="343" /></a></p> <p>And with the rate for large companies set to rise to 15 per cent and the exhaustion of capital allowances for onshored intangible assets the risks to forecasts would seem to be on the upside.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-7842685971571344992023-10-04T10:30:00.001+01:002023-10-04T10:30:57.301+01:00Population Projections<p>Almost all of the work the CSO does is retrospective – collect data on what has already happened.  There is one area where part of the work undertaken is forward looking – demographics.</p> <p>After every Census the CSO use a set of fertility, mortality and migration scenarios to project out the country’s population by several decades.  These are not forecasts; merely projections of what might happen under different scenarios.  The most set available are <a href="https://www.cso.ie/en/releasesandpublications/ep/p-plfp/populationandlabourforceprojections2017-2051/" target="_blank">those undertaken following Census 2016</a> and they give projections out to 2051.</p> <p>The projections were based on three scenarios of net inward migration:</p> <ul> <li>M1: net inward migration of 30,000 per annum</li> <li>M2: net inward migration of 20,000 per annum</li> <li>M3: net inward migration of 10,000 per annum</li> </ul> <p>and two fertility scenarios:</p> <ul> <li>F1: fertility rate remains at 2016  level of 1.8</li> <li>F2: fertility rate declines from 1.8 to 1.6 by 2031 and stable thereafter</li> </ul> <p>When combined, the scenarios give six projections with the two fertility scenarios used for each of the three migration scenarios.</p> <p>We have now passed the subsequent census and can compare the projections to the actual outturn of recent years.  Obviously, there are things the projections, which were published in June 2018, could not be expected to account for such as COVID-19 and the Russian invasion of Ukraine.</p> <p>Anyway, here are the six projections and the actual outturns seen.</p> <p><a href="https://drive.google.com/uc?id=1Ie63aXiSU6VOscysURClw-N4S6v7Fz4o" target="_blank"><img title="Population Projections 2018 versus Outturns" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Population Projections 2018 versus Outturns" src="https://drive.google.com/uc?id=1miNpqM814qrPbrD9Z_qOUIZ3WQziJKSE" width="555" height="347" /></a></p> <p>Reality was outstripping the projections even before they were unpublished.  Of course, this reality was not confirmed at the time and only fully revealed with the results of Census 2022.  The latest population figure for 2018 (4.885 million) is 20,000 more than the highest projection for that year (M1F1 4.865 million).</p> <p>For 2020, (with the figures covering April of each year) the gap between the actual population (5.029 million) and the highest projection (4.988 million) was 42,000.  The gap to the lowest projection for 2020 (M3F2 4.904 million) was 126,000. And that is for a time before COVID or Ukraine could have any impact.</p> <p>For 2023, just five years after the projections were published and the gaps now range from 117,000 to 274,000.  Now clearly, the impact of those fleeing the war has impacted that but there were already significant, and growing gaps, by 2018.  Under the lowest projection (M3F2), the actual population of 2023 was not due to be reached until 2034.</p> <p>We can compare the migration scenarios set out in the projections to what has actually happened since 2016.</p> <ul> <li>2017: +39,200</li> <li>2018: +44,400</li> <li>2019: +44,000</li> <li>2020: +44,700</li> <li>2021: +21,800</li> <li>2022: +51,700</li> <li>2023: +77,600</li> </ul> <p>Hindsight is 20/20 vision and all that, but right off the bat it can be seen that even the highest scenario of +30,000 per annum was significantly exceeded.  More recent years have been impacted by COVID19 and Ukraine.</p> <p>Are such population projections important?  They are to the extent that they impact policy.  Our current <a href="https://www.npf.ie/project-ireland-2040-national-planning-framework/" target="_blank">National Planning Framework</a> was published in 2018.  The baseline projection on which this was based was for the population to reach 5.7 million in 2040, just 400,000 more than the 2023 population. The NPF stresses the need for plans to be flexible and the ability to adapt for higher population outturns.  We are already there.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-84946072280799683822023-10-03T15:59:00.001+01:002023-10-03T15:59:15.129+01:00Wages and Salaries in the Labour Costs of the EU14<p>Eurostat produce a quarterly labour cost index. A number of sub-components are also produced. Here is the ‘wages and salaries’ component for the Business Economies (NACE B to N) of the EU14 (the previous EU15 now excluding the UK) with Q1 2013 set equal to 100.</p> <p><a href="https://drive.google.com/uc?id=1XpWR5BgvgPKLx2skINc0F7KujzB8WBIo" target="_blank"><img title="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Nominal Index" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Nominal Index" src="https://drive.google.com/uc?id=19m8e5xnnnS0q9zNFHRJ8F9TTzIHnJx6t" width="549" height="343" /></a></p> <p>All the selected countries have seen nominal hourly wage growth over the period ranging from 43 per cent in Austria to 13 per cent in Italy.  Ireland is second-ranked with an increase of 33 per cent over the period, along with Germany.</p> <p>Next, we look at the annual growth rates with a four-quarter trailing moving average taken to smooth out some of the volatility in the series.</p> <p><a href="https://drive.google.com/uc?id=1ZSrRLF3lm--O3onOOUBb7-0U2e0q49id" target="_blank"><img title="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Nominal Growth" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Nominal Growth" src="https://drive.google.com/uc?id=1d8q6ireEpYkedk4MdjyjzoZpKF_u1zya" width="549" height="343" /></a></p> <p>We seen that annual nominal hourly wage growth in Ireland is fairly stable over the past few years, averaging close to 4 per cent since 2018. This would enough to be Ireland, top of the group in 2019 and again briefly in 2020 but accelerations in many countries has seen Ireland’s relative position drop towards the bottom and is now close to Sweden, Denmark and Finland.</p> <p>Of course, nominal changes are just changes in numbers. We want to assess real changes, i,.e. changes in the purchasing power of wages. To do that we must adjust for changes in the price level. We will do that with Eurostat’s Harmonised Index of Consumer Prices (HICP).  Here it ins since 2014, with the start of that year set equal to 100.</p> <p><a href="https://drive.google.com/uc?id=1aN8ngajXFfM3WDo_L5O-XHlpI2zgPFVX" target="_blank"><img title="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Inflation Index" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Inflation Index" src="https://drive.google.com/uc?id=1X4CCIVdldWxuCFDywFlUBRaNdOHaoSXT" width="548" height="343" /></a></p> <p>We can see that the HICP for Ireland was remarkably stably through the most of the period shown. In the HICP for Q4 2020 was little changed from what it has been in Q1 2014, i.e. there was no inflation over the period.  This certainly changed in 2021.  In the last couple of years, prices have risen by around 20 per cent in most of the selected countries. However, the reasons for the inflation have largely been common the relative ranking is largely unchanged.</p> <p>Compared to Q1 2014, Ireland’s HICP was 18 per cent higher in Q2 of this year. This was the third-lowest increase in the EU14 with Greece and Denmark seeing smaller increases.  The largest increase was in Austria where the HICP was over 30 per cent higher compared to its level in 2014.</p> <p>Inflation rates are coming down. The use of a four-quarter moving average understates the extent of the recent falls in inflation rates.</p> <p><a href="https://drive.google.com/uc?id=1H4nztARWc25WFEfMPDxEGUpYbEced7Kx" target="_blank"><img title="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2022Q3 Inflation Rate" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2022Q3 Inflation Rate" src="https://drive.google.com/uc?id=15v6af2heV5nfdUdPc_aHdF2ACIoI7Z5v" width="548" height="343" /></a></p> <p>Our purpose is to adjust the nominal wage growth rates for inflation. We see that Austria has both the highest nominal wage growth since 2014 (43 per cent) but also the highest price level increases over the same period (HICP +32% since 2014).  Here we combine both Eurostat datasets to get an index of real, i.e. inflation-adjusted, hourly wages.</p> <p><a href="https://drive.google.com/uc?id=12gwNl4wsbVCopTAYIEdIEc39ic5c6gQ8" target="_blank"><img title="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Real Index" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Real Index" src="https://drive.google.com/uc?id=1QYZZiRavE1t8ql6Uwmxn9DmsSM2CZmZ2" width="549" height="343" /></a></p> <p>Combining wage growth and HICP inflation sees the green line move to the top, but the last few years have seen a steep decline. From 2013 to the end of 2020, real wage growth is put at +20 per cent for Ireland, around five percentages points higher than any of the other selected countries.  </p> <p>During 2021 and 2022, real wages declined as the rate of inflation outpaced the growth of nominal wages.  In recent quarters they have moved closer together and real wages have been stable in Ireland in 2023 though are now only +12 per cent compared to the start of 2013. Much of the gains made up to 2021 have been reversed.  Real hourly wages in Ireland are now back to where they were in 2019.</p> <p><a href="https://drive.google.com/uc?id=1K3aynagh167cXl2xh2UT7a3aRQt_FEed" target="_blank"><img title="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Real Change to 2019Q2" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Real Change to 2019Q2" src="https://drive.google.com/uc?id=1MWrBqt80xiLpRc9znAYf7WZgW1g0vhXp" width="548" height="343" /></a></p> <p>To conclude here are the latest real annual growth rates for hourly wages:</p> <p><a href="https://drive.google.com/uc?id=1282jJ_TVUF4xxi9PQXwD2d-lmguIvvON" target="_blank"><img title="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Real Growth" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Real Growth" src="https://drive.google.com/uc?id=1dZjQioMefvkDgoFQhR33D5cj4V-mzg_L" width="549" height="343" /></a></p> <p>As shown by the levels, Ireland is back close to zero. Nominal hourly wages are up close to 4.5 per cent and the HICP is around five per cent higher than it was last year.</p> <p>To better see the trends for individual countries we will use a four-quarter moving average to smooth out some of the volatility. </p> <p><a href="https://drive.google.com/uc?id=115yf-K7oCg27COoIjytAYjyZzr7YFQuy" target="_blank"><img title="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Real Growth 4QMA" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Wages and Salaries in Quarterly Labour Costs EU14 Business Economy 2023Q2 Real Growth 4QMA" src="https://drive.google.com/uc?id=12Subwj7nvZZLCzrLV10hG11j42UBpI1f" width="549" height="343" /></a></p> <p>Ireland has ground to make up to get back to the top spot it held in the pre-COVID years.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-24404727613581196492023-09-22T14:28:00.001+01:002023-09-25T12:59:10.485+01:00The past is a foreign country<p>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.  </p> <p>Following Honohan and Walsh (2002) we can see that in the last fifty years the Irish economy has gone through two loops of:</p> <ol> <li>Imbalances building up via that deterioration of the current account, </li> <li>Weaknesses being exposed and resulting in a shooting up of the unemployment rate,</li> <li>A period of painful readjustment before, </li> <li>Recoveries took hold.</li> </ol> <p>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).</p> <p><a href="https://drive.google.com/uc?id=1XwFVesxMnWrRGPTmWsXjLJtYSknxh94r" target="_blank"><img title="Internal and External Imbalances 1975-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Internal and External Imbalances 1975-2022" src="https://drive.google.com/uc?id=1G0yR3KMOpSAhNj0ZgrTlRwCTP6f_0iQ4" width="560" height="351" /></a></p> <p>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*).  </p> <p>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.</p> <p>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:</p> <p><a href="https://drive.google.com/uc?id=19OvGFZJTPkyyJI7ysHLp-P3DDkpK7FPE" target="_blank"><img title="Internal and External Imbalances Sum of 1975-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Internal and External Imbalances Sum of 1975-2022" src="https://drive.google.com/uc?id=1DCMFDohcPig2iSd0IU-9JCzY0GOZM_aS" width="550" height="330" /></a></p> <p>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.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-21178096080138495842023-07-04T15:49:00.001+01:002023-07-04T15:49:33.379+01:00Still Waiting for US GDP to be Revised Up<p>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.  </p> <p>As a result of the changes in the destination of royalty payments we have been expecting revisions to US GDP.  See previous post <a href="http://economic-incentives.blogspot.com/2022/02/when-will-us-gdp-be-revised-up.html" target="_blank">here</a> with an even earlier one <a href="http://economic-incentives.blogspot.com/2021/02/ireland-to-add-01-to-2020-us-gdp.html" target="_blank">here</a>.  </p> <p>The <a href="http://economic-incentives.blogspot.com/2022/02/when-will-us-gdp-be-revised-up.html" target="_blank">previous post</a> 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.</p> <p>One point we will reiterate is <a href="http://economic-incentives.blogspot.com/2020/12/the-changing-nature-of-outbound.html" target="_blank">the changed nature of outbound royalty payments from Ireland</a>.</p> <p><a href="https://drive.google.com/uc?id=1YG8nYvbT-PuXXOVaeNGl0truCtXFpogr" target="_blank"><img title="Royalty Imports US v ROW 2014-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Royalty Imports US v ROW 2014-2023" src="https://drive.google.com/uc?id=1fcqfUzKYldWyxtwXnD3auMSoi1oQwe5P" width="549" height="343" /></a></p> <p>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. </p> <p>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).  </p> <p>Anyway our interest here is in the royalty payments from Ireland to the U.S. and these now exceed €100 billion in annual terms.</p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1upl5J7JQxOOpDEEMvSuRK5jF1pWqE4Hf" target="_blank"><img title="Services Trade Ireland and US BEA and Eurostat" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Services Trade Ireland and US BEA and Eurostat" src="https://drive.google.com/uc?id=1DA4FaoOcTAkO6EhXtQZxmigfX2mv1_pT" width="549" height="343" /></a></p> <p>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).</p> <p>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.</p> <p>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.</p> <p>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.  </p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1YBJ2KtWzyMUJU56_AIRWTghviyjQP1vw" target="_blank"><img title="Royalty Imports to the US Eurostat v BEA" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Royalty Imports to the US Eurostat v BEA" src="https://drive.google.com/uc?id=1Ojyl_CrUb54FPfnTtkeTyqgF8HIAMN5T" width="549" height="343" /></a></p> <p>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.</p> <p>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 <a href="https://lh3.googleusercontent.com/-GmU_2OtNY7E/XIliDBuMgcI/AAAAAAAAlcA/cms4HSk4W4csmiP68IvWRPiZSw-BuB5DwCHMYCw/s1600-h/NIE%2B2015%2BRevisions%255B3%255D" target="_blank">the order of €40 billion</a>.  Some US commentators should perhaps be wary of skeletons in their own closets.</p> <p>However, as the <a href="http://economic-incentives.blogspot.com/2022/02/when-will-us-gdp-be-revised-up.html" target="_blank">previous post goes through</a> 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.</p> <p>Statements from <a href="https://www.reuters.com/article/us-google-taxes-netherlands-idUSKBN1YZ10Z" target="_blank">Google</a> 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.  </p> <p>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.</p> <p><strong>Why the gap?</strong></p> <p>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.</p> <p>In the BEA’s case they undertake “<a href="https://www.bea.gov/system/files/2018-08/surveysu.pdf" target="_blank">benchmark surveys</a>” 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.</p> <p>The most recent benchmark survey for <em>Transactions in Selected Services and Intellectual Property with Foreign Persons</em> 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 <a href="https://apps.bea.gov/surveys/be120/" target="_blank">the latest such survey</a>.  In this instance the benchmark year is 2022 with the data collected in 2023 and results not due until sometime in 2024.</p> <p>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.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-71109473215601389662023-06-23T11:40:00.001+01:002023-06-23T11:40:57.895+01:00Does Ireland have the lowest per capita consumption of housing in the EU?<p>A couple of years ago we asked <a href="http://economic-incentives.blogspot.com/2019/06/does-ireland-really-have-lowest-per_25.html" target="_blank">“does Ireland have the lowest per capita consumption of housing in the EU15?”</a>  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.</p> <p>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. </p> <p><a href="https://drive.google.com/uc?id=1cQcHDGwCas7-J_59P90wJOqDxvyfLvAo" target="_blank"><img title="Consumption of Housing Services in AIC 2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Consumption of Housing Services in AIC 2022" src="https://drive.google.com/uc?id=1XThyPVIbnCHRzFvUNMAufw8Puh2PNIdT" width="567" height="433" /></a></p> <p>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.</p> <p>Here is Ireland’s consumption of housing services relative to the overall figure for the EU27.</p> <p><a href="https://drive.google.com/uc?id=1rH4FPcOSXzAToxkbhYpnXT9RJeygjMyv" target="_blank"><img title="Consumption Per Capita of Housing Relative to EU27 2003-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Consumption Per Capita of Housing Relative to EU27 2003-2022" src="https://drive.google.com/uc?id=1kYMoVruqnG52sIUhuA6sVQnE-NSDs07c" width="548" height="343" /></a></p> <p>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.</p> <p>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?</p> <p>Here is the aggregate consumption of housing services in constant prices.</p> <p><a href="https://drive.google.com/uc?id=1heG428YWeYVEyBr3uJjV3-8x9eXdbmn7" target="_blank"><img title="Consumption of Housing Services Constant Price 2003-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Consumption of Housing Services Constant Price 2003-2022" src="https://drive.google.com/uc?id=1_Y212bQQJNmiELzTcfWIpBUn1-rVP0pi" width="548" height="343" /></a></p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1N0WlVHulcKT-f8vde_rJCYR9OONY1yqh" target="_blank"><img title="Consumption Per Capita of Housing Relative 2008 and 2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Consumption Per Capita of Housing Relative 2008 and 2022" src="https://drive.google.com/uc?id=1LwePdLwPn6tScuhwQtnhMg6oqBF-6Pyr" width="272" height="504" /></a></p> <p>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.</p> <p>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.</p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1KlwOLbkPLUhp8TkAWpyPJYXrfGhhVbup" target="_blank"><img title="AIC Ireland by Item 2006-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="AIC Ireland by Item 2006-2022" src="https://drive.google.com/uc?id=1A2EXquge5AJ7dVW0f2cgpvySBtWsz79G" width="552" height="370" /></a></p> <p>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.</p> <p>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). </p> <p>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!)</p> <p>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. </p> <p>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.  </p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=15VyblDXBBbTVhmHSU3xPslP9yOTq-Jhv" target="_blank"><img title="EU27 Housing Consumption in AIC 2003-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="EU27 Housing Consumption in AIC 2003-2022" src="https://drive.google.com/uc?id=1GQFNlp_33repzohlQQFuCSqlFSH_NO_p" width="554" height="347" /></a></p> <p>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?</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-90663225282579118202023-06-19T15:46:00.001+01:002023-06-19T15:46:49.743+01:00An update on what was Ireland’s largest taxpayer<p>We previously identified Microsoft Ireland Research as a likely candidate for <a href="http://economic-incentives.blogspot.com/2021/06/is-this-irelands-largest-taxpayer.html" target="_blank">Ireland’s largest taxpayer</a>.  Microsoft Ireland remains a very large taxpayer but <a href="http://economic-incentives.blogspot.com/2023/04/the-last-insight-into-apples-use-of.html" target="_blank">may have been usurped for top billing</a>. Here will be provide a short update on Microsoft Ireland Research’s latest accounts. </p> <p><a href="https://drive.google.com/uc?id=1uU9NxzOHy2jU4FgOfFzYqAa-W9zBVe78" target="_blank"><img title="Microsoft Ireland Research Income Statement 2017-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Microsoft Ireland Research Income Statement 2017-2022" src="https://drive.google.com/uc?id=1dwuju_o-e4FuhwdYb_SHMeZyOfc5r8MI" width="550" height="254" /></a></p> <p>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.</p> <p>There is more details on the taxation of the company in <a href="http://economic-incentives.blogspot.com/2021/06/is-this-irelands-largest-taxpayer.html" target="_blank">the previous post</a>. Here we note that the tax charged in the accounts continues to be around 12 per cent of operating profit plus interest received.</p> <p><a href="https://drive.google.com/uc?id=15Yo5aIcZc6nrSFD4Pfs-ZDDz01ckSHLU" target="_blank"><img title="Microsoft Ireland Research ETR 2017-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Microsoft Ireland Research ETR 2017-2022" src="https://drive.google.com/uc?id=1pJc1ah2g8zfaTTVCaZQrJfrPWcrkx0co" width="550" height="157" /></a></p> <p>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.</p> <p>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.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-2287187047325641572023-06-14T16:27:00.001+01:002023-06-14T17:01:29.779+01:00Ireland in the 2020 Country-by-Country Data for US MNCs<p>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 <a href="https://stats.oecd.org/Index.aspx?DataSetCode=CBCR_TABLEI" target="_blank">partial database of these</a> although it currently only goes up to 2018. For US MNCs, the IRS have now published <a href="https://www.irs.gov/statistics/soi-tax-stats-country-by-country-report" target="_blank">data up to 2020</a>.</p> <p>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.</p> <p>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. </p> <p>Here are the top 25 recipients of corporate income taxes from US MNCs in the IRS CbCR data for 2020.</p> <p><a href="https://drive.google.com/uc?id=1uV-K8koQO9YlHYLSKsSVY5SG7Hf-8PZr" target="_blank"><img title="IRS Cash Tax Paid CbCR Chart 2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="IRS Cash Tax Paid CbCR Chart 2020" src="https://drive.google.com/uc?id=1YBiTw1VeS9TaoJjKS6MCawD-p3JICEAp" width="549" height="343" /></a></p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1oYtdlNjya55b1-jo25zxzUeL_tVOq4_h" target="_blank"><img title="IRS CbCR for the EU27 Tax Payments 2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="IRS CbCR for the EU27 Tax Payments 2020" src="https://drive.google.com/uc?id=1eRCwzMVbgyOuztqRkkK3nn2yfUOy9Laz" width="549" height="343" /></a></p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1XaGvsYbU1B4EnxvLDCWSZ-dHtR5IyfW-" target="_blank"><img title="IRS CbCR for the EU27 Tax Payments to NNI 2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="IRS CbCR for the EU27 Tax Payments to NNI 2020" src="https://drive.google.com/uc?id=1jCzlHzoeT5qwMszeHgmjkCCmt9GzP7V-" width="549" height="343" /></a></p> <p>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).</p> <p>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.</p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=13mnlvEdCo7ymrIbuoR2NCfgoQ7vEIc6e" target="_blank"><img title="IRS CbCR for the EU27 Tax Payments Per Capita 2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="IRS CbCR for the EU27 Tax Payments Per Capita 2020" src="https://drive.google.com/uc?id=1UYioPeewuA_lTR7irdZMVlN7qZciFXSK" width="549" height="343" /></a></p> <p>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.</p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1YvlOpkzRN2NE2mFpPZTscMeh2K9YG0Is" target="_blank"><img title="IRS CbCR Effective Tax Rates in EU27 2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="IRS CbCR Effective Tax Rates in EU27 2020" src="https://drive.google.com/uc?id=19iZRWQQF3sWmIoz29ZiZbj_MHJZa83qP" width="550" height="343" /></a></p> <p>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.</p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1W4mnHXyhJy-SEVA6Gl3mVGWN20C60Wcr" target="_blank"><img title="IRS CbCR Employees Number in EU27 2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="IRS CbCR Employees Number in EU27 2020" src="https://drive.google.com/uc?id=11KuXYXonkv7ji6MSn4ztYaLQ6IlLZE6P" width="549" height="343" /></a></p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1K7uKcJWmNGJr3NIwkpvIxAQGFkxuwvWD" target="_blank"><img title="IRS CbCR Employees Share of Total Employment in EU27 2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="IRS CbCR Employees Share of Total Employment in EU27 2020" src="https://drive.google.com/uc?id=1e3w8tB5haNcECgH03Vgu2dZizbiglTGD" width="549" height="343" /></a></p> <p>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. </p> <p><a href="https://drive.google.com/uc?id=1bfSKcwQLQpbQQeG29xo3QBRyeyu-WHQe" target="_blank"><img title="IRS CbCR Tangible Assets in EU27 2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="IRS CbCR Tangible Assets in EU27 2020" src="https://drive.google.com/uc?id=1ghKw8czkNq7h0QuCofhsc0roGoKisO0Y" width="550" height="336" /></a></p> <p>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.</p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1m8EA5BvuDgd8STajAtgsYlt-Iw7I-LRV" target="_blank"><img title="IRS CbCR Tangible Assets 2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="IRS CbCR Tangible Assets 2020" src="https://drive.google.com/uc?id=1bna8gScBiXImRfbt_tnYk9xU6lsHsCxN" width="550" height="342" /></a></p> <p>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.  </p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-6108123959668417162023-04-18T15:42:00.001+01:002023-04-19T01:36:00.167+01:00The last insight into Apple’s use of capital allowances?<p>As is well known <a href="http://economic-incentives.blogspot.com/2018/01/what-apple-did-next.html">Apple revised its international structure in 2015.</a>  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).</p> <ul> <li>AOI’s 2018 Accounts: <a href="http://economic-incentives.blogspot.com/2019/08/some-insight-into-apples-use-of-capital.html">Some insight into Apple’s use of capital allowances</a></li> <li>AOI’s 2019 Accounts: <a href="http://economic-incentives.blogspot.com/2020/08/further-insights-into-apples-use-of.html">Further insight into Apple’s use of capital allowances</a></li> <li>AOI’s 2020 Accounts: <a href="http://economic-incentives.blogspot.com/2021/06/the-latest-insight-into-apples-use-of.html">The latest insight into Apple’s use of capital allowances</a></li> <li>AOI’s 2021 Accounts: <a href="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 subsidiary, Apple Operations International (AOI)." target="_blank">The next insight into Apple’s use of capital allowances</a></li> </ul> <p>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.</p> <p><strong>Where in the world is AOI?</strong></p> <p>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.</p> <p>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.</p> <p>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.</p> <p>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 <a href="https://www.irishtimes.com/business/apple-made-key-subsidiary-irish-resident-for-tax-reasons-in-2014-1.3282037" target="_blank">here</a>.  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.</p> <p>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.</p> <p><strong>How is the AOI group doing?</strong></p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1CJ4cwrsKfJtHn7hBplryKnmuq0SKTmNk" target="_blank"><img title="AOI Income Statement 2017-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="AOI Income Statement 2017-2022" src="https://drive.google.com/uc?id=1rjwhislnTt1CAfEPDvaGigdLcSGzgPiM" width="554" height="266" /></a></p> <p>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.  </p> <p><strong>How much tax does the AOI group pay?</strong></p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=101J4TG1BXF-uNnE_HduxbIlOAtMqKCiA" target="_blank"><img title="AOI Cash Flow Statement 2017-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="AOI Cash Flow Statement 2017-2022" src="https://drive.google.com/uc?id=1waC7jJyaVnkuZ1xAQJ2-6TTJRv2Rm9Cj" width="569" height="231" /></a></p> <p>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.]</p> <p><strong>Why are cash tax payments lower than the tax provision?</strong></p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1wj79T6iNHWv1uaitVfJvPauq1HU2Iwd6" target="_blank"><img title="AOI Balance Sheet 2016-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="AOI Balance Sheet 2016-2022" src="https://drive.google.com/uc?id=1if_sZeon3tvPtiBfynlWUvV4bvlG6PKV" width="552" height="389" /></a></p> <p>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. </p> <p><strong>How much tax does the AOI group pay in Ireland?</strong></p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1zUvmf3XxinCx2TCOSd7WRoCK34A9C-d-" target="_blank"><img title="AOI Tax Reconcilliation 2017-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="AOI Tax Reconcilliation 2017-2022" src="https://drive.google.com/uc?id=1PvDyPogY0YZFqaM3lN_hOhlvYu3qGviv" width="568" height="214" /></a></p> <p>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.</p> <p>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).</p> <p>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.</p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=10Aru0VMMhEDsAA4cLDqDQFWPMSeoTrW-" target="_blank"><img title="Apple 10K Provision for Income Tax 2022 - 2" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Apple 10K Provision for Income Tax 2022 - 2" src="https://drive.google.com/uc?id=1HFugn3p0CatxTL_fOATlZKnyDI-ZR2bY" width="520" height="410" /></a></p> <p>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.</p> <p>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.</p> <p>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.</p> <p>We are now left with about $5 billion of the provision for taxes in the AOI group’s accounts that could be in Ireland.</p> <p><strong>What amount capital allowances are left?</strong></p> <p>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.  </p> <p>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.</p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=19wEaLMC_vxxE2vXwPczgpy897rCVsxCe" target="_blank"><img title="AOI Deferred Tax Assets 2017-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="AOI Deferred Tax Assets 2017-2022" src="https://drive.google.com/uc?id=1cagEsunmmnTZXmjVmzI7SC2r36aT2rwt" width="563" height="476" /></a></p> <p>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).</p> <p>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.</p> <p>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.</p> <p>Here are the month Corporation Tax receipts in March for recent years:</p> <p><a href="https://drive.google.com/uc?id=1G0jTWpedlpAY0EtYfuTW5sPyABYm-I3Q" target="_blank"><img title="CT Revenues March 2009-2023 Bar" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="CT Revenues March 2009-2023 Bar" src="https://drive.google.com/uc?id=1S-paY23zLAaRWT18pRxbPQ7mtRKxtDZf" width="548" height="343" /></a></p> <p>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.  </p> <p>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.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-69643614203614558152023-04-17T12:09:00.001+01:002023-04-17T14:07:45.658+01:00What to do with €30 billion of savings?<p>To paraphrase a former Taoiseach, as a community we are living away within our means. This can be represented using the recently published <a href="https://www.cso.ie/en/releasesandpublications/ep/p-isanf/institutionalsectoraccountsnon-financialquarter42022/keyfindings/" target="_blank">Q4 2022 update of the Institutional Sector Accounts</a>.  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:</p> <p><a href="https://drive.google.com/uc?id=1-Rge2e0D_h5FutK7Uet6n9dGVfG0RLvf" target="_blank"><img title="Savings minus Investment for HH and Gov" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Savings minus Investment for HH and Gov" src="https://drive.google.com/uc?id=1BRMGrqH2AMbNiezC_VrjC4gBCoi5n_wR" width="548" height="343" /></a></p> <p>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.</p> <p>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.</p> <p>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.</p> <p><strong>Ireland’s Savings in Comparative Terms</strong></p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1kykLdBsoL2sBsMYf8ASNDuOlxhAlZQYt" target="_blank"><img title="Savings minus Investment Selected EU Countries 2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Savings minus Investment Selected EU Countries 2022" src="https://drive.google.com/uc?id=1nAVX77VRCgUtRbkf_jHrmNpiyHUCyUDn" width="549" height="343" /></a></p> <p>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.</p> <p>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 <a href="https://www.gov.ie/en/press-release/ac49a-minister-mcgrath-announces-4-billion-transfer-to-the-national-reserve-fund/" target="_blank">National Surplus Reserve Fund</a>.  </p> <p>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. </p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1MftJcwTMhvi9lRNLsjD8FQJ5bDiPxFm1" target="_blank"><img title="Household Sector Loans and Deposits 2002-2022 Q3 CB Data" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Household Sector Loans and Deposits 2002-2022 Q3 CB Data" src="https://drive.google.com/uc?id=1TFZuvHwBgFD-7cY5sg78KRhNHexooYlI" width="548" height="343" /></a></p> <p>This increase in household sector deposits in Ireland has been one of the fastest in the EU14.</p> <p><a href="https://drive.google.com/uc?id=1FIwnU5pc0ayDp4MdjE7qneei0f8YC1oJ" target="_blank"><img title="EU14 Household Deposits Change 2019-2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="EU14 Household Deposits Change 2019-2021" src="https://drive.google.com/uc?id=1sm_owPl3qzJL_IT6Qv_7ZqZ3j3UlgUYg" width="549" height="343" /></a></p> <p>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.</p> <p><a href="https://drive.google.com/uc?id=1fACiMbZx-GphjXsILWomleUpURBllikc" target="_blank"><img title="EU14 Household Deposits to Income Ratio, 2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="EU14 Household Deposits to Income Ratio, 2021" src="https://drive.google.com/uc?id=1sdoTNzrQh5M4P0coMdY4mwL5pxuK4pR7" width="549" height="343" /></a></p> <p><a href="https://drive.google.com/uc?id=1NvErRQPnTo7mrxqniaBoIXB2KFo-3PEs" target="_blank"><img title="EU14 Household Deposits to Loans Ratio, 2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="EU14 Household Deposits to Loans Ratio, 2021" src="https://drive.google.com/uc?id=1uKhu8BLZdq1gembBYKRSbH4-T1vnLmYO" width="549" height="343" /></a></p> <p>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?</p> <p><strong>Macroeconomic Constraints: Real and Financial</strong></p> <p>The economy faces constraints but these are more real (resources) than financial (income).  The <a href="https://www.cso.ie/en/releasesandpublications/ep/p-mue/monthlyunemploymentmarch2023/" target="_blank">unemployment rate is below five percent</a> 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.</p> <p>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.</p> <p>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.</p> <p>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). </p> <p>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.</p> <p>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).</p> <p><a href="https://drive.google.com/uc?id=1fu_lql-RfSFSAryMoPbs_dW_boSzHzuh" target="_blank"><img title="Internal and External Imbalances 1975-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Internal and External Imbalances 1975-2022" src="https://drive.google.com/uc?id=1njA6qQ8glwFHy1J3ZdvHc6mLaF0GnsBL" width="549" height="343" /></a></p> <p>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.  </p> <p>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.  </p> <p>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.  </p> <p><a href="https://drive.google.com/uc?id=1lWzSNyvFMjv2I9As9YqSIte2eGlYk4ur" target="_blank"><img title="Exchequer Corporation Tax 12-Month Rolling 2012-2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Exchequer Corporation Tax 12-Month Rolling 2012-2023" src="https://drive.google.com/uc?id=104IDOYPQgpHan68bZm8maC_gdWVt_5um" width="548" height="343" /></a></p> <p>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.</p> <p><strong>Conclusion</strong></p> <p>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.</p> <p>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. </p> <p>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.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-33955379832484068742023-02-27T15:35:00.001+00:002023-02-27T16:00:18.604+00:00Do the Collisons have more wealth than half the population?<p>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 <a href="https://www.oxfamireland.org/blog/ireland-two-richest-people-have-more-wealth-50-percent-population-poorest-end" target="_blank">the press release was</a>:</p> <p><a href="https://drive.google.com/uc?id=1W6XIgsagdsTFzvHhb59T6u2MVm3sFqL6" target="_blank"><img title="Oxfam Headline 2023" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Oxfam Headline 2023" src="https://drive.google.com/uc?id=1LtDhntNkT6Vgfbg-F12_FLtvHDxdxtGc" width="550" height="249" /></a></p> <p> </p> <p>A number of media outlets gave prominence to the claim (such as <a href="https://www.thejournal.ie/oxfam-wealth-report-ireland-5970265-Jan2023/" target="_blank">here</a>, <a href="https://www.todayfm.com/news/top-two-richest-people-in-ireland-have-combined-wealth-of-e15-billion-1422340" target="_blank">here</a>, <a href="https://www.irishcentral.com/news/ireland-wealth-disparity" target="_blank">here</a>, <a href="https://www.rte.ie/news/business/2023/0116/1346849-1-of-irish-population-owns-27-of-the-wealth-oxfam/" target="_blank">here</a>, <a href="https://www.irishexaminer.com/business/economy/arid-41048837.html" target="_blank">here</a>, <a href="https://www.echolive.ie/business/arid-41051150.html" target="_blank">here</a>, and <a href="https://www.irishtimes.com/business/2023/01/16/number-of-irish-worth-at-least-50m-more-than-doubled-last-year-says-oxfam/" target="_blank">here</a>).  From Oxfam’s perspective this is achieving their objective and they certainly have no reason to change their approach.</p> <p>The estimates of the wealth of individuals are taken from <a href="https://www.forbes.com/real-time-billionaires/#7f6e3be83d78" target="_blank">the Forbes Billionaires list</a>. 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.</p> <p>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 <a href="https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-databook-2022.pdf" target="_blank">the Credit Suisse Global Wealth Report</a>.  </p> <p>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. </p> <p>But let’s look at the wealth estimates in a little more detail. First, by decile:</p> <p><a href="https://drive.google.com/uc?id=1B7iwHhJIlPzbridpMSGxc-0wK1aZs4um" target="_blank"><img title="Credit Suisse Bottom 50 Percent Ireland" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Credit Suisse Bottom 50 Percent Ireland" src="https://drive.google.com/uc?id=1wzFgBSYmu9XC9wbrZzf1YB2dm77cPYjy" width="311" height="196" /></a></p> <p>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.</p> <p>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.  </p> <p>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.</p> <p>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.</p> <p>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.</p> <p>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 <a href="https://www.cso.ie/en/releasesandpublications/ep/p-hfcs/householdfinanceandconsumptionsurvey2018/wealth/#:~:text=Tenure%20Status%20of%20Households%20in%20the%20Bottom%20Wealth%20Decile" target="_blank">the 2018 HFCS</a>, the CSO discussed the reasons for this:</p> <blockquote> <p>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.</p> </blockquote> <p>For 2020, <a href="https://www.cso.ie/en/releasesandpublications/ep/p-hfcs/householdfinanceandconsumptionsurvey2020/incomeandwealthinequality/#:~:text=net%20household%20wealth-,.,-Source%3A%20CSO%20Ireland" target="_blank">the CSO estimate</a> 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.</p> <p>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.”</p> <p>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.</p> <p>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 <a href="https://www.bloomberg.com/news/articles/2023-02-16/stripe-is-on-track-to-turn-a-profit-with-1-trillion-in-payment-volume?leadSource=uverify%20wall" target="_blank">Bloomberg said</a>:</p> <blockquote> <p>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. </p> </blockquote> <p>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.</p> <p>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 <a href="https://www.cnbc.com/2020/01/31/amazon-amzn-reaches-1-trillion-market-cap.html" target="_blank">the first time in early 2020</a>.  This pushed Bezos to top of the rich lists.  </p> <p>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.</p> <p>The key factor was further increases in Amazon’s share price.  By the middle of 2021, <a href="https://ycharts.com/companies/AMZN/market_cap" target="_blank">Amazon’s market capitalisation</a> 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 href="https://finance.yahoo.com/news/amazon-loses-1-trillion-market-171625425.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAALtTo4IB2F1bDEm_FS0T3VLyM6-_FKRwRB434PbnmPwUW5YTd7k5k6LVi4JE1tT7BJAGrMXUBcf7Dfd8YkR3VPRAcIbBfMC2aWGoOt0EGLnFhhcftMPmYFZowEu9Q6OiiZmu0xyP0HQ6D5W0AuoG_NspD0nOWjEzKgQDLRpwXCxG" target="_blank">a reduction of $1 trillion</a>.  This reduction is greater than Credit Suisse’s estimate of the net wealth of the entire Irish population ($920 billion).</p> <p>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.</p> <p>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.</p> <p>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.</p> <p>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, <a href="https://www.irishexaminer.com/business/economy/arid-40217897.html" target="_blank">as noted elsewhere</a>,  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.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-36590534651001573572022-11-28T16:49:00.001+00:002022-11-28T16:49:55.795+00:00What did we do with €166 billion of Gross National Savings?<p>The <a href="http://economic-incentives.blogspot.com/2022/11/what-to-do-with-166-billion-of-annual.html" target="_blank">last post</a> used <a href="https://www.cso.ie/en/releasesandpublications/ep/p-ana/annualnationalaccounts2021/disposableincomeandsavings/" target="_blank">the sector accounts</a> to give the steps that led to there being €166 billion of gross national savings in 2021. Here we will look at bit closer at what this €166 billion was used for.</p> <p>A large chunk of it was already accounted for by one item included in the previous post – €105 billion of gross capital formation.  This left an excess of just over €60 billion of gross savings over investment.  </p> <p><a href="https://drive.google.com/uc?id=1EXzxDfGaz-I2ktAJftU_7WS6RG8MwW_w" target="_blank"><img title="Gross Savings and Net Lending by Sector 2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Gross Savings and Net Lending by Sector 2021" src="https://drive.google.com/uc?id=17PHx9DvWqk-rM0yyaRygYWyC6loWThQw" width="550" height="209" /></a></p> <p>Accounting for net capital transfers and the proceeds from acquisitions less disposals of non-produced assets meant that the total amount available for net lending was €64.4 billion.  The sectoral split shows that almost all sectors were net lenders in 2021 with the only significant net borrowing being the €7 billion deficit recorded for the government sector.</p> <p>So, that leads us to ask what did we do with that €64 billion? The answer is in the financial transactions account, though the numbers here are pretty big.  Unfortunately we are not provided with the same sector split in this account (foreign-owned etc.) that is available elsewhere.  Still the main sectors do provide some insight.</p> <p><a href="https://drive.google.com/uc?id=1NmcKVEgCAMxtUMBBVlRp8IcMgwrjraRu" target="_blank"><img title="Financial Transactions by Sector 2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Financial Transactions by Sector 2021" src="https://drive.google.com/uc?id=1WQScT6xTLu7EaqmLYojn_mLIaHZjNrux" width="562" height="382" /></a></p> <p>Across all sectors, total transactions in financial assets led to an increase in these assets of €644 billion while there were transactions giving a €583 billion increase in financial liabilities.  The gap between them is net financial transactions and this was €60.9 billion in 2021.  </p> <p>This is not exactly equal to the €64.4 billion of net lending that was available in the capital account but given the scale of the figures it is not a surprise that they do not fully match.  What may be a surprise in 2021 is that the largest contributor to the statistical discrepancy between the two is the household sector.</p> <p>That aside, the figures for the household sector are the most straightforward.  Households added almost €14 billion to their deposits in 2021.  They also put nearly €4 billion in insurance and pension schemes.  </p> <p>The figures indicate the household bought nearly €6 billion of equities in 2021. Digging a little deeper into that item shows that around two-thirds of that was made up of purchases of unlisted shares.  Transactions in unlisted shares was something that <a href="http://economic-incentives.blogspot.com/2018/05/why-dont-household-sector-accounts-make.html" target="_blank">piqued our interest a few years ago</a> but the scale here is significantly smaller.</p> <p>The government column shows that there were excess liabilities taken on relative to the deficit that needed to be financed.  With €20 billion borrowed versus a deficit of €7 billion this meant that €13 billion was added to the government’s financial assets, mainly deposits, which are held with the Central Bank.</p> <p>The Central Bank itself is included as part of the financial corporate sector.  The numbers here are enormous (in large part due to IFSC activities) but the net figures are pretty small.  The figures for the non-financial corporate sector are also large and again it is hard to identify discernible patterns in the components but financial transactions did result in an improvement of around €44 billion in the financial position of the sector.</p> <p>So what did we do with €166 billion of gross national savings?  Spending on capital formation by all sectors added around €105 billion to the capital stock and left just over €60 billion for net lending. The household sector added €22 billion to its financial position, the corporate sectors sectors €46 billion, the while the government sector had to borrow €7 billion.  The next step will be look at the impact these had on the national balance sheet.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-47398088017659772542022-11-02T16:38:00.001+00:002022-11-02T16:38:58.707+00:00What to do with €166 billion of annual Gross National Savings<p>Over the past week the CSO have published further insights into the 2021 Annual National Accounts with <a href="https://www.cso.ie/en/releasesandpublications/ep/p-ana/annualnationalaccounts2021/disposableincomeandsavings/" target="_blank">additional tables on disposable income and savings</a> and <a href="https://www.cso.ie/en/releasesandpublications/ep/p-isanff/institutionalsectoraccountsnon-financialandfinancial2021/keyfindings/" target="_blank">the 2021 Institutional Sector Accounts</a>.  Here we will give a quick run through the output, income, spending and saving of the Irish economy in 2021.</p> <p>The turnover of the Irish economy is probably something a touch north of €1 trillion.  Of this, some will be goods and services sold in the same condition as received (e.g. wholesaling and retailing) so do not contribute to output.  The latest estimate of the CSO is that the value of output produced in the Irish economy was around €800 billion in 2021.</p> <p><a href="https://drive.google.com/uc?id=17V3QmgfSJnZvisREcP5BtryqqaX6gGlr" target="_blank"><img title="Output and Value Added by Setctor 2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Output and Value Added by Setctor 2021" src="https://drive.google.com/uc?id=1O1DO_GvfAWWkPH_iihoWKfiVKFPRY9d4" width="550" height="196" /></a></p> <p>And it is no surprise that the largest contributor to this was the sector of foreign-owned non-financial corporations.  The value of their output was almost half a trillion in 2021.  Of course, the value of output includes the value of intermediate goods and services used in production (e.g. flour for bread).  </p> <p>Subtracting intermediate consumption (which will include imported intermediate goods and services) gets us to Gross Value Added of each sector.  Including the value of taxes less subsidies on products (which are not sectorised) gives the Gross Domestic Product of the Total Economy.</p> <p>The operating surplus of each sector is got by adding subsidies on production received (such as wage support schemes) and subtracting taxes on production paid (commercial rates, water charges, motor tax for businesses etc.) and also subtracting compensation of employees paid.</p> <p>There was just over €110 billion of compensation of employees paid across all sectors of the Irish economy in 2021.  The share of this coming from foreign-owned companies (financial and non-financial) was 33.4%. This is up from 27.3% in 2013.</p> <p>To get from operating surplus to national income we add in the recipients of the compensation of employees and the net recipient of taxes and subsidies on products and production.  These obviously are the household and government sectors but in both cases there are some minor cross-border flows.  And then account is taken of net property income comprising dividends, retained earnings, interest and other investment income. In overall terms, these resulted in a net outflow of €103 billion from the Irish economy in 2021.</p> <p><a href="https://drive.google.com/uc?id=13Pt6qPiF3MNj-xOUOR5_JE-jHELVgpLk" target="_blank"><img title="Operating Surplus and Income by Sector 2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Operating Surplus and Income by Sector 2021" src="https://drive.google.com/uc?id=1bVQsM_Qlc7-fJ-KStDcIWjbwsJMWP743" width="562" height="235" /></a></p> <p>Again, there is no surprise that the largest source of these outflows was foreign-owned companies.  These companies generate significant value added and operating surplus in Ireland but the main beneficiaries of these profits are their foreign-resident shareholders.</p> <p>It is the net profits that are allocated to non-residents.  In national accounts net means after depreciation.  So some of the profits of foreign-owned companies are included in Ireland’s Gross National Income to cover the maintenance and/or replacement of the capital assets used in the production process.  Their profits also contribute to national income via the corporate taxes paid on them.</p> <p>The above table also includes €10 billion of net property income received by redomiciled PLCs – companies who have moved their legal headquarters to Ireland.  This inflow is mainly the difference between the retained earnings of these companies’ subsidiaries in other countries and the dividends paid out to their, mainly non-resident, shareholders.  The retained earnings of these foreign subsidiaries is counted as Irish foreign-direct investment abroad though outside of the legal headquarters Irish residents will not be the ultimate beneficiaries of that investment. </p> <p>We next look at the transition from Gross Income to Gross Disposable Income which involves accounting for taxes, social transfers and other current transfers.</p> <p><a href="https://drive.google.com/uc?id=1dZEMFb7T8ViX5LR26RyZ6ZAEHL7BZUTq" target="_blank"><img title="Gross Income and Gross Disposable Income by Sector 2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Gross Income and Gross Disposable Income by Sector 2021" src="https://drive.google.com/uc?id=1Q_dSZcMHCfrfpOLab0Rn7KgYd_d0vZMz" width="550" height="205" /></a></p> <p>Here we see the Corporation Tax paid by foreign-owned firms.  Foreign-owned non-financial corporates paid €11.5 billion in 2021 with foreign-owned financial corporates paying a further €1.2 billion.  These payments contribute to Ireland’s Gross National Disposable Income.</p> <p>Some cross border transfers such as foreign aid and Ireland’s contribution to the EU budget means that Gross National Disposable Income is a few billion lower than Gross National Income (€319 billion versus €323 billion).  Though EU subsidies to agriculture were counted as in inflow earlier in the sequence.</p> <p>And then we come to the use of that disposable income.  On the current side, there is consumption expenditure and on the capital side there is capital formation.  There is an adjustment for the change in pension entitlements (the difference between household contributions to private pensions operated by the financial sector and household pension benefits received from the financial sector).  This only changes the sectoral balances of those two sectors and not the balance for the Total Economy. </p> <p><a href="https://drive.google.com/uc?id=1bYMl2T2Y6HCfWPerYDW0_DDgDR-9GqK_" target="_blank"><img title="Disposable Income Consumption Savings and Capital Formation by Sector 2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Disposable Income Consumption Savings and Capital Formation by Sector 2021" src="https://drive.google.com/uc?id=15D0FPKM42NDcpOZ84_copOuVAaAByiHh" width="550" height="213" /></a></p> <p>We can see that Consumption Expenditure uses €153 billion of the €319 billion Gross National Disposable Income.  This resulted in Gross National Savings of €166 billion in 2021 that is used in the title of the post.</p> <p>In principle, this is savings that is available to add to national wealth – in either financial or non-financial assets.  Of course, an immediate pause for thought is that €90 billion of it arises in foreign-owned non-financial corporations (with a further €10 billion with redomiciled PLCs).  Yes, we would like them to have savings to maintain and/or replace the capital assets they have deployed against Irish labour (factories, plant & equipment etc.) but this level of savings goes well beyond that.</p> <p>The savings also coves the depreciation of assets owned by Irish-resident subsidiaries of foreign-owned companies but which are not deployed against Irish labor.  This include the aircraft fleets of aircraft leasing companies and the produced intangible assets that US MNCs have onshored here in recent years.  </p> <p>These companies will seek to repair/maintain and ultimately replace these assets and the savings shown above are to cover that.  The savings can also be used to repay any debts that may have been used to acquire those assets.  These savings are not available to use by the broader economy The pilots and cabin crew who fly the aircraft and the scientists and engineers who undertake R&D for US MNCs are almost exclusively based outside of Ireland.  The assets might nominally be located, or registered, in Ireland but the activity they underpin takes place elsewhere.</p> <p>The aircraft might be flying around south-east Asia but there is some activity in Ireland. That is primary related to the financing and leasing activities of the companies.  A US pharmaceutical MNC might undertake its R&D in the US but it could have significant manufacturing facilitates.  From an Irish perspective we are really on interested in the savings that can allow those activities to continue – mainly to repair and/or replace buildings and plant and equipment.</p> <p>It is true that aircraft leasing companies resident in Ireland have significant savings to cover the costs of the aircraft fleets and the Irish-resident subsidiaries of US MNCs have significant savings linked to the produced intangible assets they have onshored here but these are not savings in the “national” sense.  They cannot be used for other purposes and cannot be used to add to the wealth of the resident population.  But even stripping out foreign-owned NFCs and redomiciled PLCs there was still €65.5 billion of gross savings in 2021.</p> <p>As noted above, one way to add to national wealth is through capital formation.  And the table gives the gross fixed capital formation of each sector.  As it turns out, a lot of the €90 billion gross savings of the foreign-owned NFC sector, in aggregate terms at least, was used for capital formation.  The sector undertook €74 billion of capital formation in 2021.  This left a surplus of savings over investment for foreign-owned NFCs of €16 billion.</p> <p>All told, the savings minus investment of the Total Economy in 2021 was €60.7 billion in 2021.  Although we have reached it using the Sector Accounts this is the equivalent of the balance on <a href="https://www.cso.ie/en/releasesandpublications/ep/p-ia/internationalaccountsq22022/balanceofinternationalpayments/#:~:text=Financial%20Account%20Balances-,Table%201.2%20Summary%20of%20Current%2C%20Capital%20and%20Financial%20Account%20Balances,-%E2%82%AC%20million" target="_blank">the Current Account of the Balance of Payments</a>.  </p> <p>With GDP of €426.3 billion, a current account surplus of €60.7 billion is equivalent to 14.2 per cent of GDP.  Now, we clearly know neither figure reflects the underlying position of the Irish economy.  As the previous table shows the current account includes €16.2 billion from foreign-owned non-financial corporates and €9.5 billion from redomiciled PLCs.</p> <p>But even stripping those out that still leaves a surplus of savings over investment of €36.3 billion.  This is the €65.5 billion of gross savings of the domestic sectors less the €29.2 billion of capital formation they undertook.  The most notable contributions to this are the elevated savings of the household sector and the surplus of the domestic non-financial corporate sector.  </p> <p>The level of the savings in the household sector has been observed since the start of the pandemic.  It is not clear why the domestic NFC sector is running such a surplus but <a href="https://www.cso.ie/en/releasesandpublications/ep/p-isanff/institutionalsectoraccountsnon-financialandfinancial2021/nfc/#:~:text=Figure%202.8%20illustrates%20this%20investment%20rate%20for%20domestic%20corporations." target="_blank">the CSO do point out</a> that the investment rate (to GVA) of domestic NFCs is about eight percentage points below the EU average.  It this was at the EU average it would add close to €5 billion to the capital formation of domestic NFCs (and reduce their contribution to the current account by a commensurate amount).</p> <p>Here is a look at the contribution of the domestic sectors the the current account since 2013.  The chart shows the aggregate [S-I] position of the domestic sectors as well as the latest estimates of the modified current account (which is a related measure).</p> <p><a href="https://drive.google.com/uc?id=1oBK3LWaLbWSRyEO2bqsSeVMT7oLDlV88" target="_blank"><img title="Savings minus Investment by Sector and the Modified Current Account 2013-2021" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Savings minus Investment by Sector and the Modified Current Account 2013-2021" src="https://drive.google.com/uc?id=1EWVlHPNeKU7aFO86H5ZrLxTEAvcyMtYF" width="548" height="343" /></a></p> <p>Whether we used the sector approach of [S-I] or the asset approach of CA* it shows a significant underlying surplus of savings over investment.  The magnitude of this is something in the order of €30 billion (and as noted that is after the domestic sectors undertook €29.2 billion of capital formation).</p> <p>So, while there mightn’t be €166 billion to add to national wealth.  It looks like there is something around €60 billion to do so.  So what to do with it.  Well, we could eschew wealth and use it for consumption.  If it is to be added to the national balance sheet it could be used for capital formation such as new housing for households.  But it looks like a lot of is going on the financial balance sheet, particularly household deposits.  Perhaps there is reason for such caution but a bump in spending (current or capital) wouldn’t go amiss either.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-28268748553835690192022-10-11T15:48:00.001+01:002022-10-11T15:48:58.210+01:00Corporation Tax in the Q2 2022 Institutional Sector Accounts<p>Ireland’s surging revenues from Corporation Tax are evident in the Institutional Sector Accounts which are now available for <a href="https://www.cso.ie/en/releasesandpublications/ep/p-isanf/institutionalsectoraccountsnon-financialquarter22022/" target="_blank">the second quarter of 2022</a>.  Here is the four-quarter sum of Taxes on Income or Wealth (D.5.) paid by the non-financial corporate sector since 2004.</p> <p><a href="https://drive.google.com/uc?id=1zF6ln-Xf6ZkIoHsLu7Ony6XC4zIjJWjz" target="_blank"><img title="Taxes Paid by NFCs 2000-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Taxes Paid by NFCs 2000-2022" src="https://drive.google.com/uc?id=1L1MeVV4Co0DQzZc8xXhdkksaGve0aYN-" width="549" height="343" /></a></p> <p>Obviously, we are interested in what has been happening in recent years and, in particular, the near-vertical increase seen in recent quarters.  Looking at the series there are three level changes that can be identified over the past decade: 2015, 2018 and 2022.</p> <p>This is more evident if we look at the annual change of the four-quarter sum.  The three peaks correspond to the years listed above and are instances when the annual increase was 40 per cent of higher. </p> <p><a href="https://drive.google.com/uc?id=1C2fHxGk0rHM77vY8gLyKESZa2b_8hJ8Y" target="_blank"><img title="Taxes Paid by NFCs Annual Change 2012-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Taxes Paid by NFCs Annual Change 2012-2022" src="https://drive.google.com/uc?id=1b4rqiMT0pHqy9UFpqtcC2A61cLukOw3C" width="549" height="343" /></a></p> <p>Of course, what is striking about the latest increase is that it is a 50 per cent increase on what was already an elevated level.  We could go back through some of the factors behind the 2015 and 2018 jumps but here will we focus on the most recent increase – though as the most recent it is the one we know least about.  It will be the first half of 2024 before the Revenue Commissioners report aggregate data for the CT returns filed with them for financial years ending during 2022.</p> <p>One thing we can look at from the Institutional Sector Accounts is the indicative effective tax rate using Net Operating Surplus (NOS).  Some differences aside, NOS in the national accounting equivalent of Earnings Before Interest and Taxation (EBIT) from financial accounting.  There may also be some timing differences that distort things from time-to-time but these should wash out.</p> <p>Here is the ETR on the Net Operative Surplus of Non-Financial Corporates since the start of 2014.  To help with some of those timing issues both the numerator and denominator are taken as a four-quarter moving sum.</p> <p><a href="https://drive.google.com/uc?id=1_oG-PAXZo5WvdtoGHwADmxLPkszYMl7O" target="_blank"><img title="ETR on NFC NOS 2000-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="ETR on NFC NOS 2000-2022" src="https://drive.google.com/uc?id=10InKTWcCqxaFVU4ZI6hMynCCj1VN9z_o" width="549" height="343" /></a></p> <p>What we see is that, bar the odd fluctuation, the ETR on NOS has been generally fairly stable over the past decade or so.  And this is a period when there have been some tumultuous changes in Ireland’s national accounts (2015 and all that).</p> <p>There a small step-up evident in late 2018.  It is possible this is due to rule changes related to the claiming of capital allowances for intangible assets introduced in Budget 2018. But that is something for another day.</p> <p>It can also be seen in the chart that the ETR is below the 12.5 per cent headline rate for Ireland’s Corporation Tax.  A key reason for this is likely to be differences in the treatment of the depreciation of aircraft.  </p> <p>For tax purposes in Ireland, aircraft can be amortised over an eight-year period while in the national accounts a wide-body aircraft is depreciated over 25 years, which better reflects the actual lifespan of the asset.  In both cases the gross, or pre-depreciation, profits will be the same.  Due to the longer depreciation period, the net profit in the national accounts will be higher and this reduces the effective rate.  Tax accounts for aircraft leasing will have more depreciation (or at least will have more depreciation quicker) which will reduce net profits and lead to a higher ETR, probably close to the 12.5 per cent rate.  Again, this is something for another day and is not really our interest here.  </p> <p>Our interest is in the ETR in the chart for the past two or three quarters which is the highest for the period shown.  At 9.6 per cent, the ETR for Q2 2022 is around two percentage points higher than the average from 2014 to 2021 (7.3 per cent).  The average in 2019 and 2020 (post the 2018 step-up) was 8.0 per cent.</p> <p>Is there something that could be pointed to that could have caused this recent rise in the ETR?  There is nothing that particularly stands out.  There doesn’t appear to have been any rule or rate changes that could be pointed as contenders as explanations.</p> <p>One issue could be the preliminary nature of the 2022 figures for NFCs in the latest institutional sector accounts.  The CSO will have a fair handle on gross profits - from trade data and other sources.  They can obviously see how much Corporation Tax is being paid from the monthly Exchequer statements – but the detail behind those payments may not yet be available to them.</p> <p>As alluded to above, companies are currently paying Corporation Tax linked to profits made in 2022.  Companies make preliminary Corporation Tax payments in months six and eleven of their financial year – by which time it is expected that they will have 90 per cent of their expected Corporation Tax liability paid.  Companies then file their full Corporation Tax return in month nine following the end of their financial year and accompany that filing with any outstanding amount due.</p> <p>So a large company with a year-end of December 31st will make its first preliminary Corporation Tax payment in June (45 per cent), make its second preliminary payment in November (90 per cent) and file its full Corporation Tax return the following September.</p> <p>A similar schedule has been set out for alternative year-ends. For example, if a company has a year end of September 30th, its first preliminary payment will be due in March, its second in August with its full return to be filed by the following June.  This could be significant has 2022 has seen unusually large CT revenues reported for March and August.</p> <p><a href="https://drive.google.com/uc?id=1GzLkYBoz7okp09IualTOtK29yW9anKJp" target="_blank"><img title="Corporation Tax Cumulative Annual 2014-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Corporation Tax Cumulative Annual 2014-2022" src="https://drive.google.com/uc?id=1BzYJUVDzExWBemB0Nn_lItjp7f_gO-d3" width="549" height="343" /></a></p> <p>Of course, the Exchequer Returns also give no reason for an increase in the ETR.  One possible explanation is that the CSO have underestimated profits and that these will be revised up in subsequent releases which will, in turn, reduce the ETR.  It’s certainly possible but the CSO have been keeping an ever-closer eye on some of the key MNCs operating in Ireland via its Large Cases Unit (LCU).</p> <p>An alternative explanation is that the gross profit figure is fine but that the net profit, i.e. post depreciation, will be revised.  Companies pay Corporation Tax on their net profit.  In recent years, there have been huge claims for capital allowances for intangible assets.  However, these allowances, at least as related to the original acquisition of the intangible asset, will be exhausted.</p> <p>This means a company could face a much higher tax bill even if its gross profit is unchanged.  This is because it has run out of capital allowances to use as an offset against the gross profit.  If this was to happen, the companies net profit would increase and it would have to pay more tax.</p> <p>It is possible that this is the reason for some of the 2022 increase in Corporation Tax.  Of course, absent the full returns of the companies it is just supposition.  It is not clear how the tax treatment of capital allowances for intangible assets aligns with the consumption of fixed capital for those assets in the national accounts.  Both are versions of depreciation and, as set out above for aircraft, they do not have to coincide.</p> <p>The Institutional Sector Accounts show no decline in the consumption of fixed capital for NFCs.  Here are the quarterly CFC figures for the NFC sector since 2012.  </p> <p><a href="https://drive.google.com/uc?id=1t1Mkg5vZ1z6AXolkGG-QMPT9Lbkk2lE2" target="_blank"><img title="Consumption of Fixed Capital of NFCs 2014-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Consumption of Fixed Capital of NFCs 2014-2022" src="https://drive.google.com/uc?id=10e0kD6oqrCow9CUOkl8gx-voENuonNmG" width="549" height="343" /></a></p> <p>The step changes linked to the onshoring of intangible assets (Q1 2015, Q1 2020 and others) are clearly visible.  The increases over the past two and a half years are more gradual and more like those that would be linked to the ongoing, and regular, increase in the stock of tangible assets (buildings, plant and machinery) owned by the sector.</p> <p>Could some of the 2022 increase in CT be linked to the exhaustion of capital allowances? It could be. It certainly is something that could happen over the coming years.  But it will a while before we have evidence of that.  </p> <p>How it will be treated in the national accounts will also be worth keeping an eye on.  As noted, the exhaustion of the capital allowances will not impact gross profits – so GDP won’t be directly impacted. It is net profits that will change – so the impact may be on GNP.  Higher net profits accruing to foreign-owned companies would push down on GNP.  This would reduce the gap between GNP and GNI*.</p> <p>Another possibility is that the intangible assets are relocated when the capital allowances run out.  This would have a direct impact on GDP – pretty much the reverse of what we have seen with the onshoring in recent years, most notably the event in 2015.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-14457375978164680062022-10-07T17:52:00.001+01:002022-10-07T17:52:58.684+01:00The Household Sector in 2022: Continued Savings<p>The CSO have published the Q2 2022 update of the institutional sector accounts.  They continue to show a strong performance for the household sector – at least in aggregate terms.  A previous discussion of estimates for distributional sector accounts is <a href="http://economic-incentives.blogspot.com/2022/07/distributional-national-accounts-for.html" target="_blank">here</a>.</p> <p>It should also be noted that the figures are presented in nominal terms, i.e., not inflation adjusted. Here is the current account showing income, consumption and savings for the first half of the past five years.  Percentage changes relative to 2019 (pre-COVID) are also shown.</p> <p><a href="https://drive.google.com/uc?id=1t9DxZWPO22uNvSPBSbW8iuHlFCOGVhZI" target="_blank"><img title="Household Sector Current Account 2018-2022 H1" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Household Sector Current Account 2018-2022 H1" src="https://drive.google.com/uc?id=1r2kA3LMOtkw6CyryHssURLr8SWj1A-Wz" width="566" height="574" /></a></p> <p>The bottom line is that the household savings rate remains elevated.  The savings rate was 13 per cent for the first half of 2019; it was 24 per cent for the equivalent period of 2022.  This is the result of strong income growth (aggregate compensation of employees is up over 20 per cent since 2019) and modest consumption expenditure growth (up five per cent over the same period).</p> <p>In the first six months of 2019, households received €50.0 billion of employee compensation.  This increased to €60.6 billion in the first half of 2022.  There was an increase in pay from all sectors but the largest, and fastest increase was from non-financial corporates.  Companies to the first half of 2019, businesses paid out €7.4 billion more on their employees, an increase of 23.1 per cent.</p> <p>The increase in income has resulted in an increase in income taxes paid.  These are up 36 per cent compared to 2019.  Social insurance contributions are also up with contributions to private pension schemes up nearly 40 per cent (from €3.5 billion in the first half of 2019 to €4.8 billion this year).</p> <p>The last few years has seen significant changes in social benefits received from the government sector.  These were €11.8 billion in the first half of 2019 and rose to €15.1 billion in 2020 (due the lockdowns and the Pandemic Unemployment Payment).  They rose to €15.9 billion in 2021 before falling back to €13.3 billion in the first half of this year.</p> <p>All told, there was a near 20 per cent rise in the gross disposable income of the household sector in the first half of 2022 compared to the same period of 2019.  As noted, the increase in consumption expenditure has been more muted with only a five per cent rise over the same period.</p> <p>The household sector had €7.4 billion of gross savings in the first half of 2019.  Although 2022 saw a slightly lower level than both 2020 and 2021, at €16.1 billion it remains significantly higher than pre-COVID levels with the savings rate continuing to exceed 20 per cent.</p> <p>The capital account (below) shows that these savings are not being used for capital formation (investment spending) though the household sector did have just over €1 billion of net capital formation in the first half of 2022.  This compares to negative net capital formation in the equivalent periods of the preceding three years (as depreciation – consumption of fixed capital – exceeded gross capital formation).</p> <p><a href="https://drive.google.com/uc?id=1b2w-s1eBSUYx49Hpn9fzof9nX-LCyBgq" target="_blank"><img title="Household Sector Capital Account 2018-2022 H1" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Household Sector Capital Account 2018-2022 H1" src="https://drive.google.com/uc?id=1P-aRR3LMq_QQNMk4lpJSQYomoVGREPWt" width="550" height="308" /></a></p> <p>One notable item in the capital account is the €3 billion of investment grants received in 2022.  This is linked to the Mica Redress Scheme which was approved by Government earlier in the year.</p> <p>The household sector remained a significant net lender in 2022.  Other figures suggest that most of this is going on increased deposits (though the €3 billion from the Mica Scheme will go on the financial balance sheet as an “other receivable”.  There will also have been a reduction in loans liabilities.  What is needed is an increase in capital formation – new houses.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-9464443102799338232022-07-21T14:26:00.001+01:002022-07-21T14:26:03.303+01:00Downward Historical Revisions and a Large 2021 Increase in the Modified Current Account<p>The current account of the balance of payments is an important macro-economic indicator. For a variety of reasons Ireland’s headline current account outturns are pretty useless as an indicator of the underlying position of the economy. To that end, the CSO have been publishing a modified current account for a number of years.  <a href="https://www.cso.ie/en/releasesandpublications/ep/p-ia/internationalaccountsq12022final/modifiedcurrentaccount2021/" target="_blank">The latest estimates</a> were published last week.</p> <p><strong>Historical Revisions</strong></p> <p>The first thing we note is that the historical series has been revised down.  This is something that may have been expected given it was thought that something may be <a href="http://economic-incentives.blogspot.com/2021/11/is-something-mucking-up-modified.html" target="_blank">mucking up the current account</a> and <a href="http://economic-incentives.blogspot.com/2022/05/irelands-burgeoning-current-account.html" target="_blank">the impact of the statistical discrepancy</a>.  Anyway, here are the revisions.</p> <p><a href="https://drive.google.com/uc?id=1zlPfwt0bnGztIIbGVdRIZLx7cAalqSFG" target="_blank"><img title="Modified Current Account 2022 Revisions" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Modified Current Account 2022 Revisions" src="https://drive.google.com/uc?id=1wQ9qJwQxgxwLfSBxnRkFt_6JhX0lfRTg" width="548" height="343" /></a></p> <p>For 2022, the estimate of CA* has been revised down from €24 billion to €13 billion.  This is still a significant surplus and equivalent to around 6.5 per cent of GNI* in 2020.</p> <p><strong>Large Increase in 2021</strong></p> <p>The second thing we note from the latest estimates is the large increase for 2021.  The 2021 estimate of CA* is a surplus of €26 billion or 11.1 per cent of GNI*.  In a very timely manner, the CSO have published <a href="https://www.cso.ie/en/releasesandpublications/ep/p-isanf/institutionalsectoraccountsnon-financialquarter12022/" target="_blank">institutional sector accounts</a> that are consistent with the recent National and International Accounts.  Using these we can get a sectoral breakdown of the modified current account.</p> <p><a href="https://drive.google.com/uc?id=1RfKNw8FlDaTCjkBNbPtgpw6_NJ1MgupH" target="_blank"><img title="Modified Current Account by Sector 2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Modified Current Account by Sector 2022" src="https://drive.google.com/uc?id=1hcnU_fMvbvXOQTq4iPMcuw-3HDQHnKBn" width="548" height="343" /></a></p> <p>The primary drivers of Ireland’s underlying position in the current account of the balance of payments are the household and government sectors.  This remains true to the large increase showing for 2021.</p> <p>Household savings remained elevated in 2021 while the government deficit closed significantly - due mainly to surging revenues.  Typically taxes would not feature in a discussion of the current account.  They might impact sectoral positions but are generally internal transfers.</p> <p><strong>Corporation Tax and the Current Account</strong>  </p> <p>Ireland is unusual in having a large share of Corporation Tax paid by foreign-owned companies.  Some of these have set up operations in Ireland to service the domestic market but the largest source of Corporation Tax are foreign-owned FDI companies with operations in Ireland to manufacture for or service markets abroad. </p> <p>About three-fifths of Corporation Tax is based by US MNCs.  This tax is paid from the profits made on export sales and boosts Ireland’s current account.  The money is not counted as a factor outflow to foreign shareholders but goes to the government as corporate income tax payments.  Strong rises in other taxes such as Income Tax and VAT also helped improve the government’s position.  That the household sector maintained its savings at such an elevated level points to a strength in the position of that sector – albeit in aggregate terms.</p> <p><strong>The Corporate Sectors in 2021</strong></p> <p>At this stage we can’t delve too deep into developments in the corporate sectors.  That will come later in the year when a split by foreign and domestic ownership is made available.  For the moment we can see that this is where most of the revisions arise.  The “not sectorised” component of the current account for 2020 went from +€6.4 billion in the 2021 estimate to +€2.4 billion in the latest estimate.  </p> <p>While the impact of the non-financial corporate sector in 2020 (though technically a residual to make the sectoral balances consistent with CA*) went from +€9.5 billion in last year’s estimates to €1.0 billion in the latest figures.  It is these two changes that led to the downward revision in CA* for 2020 shown in the opening chart.</p> <p>The contribution of the NFC sector also seems to have played a role in the large 2021 increase in CA* – see the large red block in the column for 2021 in the second chart.  But, as noted above, probably best to wait until the foreign/domestic split of that is made available later in the year before drawing any conclusions on that.  </p> <p><strong>Who Should be Spending More?</strong></p> <p>Looking at the household and government sectors shows that the improvement in 2021 was more than just a measurement anomaly.  With the quarterly figures now available we can extend this to Q1 2022.  Here it is as a four-quarter moving sum.</p> <p><a href="https://drive.google.com/uc?id=1dLdYQcnEls-uc4k0GFYmNzWIotydKtrK" target="_blank"><img title="HH Gov Savings minus Investment" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="HH Gov Savings minus Investment" src="https://drive.google.com/uc?id=1FhVu86_P4aXpX2Ho_29zPS4s-nSGyJaw" width="548" height="343" /></a></p> <p>One conclusion that could be drawn from this is that the government is (not yet) saving any of its corporate tax largesse – but the household sector is. Could we get households to spend more and the government to save a small bit?  And the increase in household spending can be greater than any saving done by the government.  We don’t need a +€20 billion outturn as currently shown in the above chart.</p> <p><strong>Events, Dear Boy, Events</strong></p> <p>If it’s extra spending we’re looking for then it may already be happening – but due to outside circumstances rather than a conscious decision to spend more. Here is national net monthly fuel imports.  </p> <p><a href="https://drive.google.com/uc?id=1nIFzvZTW7pJZDoMpsnBdrS64xXzgwA-8" target="_blank"><img title="Fuel Imports Net 2005-2022" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Fuel Imports Net 2005-2022" src="https://drive.google.com/uc?id=191Yf_LsrMuz429CxM7sGhhhI1kt-N-H1" width="548" height="343" /></a></p> <p>Pre-COVID these were running at around €400 million a month.  The latest figures go to May 2022 and show net imports of around €1 billion a month.  Import spending at that rate won’t be long in putting a dent in national net lending. But seems unlikely to be large enough to wipe it out.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0tag:blogger.com,1999:blog-2826531655042170344.post-20310270240476625042022-07-14T11:42:00.001+01:002022-07-14T11:42:01.221+01:00Continued Calm in the Aggregate Corporation Tax Calculation–apart from Capital Allowances Claimed.<p>This time last year we noted <a href="http://economic-incentives.blogspot.com/2021/07/relative-calm-in-2019-aggregate.html" target="_blank">the relative calm across most of the items in the 2019 update</a> of the Revenue Commissioner’s aggregate Corporation Tax calculation.  The recent release of the 2020 update has seen this largely continue.  </p> <p>This may not be a surprise as, elevated though they are, Exchequer Corporation Tax receipts were relatively stable across 2018 (€10.4 billion), 2019 (€10.9 billion) and 2020 (€11.8 billion).  It is also hard to discern a clear impact of the COVID-19 pandemic in the figures.</p> <p>Anyway here is the calculation of Taxable Income for the most recent five years that are available.</p> <p><a href="https://drive.google.com/uc?id=16uoDzqAG7-UYFsb20B49_DzGB1ZC9dTb" target="_blank"><img title="Aggregate CT Calculation for Taxable Income 2016-2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Aggregate CT Calculation for Taxable Income 2016-2020" src="https://drive.google.com/uc?id=1P66Mc4-Bq2vW1KVhTw7Sl5COZyCYpoiK" width="576" height="494" /></a></p> <p>The bottom line is that Taxable Income for the financial years of companies that ended during 2020 aggregated to just over €110 billion, an increase of around €4 billion on 2020.  There is probably a bit more going on under the headline aggregate figures.</p> <p>The starting point of Gross Trading Profits was actually lower in 2020 compared to 2019.  However, this was offset by lower figures for capital allowances used and trade losses carried forward used.  There may be a pandemic effect here via the impact on the aircraft leasing sector which would have seen a big drop in gross income in 2020.</p> <p>There was a reduction in trade charges in 2020.  In this context these are typically certain royalty payments for the use of intellectual property.  The reduction may be due to the restructuring undertaken by US MNCs and the relocation of the IP either back to the US or onshored to Ireland.  We might have expected this to result in an increase in capital allowances but as noted above they actually fell.</p> <p>There is however some tumult if we look at the figures for capital allowances claimed.  The figures in the above tables are for capital allowances used, that is actually offset against positive income in the year they are claimed.  In some cases firms may claim capital allowances but not have sufficient positive income to use them against.  Those unused capital losses are carried forward to subsequent periods where they may be offset against positive profits if they arise. [Technically, the unused capital allowances are carried forward as trade losses.]  </p> <p><a href="https://drive.google.com/uc?id=1tlx7MIAICVGiieFINmXkkfOXI7tQqZ-o" target="_blank"><img title="Aggregate CT Calculation Capital Allowances Used and Claimed 2013-2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Aggregate CT Calculation Capital Allowances Used and Claimed 2013-2020" src="https://drive.google.com/uc?id=1f4D0K7ZnK8kgkJ7Czp7i4k6svWAsNEam" width="550" height="225" /></a></p> <p>The first time we really got interested in these figures was when those for 2015 were published.  These gave insight into the 26 per cent GDP growth rate published by the CSO for that year.  In 2015, the amount of capital allowances claimed jumped from €24 billion the previous year to €51.5 billion.  There was an associated increase in the figures for capital allowances used which is also reflected in the increase in Gross Trading Profits (which are included in GDP).</p> <p>The following years saw increases but nothing that really stood out – until 2020.  As can be seen, claims for capital allowances went from €86 billion in 2019 to €145 billion in 2020.  The annual increase in 2020 is bigger than the annual total for 2015.  But what is unusual now is that it is not associated with increases in the other related items.</p> <p>As discussed above there was actually a slight drop in the amount of capital allowances used in 2020, as there was for Gross Trading Profits.  So we have a huge increase in capital allowances claimed but no evidence of an associated increase in profits.  It is hard to know what is behind the rise in claims for capital allowances.</p> <p>The panel on the right of the table gives the figures for the consumption of fixed capital for non-financial corporates in the national accounts.  We can see that by and large the national account version of depreciation tracks the tax treatment of it.  Consumption of fixed capital jumped in 2015 and typically has been around 85 per cent of the figure for capital allowances claimed.</p> <p>The figures can differ in how depreciation is treated.  Most notable the capital allowances for aircraft for leasing can be claimed over eight years whereas such aircraft will be depreciated over 25 years in the national accounts.</p> <p>The difference between the figures exploded in 2020 with consumption of fixed capital in the national accounts being a little over 60 per cent of the figure for capital allowances claimed in the Corporation Tax statistics.  There may be some insight in the forthcoming annual national accounts set to be published by the CSO.</p> <p>We return to the aggregate Corporation Tax calculation and look at how Gross Tax Due as derive from Taxable Income becomes Tax Due.</p> <p><a href="https://drive.google.com/uc?id=1Kd2Tmyv7zWsZlIDhKhlwVxy2NKtFLrQw" target="_blank"><img title="Aggregate CT Calculation for Tax Due 2016-2020" style="margin: 0px auto; border: 0px currentcolor; float: none; display: block; background-image: none;" border="0" alt="Aggregate CT Calculation for Tax Due 2016-2020" src="https://drive.google.com/uc?id=1qqRJuHf-uIgCL6rG4OzPz7_d8t-DllpR" width="550" height="304" /></a></p> <p>Again, there is really nothing of note that stands out in the 2020 figures.  The biggest impact on Tax Due comes from Double Taxation Relief and the Additional Foreign Tax Credit which reflects the tax paid in foreign jurisdictions on the worldwide income of Irish resident companies included in their Irish tax return.  A move to a territorial system would see such foreign income removed from the Irish tax base.</p> <p>Elsewhere there were only small changes.  The amount of the R&D tax credit remained relative stable compared to 2019.  And the end point of Tax Due gives figures that closely match the receipts collected by the Exchequer.</p> <p>There may be a bit more going on in the next releases.  In 2020, Corporation Tax jumped to €15.3 billion and is on track to be even higher in 2022.  And maybe additional data releases will give some insight into that unusual jump in capital allowances claimed in 2020.</p>Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.com0