Tuesday, October 3, 2017

The current account: where do we stand?

Here are the estimates of the current account of the Balance of Payments as currently provided by the CSO:

BoP Current Account Unadjusted

As we have explained before the recent changes of the current account are telling us close to nothing about the underlying external position of the economy.  Making the * adjustments used to determine GNI* doesn’t offer much and only gets us to this:

Bop Current Account Star Adjustments

The modified current account adjusts for the net income of redomiciled PLCs (which ultimately doesn’t accrue to Irish residents) and the depreciation of foreign-owned aircraft for leasing and intangible assets (which accrues to non-residents through the repayment of debt rather than income).  These adjustments may have given us a better level indicator of national income, GNI*, but still left us with a current account that offered little insight.

In our previous effort, we made a further adjustment for the acquisition of these aircraft for leasing and intangible assets.  That is because these items are imported but the purchases are not funded from domestic sources so any deficit that results from these is not reflective of the underlying position of the economy.  Any such deficits are funded by intra-company lending.  Using figures for the investment in these assets gets us to:

Bop Current Account Acquisition Adjustments

This is undoubtedly an improvement and the orange line reflects what we might expect an underlying current account to do.  It deteriorates up to 2008, then shows some improvement and returns to balance in 2014.  However, it is what happened then that suggested all was not what it seemed to be.  Yes, we probably would have expected the underlying current account to continue improving in 2015 and 2016 but the improvements here seemed too large and by 2016 the orange line is showing a surplus of €13 billion.

The issue seems to be related to imports of R&D services and we tried to explore the implications of this for GNI* here.  The issue is whether expenditure on R&D activity should be treated as intermediate consumption (thus reducing profits) or a capital item (investment).  The move to new national accounting standards sees R&D spending treated as a capital item but certain issues remain in the introduction of a consistent treatment across the national accounts and the balance of payments.

Although R&D spending is treated as a capital item in the national accounts it is still treated as intermediate consumption for balance of payments purposes.  The previous post runs through this in more detail but when a consistent treatment is taken it is likely the outflows of profits will increase by the amount of spending on R&D service imports (as almost all of this is undertaken by foreign-owned MNCs.)

It’s all becoming messy now but if we make a further adjustment for imports of R&D services this is what we get:

Bop Current Account R and D Adjustment

That looks about right.  The balance has been adjusted down for all years but this difference increases for 2015 and 2016 when R&D service imports really ramped up.  The green line reflects what we would think an underlying current account balance would look like and has steady improvement to a small surplus in 2016 unlike the rapid increases of the earlier attempt.

So let’s put this underlying measure relative to GNI* to see what we get (though we have some issues over how R&D service imports are influencing that).

Bop Current Account Underlying to GNI star 

As the label shows it is quite the journey from the official estimate of the current account to this derived underlying measure.  There may be some issues here and there but it seems to fit the bill.  The current account deficit that began to open in 2004 and 2005 and looks like it returned to something close to balance last year after a number of years of sustained improvements.  We’ll take that.  For now.

Here is a table showing the adjustments made. Click to enlarge.

Bop Current Account Adjustments Table

And to conclude here is something which may or may not change the underlying position – R&D exports.  All the focus has been on onshoring of IP but it seems like there is also IP going in the other direction with a surge in IP exports in recent years (albeit at a scale much much smaller than what has been happening in the other direction).

Bop Current Account R and D Exports

Monday, October 2, 2017

Effective Tax Rates in the C&AG Report-Companies

Comparing effective tax rates across countries may be difficult but comparing them across companies using the same system should be insightful.  And we get significant added value from the C&AG report chapter on Corporation Tax Receipts in the analysis provided of the “Top 100” companies.

The C&AG place companies in the “Top 100” using their Taxable Income and Tax Due figures for 2015.  The table below gives the outturns for these, and the steps between them, in the aggregate Corporation Tax computation published by the Revenue Commissioners.

Revenue CT Comp 2011 to 2015

For 2015, we can see that €65.1 billion of Taxable Income resulted in €6.2 billion of tax due or 9.6 per cent of Taxable Income.  There is lots going on before we even get to Taxable Income (capital allowances, loss relief and trade charges) which is where most previous attention has focused.  The C&AG report gives some insight into what happens lower down the calculation. 

The table shows that before any reliefs or credits are applied the 12.5 per cent and 25 per cent Corporation Tax rates gave rise to €8.4 billion of gross tax (12.9 per cent of taxable income) with the reliefs and credits leading to the €6.2 billion tax due figure.

Of the two ranking used by the C&AG the ranking by Taxable Income is probably the most informative as it gives the position before the application of credits and reliefs.  The distribution of effective tax rates (tax due as a percentage of taxable income) for the top 100 companies by taxable income is given in this useful chart:

C and AG ETR by Taxable Income

The overall rate for the top 100 is put at 9.3 per cent but there is significant variability within the group.  Reassuringly, depending in your perspective, 79 of the 100 companies had effective rates (using the tax due as a proportion of taxable income approach) of between 10 and 15 per cent with 57 companies having rates of 12.5 per cent or above (likely reflecting the 25 per cent CT rate on non-trading income).  At the other end, though, 13 companies have effective rates of less than one per cent with eight being zero or negative which unsurprisingly is where attention was drawn.

How can this be?  Well, the C&AG report (and the table above) tell us:

Of the 13 taxpayers with an effective rate of less than 1% for 2015, they had availed either of double taxation relief to offset Irish corporation tax or of the research and development tax credit or of both these reliefs. The other 43 taxpayers with an effective rate of less than 12.5% had also availed of various reliefs.

There are no loopholes here.  Double tax relief and the R&D credit are central parts of the Irish Corporation Tax regime.

Ireland uses a worldwide system so profits earned abroad are included in an Irish-resident entity’s taxable income.  There as €7.5 billion of “foreign income” included in Ireland’s Corporation Tax base in 2015.  To allow for the tax paid on that in the source country Ireland grants a credit to avoid double taxation.  Total relief for tax incurred abroad amounted to €1,195 million in 2015 (double tax relief was €947 million and the additional foreign tax credit was €238 million).

We don’t get a break down of companies using double tax relief but any Irish-resident companies whose taxable income is derived from activities outside of Ireland will have an effective tax rate close to zero as the relief available for tax paid abroad will almost always fully offset the tax due at 12.5 per cent in Ireland.  If they do have Irish-source income it will be taxes at 12.5 per cent unless they use the second major relief which is the R&D tax credit.

In 2015, claims under the R&D tax credit amounted to €708 million (of which €349 million was used and €359 million was the payment to firms of excess R&D credit).

If double tax relief can be viewed as relief for tax incurred abroad, the R&D credit can be considered relief for (a particular) an expense incurred in Ireland.  Claims that the zero per cent rates reflect tax avoidance are a little wide of the mark given that to achieve them the company must either pay tax abroad or spend money in Ireland.

Of course, what the R&D credit does is subsidise that expense and whether that is justified is an important policy question which was addressed by this 2016 evaluation published by the Department of Finance while Ireland’s approach can be compared to that used internationally in this  OECD review of R&D incentives published a few weeks ago. 

Spending 100 to get back 37.5 (12.5 from the standard deduction of the expense and 25 via the credit) does not make sense unless the company expects the R&D activity to lead to increased profitability in the future.  In the absence of the credit companies will undertake some R&D and the 2016 evaluation found a 40 per cent deadweight from the scheme.  That is, while 60 per cent of the associated R&D activity from the result of the scheme, 40 per cent would have taken place anyway and these companies benefitted from partial public funding of R&D they would have fully funded privately anyway. 

On the repayable component of the scheme (i.e. instances where the tax credit is less than a companies computed tax bill) which were the subject of a recent set of parliamentary questions the evaluation finds:

Analysis of the firm characteristics of the R&D tax credit show that it is mainly older, larger and non-Irish firms who derive financial benefit from the scheme, although it is typically Irish firms who benefit more from the repayable credit element of the scheme.

Should we be concerned with the zero per cent effective rates shown in the C&AG report? Not unless we think companies are paying tax elsewhere or incurring R&D expenditure to avoid Irish taxes. Between them these two elements, which were highlighted by the C&AG account for €1.9 billion of the €2.2 billion between gross tax and tax due.

Granting relief for tax paid abroad is something we should do unless we move to a territorial system in line with most other countries in which case the foreign income of Irish-resident companies would not be counted as part of taxable income while granted relief for R&D expenditure is a deliberate policy choice designed to encourage such activity which we can change if we wish.

If anything, when looking at these useful figures the focus should be on the other end of the range published by the C&AG but “79 of top 100 companies have tax rate of 10% or above” is not what the headline writers are looking for.  And, as stated earlier, most of the action happens above the starting point of taxable income used by the C&AG.

Effective Corporate Tax Rates in the C&AG Report–Countries

The Office of the Comptroller and Auditor General has published its Report on the Accounts of the Public Services 2016 which includes a chapter on Corporation Tax Receipts.  One issue which the chapter addresses is effective rates of Corporation Tax.  For a variety of reasons this is rarely straightforward.  Here is a chart included by the C&AG

C and AG ETRS

The chart is an effort to compare effective rates with statutory rates.  The statutory rates are taken from the OECD with the effective rates taken from the Paying Taxes 2017 report from pwc.  Two paragraphs are provided as commentary to the chart:

20.22 In 2015, Ireland had the lowest statutory rate of corporation tax of all OECD countries.1 Based on the PwC/World Bank report, Ireland’s estimated effective rate of corporation tax was 12.4%, which was just 0.1% below the statutory rate. 12 OECD countries had an effective rate of corporation tax which was lower than this; one had a rate which was equal; and 21 had an effective rate which was higher.

20.23 In 2015, the United States had the highest statutory rate of corporation tax in the OECD at 39%, coupled with the second highest effective rate of 28.1%. France had the second highest statutory rate at 38% but the lowest effective rate at just 0.4%. The OECD reported that for 2015, France’s corporation tax as a percentage of total taxation was 4.6%.

The French example should give pause for thought. Could they really have an effective corporate income tax rate of 0.4 per cent?  Well in the case of the model company used in the pwc report it would seem so but that is hardly representative of the French tax system.  And it is not clear what the final sentence is supposed to add.  The proportion of total tax in France that is raised from Corporation Tax tells us nothing about the effective rate.

Of course, what the chart is trying to address is a legitimate question: how do effective rate for corporate income tax compare across countries?  The advantage of the pwc report is that it allows such cross-country comparisons but highlighting the outcome for France shows the approach used may not give the best insights in all cases.

We can try to do something similar with Eurostat national accounts data though it gives a smaller sample size.  The following table gives taxes on income paid as a proportion of net operating surplus for the non-financial corporate sectors of the EU28, where available.  (Click to enlarge).

ETR on NOS

The averages provided are unweighted, arithmetical averages and for the ten years shown an overall average of 18.8 per cent results.  Ireland comes in at 10.4 per cent with France showing a much more plausible result of just over 30 per cent.  Three countries have a lower average than Ireland for the period shown, Estonia, Latvia and Lithuania.

For what it is worth, the reason for the high rate for Cyprus (44.7 per cent) is the inclusion in D51 of items that would not necessarily be considered a profits tax such a defence contributions based on dividends and taxes collected from offshore companies.  What would typically be considered Corporation Tax makes up around 30 per cent of the amounts included under D51 for Cyprus which would bring to effective rate rate close to the headline rate which is similar to Ireland’s. 

Maybe this just highlights the difficulty in making such comparisons but looking at aggregates is likely to give a better reflection of what is going on in general than using a hypothetical individual example.

What do we conclude? Ireland has an “effective rate” that averages just over ten per cent.  This is low by EU standards but, of course, that is deliberately so.  No country in the EU has an effective rate of 0.4 per cent.

Monday, September 25, 2017

Explaining the rapid growth in GNI*

When modified Gross National Income, or GNI*, was published by the CSO in July it was welcomed as a step forward in our understanding of the underlying performance of the Irish economy.  There is no doubt it gave a better measure of the level of the Irish economy but there was some disquiet about the growth rates it implied.  The nominal growth rates of GNI* for 2014 , 2015 and 2016 are estimated to be 8.0 per cent, 11.9 per cent and 9.4 per cent which were “too hot” for many tastes.

We poked around this and unsurprisingly the issue seems to arise in the non-financial corporate sector as shown in this table looking at Gross National Income since 2011 making the * adjustments for depreciation on certain foreign-owned assets and the net income of redomiciled PLCs to the NFC sector.

GNI star by sector

The 9.4 per cent nominal growth rate for 2016 is shown in the bottom right hand corner.  We can see that reasonably plausibly growth rates are estimated for the household, government and financial corporate sector but the 22.5 per cent growth rate for the non-financial corporate sector does not seem right.  Looking a longer series of GNI* for the NFC sector shows how rapid the recent growth has been.

GNI star for NFCs

In 2016, nominal GNI* for the NFC sector was twice what it was at the peak of the boom.  It is probably worth noting what is not in GNI*. In rough terms GNI* is got from:

  • Value of Output
    • less Intermediate Consumption
  • equals Gross Value Added
    • less Compensation of Employees
  • equals Gross Operating Surplus
    • plus net factor flows
  • equals Gross National Income
    • less net income of redomiciled PLCs
    • less depreciation on foreign-owned IP assets
    • less depreciation on aircraft for leasing
  • equals modified Gross National Income, GNI*

So GNI* should not include the profits of foreign-owned MNCs (which will be picked up by net factor flows – distributed profits and retained earnings) and also gross income attributed to Ireland through redomiciled PLCs or the depreciation of certain foreign-owned assets.  GNI* should give a good indication of the gross income of the “Irish” business sector. 

It might be instructive to pull a few measures out of the national accounts to try and see what is going on.  From the national accounts we will look item 4 from Table 1 of the NIE  which is the domestic trading profits of companies (including corporate bodies) before tax and from the Balance of Payments we will take the Current Account outflows of direct investment income on equity.

Domestic Profits v Outflows of Income

So in general terms we have the profits (after depreciation but before tax) generated by businesses in the Irish economy and the outflows of profits attributed to direct investors.  We won’t be too prescriptive about what the difference represents but in rough terms it gives us the net profits generated in Ireland that stay in Ireland and, as such, are included in GNP and GNI.  So why has this exploded recently?

The key problem is that of scale and concentration.  Issues in the statistics that would be little more than noise for most countries are amplified in the case of Ireland because of the nature of the MNC presence here.  And for the past few years the issues have all affected the figures in the table in the same direction: they have increased the growth in the difference between them which in turn has increased the growth of GNI*.

The first issue is one of data and coverage.  The Balance of Payments estimates are the result of survey data from the companies while the National Accounts figures come more from administrative date (from sources such as the Revenue Commissioners etc.).

The second issue is the treatment of depreciation.  Both of the figures above are measures of profit after depreciation but the National Accounts use the “perpetual inventory method” as the basis for the depreciation figure used whereas depreciation for Balance of Payments purposes is more closely aligned with the accounting treatment in the companies’ accounts.

Although these could impact the figures in any direction it seems for 2014 they increased the estimated outflows of profits in the Balance of Payments relative to the estimate of profits shown in the National Accounts.  This drove down the level of the difference shown above for 2014.  These data and depreciation issues unwound somewhat by 2016 and the difference moved closer to what it “should” be but this, of course, meant the growth is higher than would otherwise have been the case.

Between 2014 and 2016 the difference in the measures shown above increased by about €18 billion (from €18.3 billion to €36.6 billion).  According to the CSO around €4 billion of this was the result of issues with the data coverage and depreciation methods outlined above but there is nothing systematic about these impacts and there is no reason their impact could not have been in the other direction.

There are two issues that are systematic – the impact of taxation and the treatment of research and development expenditure.

The National Accounts measure shown in the second table is profit before tax while the Balance of Payments gives a measure of the profit attributed to direct investors after tax.  It is only natural that the absolute gap would increase as profits increase due to the impact of Corporation Tax.  This accounts for a further €1 billion of €18 billion change in the difference.  GNI has been growing because we are collecting more Corporation Tax.

The final issue is probably the most serious and results in a systematic error in the figures.  The error arises from the internationally-agreed methodologies rather than anything idiosyncratic that the CSO are doing.  The reasons are not clear but the National Accounts and Balance of Payments methodologies have different treatments for expenditure on research and development activities.

In the Balance of Payments R&D spending is treated as intermediate consumption while in the National Accounts R&D spending is considered a capital item.  The difference is between a cost that reduces profits versus a subsequent use of profits generated for investment.  As a result of this, the Balance of Payments will give a lower estimate of profits compared to that which arises in the National Accounts and if R&D spending grows the difference between them grows. 

So has R&D spending from Ireland on activities elsewhere being growing? Yip. 

Research and Development Imports

The table starts with total imports of R&D from the Balance of Payments.  This figure has been incredibly volatile recently and most of this is due to the lumpy nature of acquisitions of intellectual property products (intangible assets).  We can get the figures for these outright purchases of intangible assets in Annex 4c of the Quarterly National Accounts.  The residual approximates imports of R&D services, that is payments made from Ireland for R&D activities that take place somewhere else.  Almost all of this is undertaken by foreign-owned MNCs.

We can see that this grew by €5 billion between 2014 and 2016 and stood at €11.5 billion in 2016.  This figure is subtracted as a cost from the profit estimate used in the Balance of Payments.  In the National Accounts it is not taken as a cost but appears as a capital item much further down the accounts.  There is a substantial, and growing, difference between the National Accounts and Balance of Payments profit measures.

What does this mean for the figures? Well, go back to the schema for GNI* outlined above.  The estimate of profits generated (Gross Operating Surplus) comes from the National Accounts and the estimate of net factor flows is taken from the Balance of Payments.  So the National Accounts profits generated in Ireland are higher to the extent they don’t subtract R&D spending as a cost and the Balance of Payments outflows of profits to direct investors are lower because they do. 

This means that in 2016 around €11.5 billion of R&D investment was counted as coming from “Irish” income even though it was funded by MNC profits and any resulting profits will not benefit Irish residents outside of any tax that may be collected on them.

It is a hard circle to square.  One approach would be to estimate profit outflows for Balance of Payments purposes before accounting for R&D spending on activities elsewhere, thus making outbound profits higher.  Doing this through retained earnings would lead to an inflow of direct investment in the financial account and those monies could then be treated as been used to fund the R&D spending.  This would have no net impact on the overall Balance of Payments but would reduce the current account balance.  Outbound factor flows should reflect monies that are distributed or available for distribution but that is not the case here as the money is being used to fund R&D activities.

However, it does not seem right that imports of R&D services by foreign companies should be counted as coming from national income but that is what is implied by the current inconsistency between the National Accounts and Balance of Payments methodologies.  This holds for all countries not just Ireland but again scale and concentration amplifies the impact in the case of Ireland. Correcting this anomaly would knock a couple of percentage points of the recent growth of GNI* and would also bring down the level of GNI* (how’s that debt ratio??).  This may happen if the different treatment is as a result of paragraph 1.51(a) of the ESA2010 manual.

1.51 (a) the recognition of research and development as capital formation leading to assets of intellectual property. This change shall be recorded in a satellite account, and included in the core accounts when sufficient robustness and harmonisation of measures is observable amongst Member States;

As well as looking at the growth of GNI* we also had a poke around for an underlying current account balance.  Adding an adjustment for the acquisition of IP assets to the * star adjustments gave us this:

Adjusted Modified Current Account Annual

As we said then, this seemed plausible up to 2014 but the improvements since then did not.  Well now we know.  There are some data and depreciation issues having an effect but the biggest issue is the treatment of R&D spending by MNCs.  The figure above shows a surplus of €13 billion for 2016 but included in that was a large amount of MNC profits that were used for R&D spending.  Accounting for that would hugely erode the surplus shown above but there still would be some improvement in the current account as all years would be pushed down.   The macroeconomic position is improving, just not to the extent that the current estimates of GNI* might imply. 

We started off with an €18 billion increase in the difference between profits generated in the economy and those attributed to non-resident direct investors.  What we have seen here is that about two-thirds of that is the result of data and methodological issues, of which the most significant is the treatment of spending on R&D activities. 

That still leaves one-third of that €18 billion as a real increase.  The profits of Irish companies have increased in the past few years and Corporation Tax receipts from all classes of company have increased and these account of maybe €6 or €7 billion of the increase we have been trying to explain.  The impact all this would have on the growth rates of GNI* is hard to tell but real rates of around six per cent would seem likely. Goldilocks would be pleased.

Tuesday, September 19, 2017

How much tax do GAFA pay?

Google, Apple, Facebook, Amazon.  The debate on corporate income tax in the EU is fixated on.  Earlier this week Dutch MEP Paul Tang, and member of the European Parliament’s TAXE committee, was co-author of a short report which looked at potential tax revenue losses from Google and Facebook.

The conclusions require a complete re-working of existing tax law.  The tax losses are based on estimated customer revenue shares in EU countries and the global profitability of the companies.  That is, if a customers in a country generate 10 per cent of a company’s net sales that country should be able to tax 10 per cent of the company’s total profit.  Of course, that is not how the system works but it is indicative of the approach some would like introduced.

What this report has in common with many other reports is that it is difficult to determine how much tax the companies are currently paying.  If the argument is that something is “too low” surely we should be told what it is and what it should be.  This is rarely shown.

The table here gives the consolidated income statements for Google, Apple, Facebook and Amazon aggregated over the five financial years that ended between 2012 and 2016.

GAFA Aggregate Income Statements 2012-2016

There are a couple of different ways of measuring how much tax a company pays but that one that matters is surely cash tax payments – how much are companies actually paying over to fiscal authorities in corporate income tax payments net of any rebates or refunds received.  This is given in the second last line of the above table.  From 2012 to 2016 Google, Apple, Facebook and Amazon paid $63.4 billion of corporate income tax.

The companies made provisions to pay around $105 billion of corporate income tax over the period but due to a number of issues (mainly the deferral provisions in the US tax code but also the use of previous losses and tax credits carried forward) the actual amount paid was about one-third less.  Still $68 billion is quite a chunk of change.

Of this, the bulk was paid by Apple which is unsurprising as it generates the largest profits.  For financial years ending between 2012 and 2016 Apple made $52.9 billion of net corporate income tax payments.  Cash tax paid was equivalent to 18 per cent of income before income taxes.

On this measure Facebook comes lowest with cash tax payments equivalent to just 7.2 per cent of income before income taxes.  The reasons for this are that Facebook built up substantial losses prior to 2012 and was able to offset these against the positive income it began to generate from 2012.  This have been exhausted and of the $1.9 billion of cash tax paid over the five years over $1.2 billion was paid in 2016 alone.  In the accounts Facebook indicate that tax payments will rise in further years as offsetting losses are no longer available to be utilised.

The lowest tax payments over the period were made by Amazon but the reason for this is pretty straightforward – Amazon had the lowest profits.  Amazon is a prodigious spender on research and development.  Of the five year period Amazon used 34 per cent of its gross margin for research and development.  This compares to a spend of 15 per cent of gross margin across the other three companies.

Do these companies pay enough tax?  That is not what we are trying to answer here.  What we can say is that between 2012 and 2016 these companies paid $68.4 billion of corporate income tax which was equivalent to 16.4 per cent of their income before income taxes.  What tends to be true of most studies of these companies is that the authors want the companies to pay more tax in certain countries which will almost certainly result in less tax being paid in others. 

Who got most of the $68 billion that the companies paid? The US, of course, because that is where most of the profits were generated.  And if the US didn’t allow deferral or have rules that allowed US-source income to be treated as “offshore” it would collect even more.  And no matter what formulas are used the EU will not simply be able to go and take that taxing right.

The annual income statements for the individual companies are reproduced below.

Google Income Statements 2012-2016

Apple Income Statements 2012-2016

Facebook Income Statements 2012-2016

Amazon Income Statements 2012-2016

Monday, September 18, 2017

US companies in the business economies of the EU–and the taxation of their profits

Data from Eurostat clearly shows the oversized presence of US companies in Ireland.  The table below gives the contribution of US companies to the business economies of the EU15 in 2014 for profits, pay, employees and investment.  The business economy is NACE B to N excluding K so it reflects the economy excluding the financial sector, sectors dominated by the public sector such as health and education, and the arts. 

Contribution of US companies to EU15 2014 2

For all the categories shown the largest contribution of US companies is in Ireland.  US companies employ 8.3 per cent of all people employed in the business economy (it is c.5 per cent of total employment) and because they pay rates are higher US companies contribute more the 13 per cent of employee remuneration.  Around one-tenth of investment in tangible goods (excluding aircraft) in Ireland is undertaken by US-owned companies.  In all of these measures the UK is next while the figures for Ireland are between three and four times greater than the mean across the EU15.

The stand-out figure is clearly for Gross Operating Surplus with US companies responsible for more than half of the Gross Operating Surplus generated in Ireland.  The next largest is Luxembourg though the relative contribution is three and a half times smaller while the mean across the EU15 is 14 times smaller than that recorded in Ireland.

We would probably prefer Net Operating Surplus (which is akin to earnings before tax and interest) but GOS gives a good approximation of the contribution of US companies to the corporate tax base in each country.  If for some reason Ireland ended up with a contribution of US companies to gross operating surplus close to the EU mean it would represent a loss of close to half the corporate tax base.

Relative to other EU countries Ireland benefits disproportionately from US companies under the headings of staff, pay and capital investment but the largest difference is for profits.  Ireland’s corporate tax revenues are generated by US companies to an extent that no other EU country comes anywhere near.

The following table gives the numbers behind the contributions of US companies in Ireland.  The total for the business economy is given as well as a breakdown by the main sectors: manufacturing, wholesale and retail, information and communication and the rest.  Remember that the financial sector is not included in any of the data used here.

Contribution of US companies to business economy in Ireland 2014

The key figures are €6.5 billion of personnel costs for 103,000 staff and €2.5 billion of investment in tangible goods.  From the €39 billion of gross operating surplus Ireland probably collected in the region of €2 billion in Corporation Tax while something around €4 billion of the total purchases of goods and services would have been made from Irish suppliers.  This gives a total of €15 billion or so.

We can see how this is broken down by the main contributing sectors in the subsequent columns.  The largest sector is manufacturing with about half of the staff, pay bill and profit totals.  Capital investment in Ireland by US manufacturing companies seemed surprisingly low in 2014.  For the years 2008 to 2012, US manufacturing companies undertook an average of over €1 billion of capital investment in Ireland.  The 2014 figure was just one-twelfth of that though capital investment by ICT companies meant the total of €2.5 billion was in and around the annual average since 2008.

The final thing we can look at is the distribution of these contributions from US companies across the EU.  In can be seen that in terms of absolute size across the EU, US companies have their largest footprint in the UK, well for the time being anyway.  Around 30 per cent of US companies profits, staff, pay and investment in the EU are in the UK.

Distribution of contribution of US companies in the EU

The stand-out figure for Ireland is again for profit.  Just over one-fifth of the gross operating surplus generated by US companies in the EU in 2014 arose in Ireland.  Current rules for allocating taxing rights means that Ireland has approximately one-fifth of the taxable income of US companies in the EU in its tax base.

Alternative proposals to allocate taxing rights are contained in the Commission’s CCCTB proposal.  This would allocate taxing rights on the basis of number of employees, pay bill, tangible capital goods and sales.  Obviously, the allocation will be done by individual company but we can see that in aggregate Ireland has about three percent of the staff measures to be included and maybe around double that for the tangible investment component (or at least for new investment in tangible capital goods in 2014).

We don’t know where these companies sell the goods and services that make up the turnover column but we can get a rough approximation of the size of national markets using ‘actual individual consumption’ from national accounts statistics.  Ireland is about one per cent of the EU market.

Again, the aggregates here don’t provide the granular detail that would go into the calculation at the level of the individual firm but if taxing rights were to be allocated on the basis of employees, pay bills, capital goods and sales, Ireland’s tax base from US companies could fall from the current level of around 20 per cent of profits generated by US companies in the EU using the arm’s length principle to something roughly one-sixth or one-seventh of that under formulary apportionment.  Again this would represent a loss of around half the existing Corporation Tax base.

Who would favour this approach?  Well, just look at France,  Italy and to a lesser extent Spain, in the above table.  France is nearly 16 per cent of the EU market and has around 10 per cent of the employment and capital investment of US companies in the EU.  How does France fare on taxing rights?  Much lower.  Only 3.4 per cent of the gross operating surplus generated by US companies in the EU in 2014 arose in France.  A similar outcome can be seen for Italy with shares of employees, pay bill, capital goods and market size that exceed its current share of the tax base.  Winners and losers.

Friday, September 8, 2017

Remarkable falls in the Live Register

There are better measures of changes in the labour market (with the QNHS being best) but it can be instructive to look at changes in the Live Register and some of the recent changes have been remarkable.

The pattern of the Live Register itself is probably pretty well understood.  Here is the seasonally adjusted total since 2007: rapid rise, level for a period, period of decline.

Live Register Total

Let’s look at the rate of change.  Here are the average monthly changes over rolling three-month periods since 2010.

Live Register Three Month Average Change

The Live Register has been dropping for five years but the three-month period that has the fastest absolute decline has been the last three months.  The average month fall (seasonally adjusted) across June, July and August has been 5,100.  The next best of the 4,500 recorded for the three months to September last year.

Maybe the seasonal adjustment casts some doubts so lets look at the annual changes in the actual numbers.  Here are annual changes recorded in the unadjusted total on the Live Register each month since the annual declines began around the start of 2012.

Live Register Annual ChangeThe largest annual decline in the Live Register was the month just past, August 2017.  Compared to 12 months ago the Live Register has fallen by 51,762.  Previously, the largest annual decline was the 48,162 drop seen in March of this year.  And again these are the absolute declines which might have been expected to moderate but are doing anything but.

Monday, August 7, 2017

What happened to Net National Income?

Back when we were hit in the face by the 26 per cent growth rate for 2015 we concluded the following:

The best we can do to strip out all of this madness is probably to look at net national income which excludes the provision for depreciation from all assets and accounts for net factor income from abroad.

Net National Income at Market Prices grew by 6.5 per cent in 2015 which is probably somewhere around where “the Irish economy” grew at in 2015 rather than the 26.3 per cent that “the economy in Ireland” grew by.

And that is probably still in and around where we think “the Irish economy” grew by in 2015 and maybe also for 2016.  But that is not the story that Net National Income is now giving.  Here are the nominal growth rates of Net National Income from NIE 2015 and NIE 2016:

Nat National Income Growth RatesReal growth rates are not available but it is the revisions we are interested in.  For 2015 we can see that the nominal growth of NNP has been revised up from 6.5 per cent to 10.8 per cent with a figure above ten per cent also reported for 2016.

Net National Income is GDP plus net factor income from abroad (negative in Ireland’s case) less the total economy provision for depreciation and an adjustment EU taxes and subsidies.  It differs from the new GNI* in that depreciation of all assets in taken out (rather than just for foreign-owned IP and aircraft for leasing) and no adjustment is made in NNI for the net foreign income of redomiciled PLCs. 

Still the extent to which these differences affect the growth of each may not be that large.  And that is what we see.  From 2012 to 2016 the average annual growth of nominal NNI in the table above was 7.5 per cent.  Over the same period the average growth of the new GNI* was 7.6 per cent.  There are some differences each year but they track each other pretty well.

So why was the nominal growth of NNI in 2015 revised up from 6.5 per cent to 10.8 per cent?

Looking at Table 1 of the NIE this is almost entirely due to the net trading profits of corporations.  Here are the NIE 2015 and NIE 2016 versions of Table 1.  The final column gives the “change in the change”.  Click to enlarge.

Table 1 NIE 2015 Changes

Lots of detail but the key is the change in the change in item 4 – the domestic trading profits of companies.  The 2015 increase in this has been revised up by €10.4 billion.  Further down the table it shows that net factor income from abroad in 2015 has gone from -€53.2 billion in NIE 2015 to -€56.0 billion in NIE 2017.  So we have a €10.4 billion additional increase in the before-tax profits earned in Ireland but less than €3 billion of additional net outflows.  This €7 billion probably added between three and four percentage points to the (nominal!) growth of GNI* in 2015.

The increase in net trading profits of companies seems to be made up of an increase in Gross Value Added and a reduction in the provision for depreciation though this is not certain.  The 2015 increase in the provision for depreciation for the entire economy has been revised down from €30.7 billion to €27.3 billion and though we have a breakdown of this by sector in NIE2016 a breakdown was not published with NIE2015 as Table 2 was entirely suppressed. [The CSO should be given credit for publishing lots of information – and additional breakdowns – that was either suppressed or not provided in NIE 2015].

Although the figures above show revisions for 2015 it seems similar earnings arose in 2016. Domestic trading profits of companies were down €0.5 billion but net factor outflows were €7.2 billion less.  Lots of moving parts but again it seems like the profits generated by Irish companies increased significantly in 2016.  The net foreign income of redomiciled PLCs was up €1 billion without which net factor outflows would have been down by more than €7 billion.

And we also seem to see something similar for 2014.  The domestic trading profits of companies in 2014 was revised up by €4 billion (from €52.3 billion in NIE 2015 to €56.7 billion in NIE 2016) but the level of net factor outflows was unchanged (-€29.7 billion in both NIEs).

Anyway the conclusion is much the same.  Some companies in Ireland are earning lots of extra profit and this isn’t being distributed or attributed to foreign owners or being consumed by depreciation.  Is there a systematic reason for this?  It is hard to tell.  We could try looking in the revisions but that suggests it is a combination of factors rather than down to a single factor. 

Here are the revisions between NIE 2015 and NIE 2016 of a number of key components in the national accounts (again all in nominal terms). Click to enlarge.

Revisions to NIE 2015 v 2016

The recent large revisions to the domestic trading profits of companies [item 4] can be seen at the top.  These revisions seem to be due to three factors:

  • downward revision to wages and salaries paid [item 9]
  • downward revision to the provision for depreciation [item 28]
  • upward revision to gross value added [item 51]

The first two of these will be largely GDP-neutral as they affect the composition rather than the level of GDP.  The latter will cause GDP to rise.

For 2015, there is a €14.8 billion upward revision to the trading profits of companies before tax. Of this around €1.3 billion can be attributed to a downward revision in wages and salaries and maybe something around €4 billion to a downward revision in depreciation (the provision for depreciation in the table above is a whole economy measure rather than just for companies). These could have arisen in any sector.

The remaining part of the revision is largely due to an upward revision to output.  For 2015, this seems to correspond to an upward revision of net exports of €5.5 billion but looking at Gross Value Added by sector we see that the revision is spread across a number of sectors.  There was an upward revision of around €2 billion to the GVA from industry, from distribution, transport, software and communications and from public administration and other services.  This spread does not point to anything systematic (in the revisions at any rate).

The €6.1 billion revision to GVA corresponds to the €6.2 billion revision to GDP.  Again all these are nominal.  Revisions to the deflators mean that the upward revisions to nominal GDP in 2015 did not feed through to increases in real GDP growth. In fact real GDP growth was revised down from the infamous 26.3 per cent rate to 25.6 per cent.

For 2014, we have a €4.4 billion upward revision to profits (and no revision to net factor income).  Again there is a downward revision to wages and salaries and also a downward revision to the provision for depreciation.  Around one-third of the revision to profits could be due to an upward revision in the GVA from the industry sector but in this instance it is not accompanied by an upward revision to net exports.

So what do we conclude? The nominal growth rates of net national income have been revised up and these upward revisions are largely the result of increased profits.  Why have profits being revised up? Seems to be a number of factors (lower COE, lower depreciation, higher output) all pulling in the same direction. 

Who is earning these profits? The much smaller changes to net factor income mean the profits are staying in the economy.  Part of this will be increased Corporation Tax payments staying in the economy but a large part of it is profits accruing to Irish companies.  Are domestic companies really doing as well as these figures would suggest? Maybe.

Thursday, August 3, 2017

Major revisions to the savings rate mean the household sector is a net borrower. Really?

While a lot of attention will undoubtedly by on the business sector in the Institutional Sector Accounts and links to the new GNI* developments in the household sector are also worth a sconce.  In this instance it is not about what is there but what is no longer there – a savings rate above ten per cent.

Here’s the current account of the household sector account and looking at the numbers shows almost everything as one would expect.  Aggregate earnings are up, aggregate wages are up, aggregate disposable income is up.  All in all the income flows paint a pretty positive picture of our recovering household sector.

Household Sector Current Account 2011-2016

There is little in the income flows that gives cause for concern.  In 2016, mixed income (labelled Gross Operating Surplus) grew 4.9 per cent while aggregate wages grew 5.1 per cent with a 6.5 per cent rise in wages paid by non-financial companies.  Work though property income and interest, taxes and social contributions, and transfers and we get to the 3.8 per cent rise in Gross Disposable Income which is not put at €94.4 billion for the year.  All as we would expect.

While the growth rates may be in line with expectations, and have not been significantly revised (chart here), the levels have been revised – and revised down.  This means that the gap between income and consumption has fallen and now the savings rate is much lower than previously indicated.  Much lower.

Savings Rates - Old and Revised

The revision begins from Q1 2010 and has become even more pronounced recently.  The last estimate published in April gave a household savings rate that was reassuringly above ten per cent.  In the revised figures published this week the average savings rate shown above has only been above ten percent for one quarter since 2010 and dipped as low as five per cent last year.  This is not so reassuring.

So what has changed?  The savings rate has changed because Gross Disposable Income has been revised down. For example, the 2016 figure has been revised down from €99.5 billion to €94.4 billion.  That is why five or six percentage points have been knocked off the savings rate.

Why has Gross Disposable Income been revised down? It is pretty easy to spot from the household sector current account we looked at when the last set of figures were published.  The whole post gave a very coherent view of what we think is happening in the household sector.  Such coherence is absent now.

Anyway, the big change is in the very first line – Gross Domestic Product.  The value added produced by the household sector has been significantly revised down.  In the April figures this was put at €29.5 billion for 2016; in the current figures it is €25.8 billion.  Gross Disposable Income for 2016 has been revised down by €5 billion and nearly €4 billion of this is explained by a downward revision in the value added produced by the household sector.  It is much the same for the other years.  It is not clear why this revision was applied.  Maybe a chunk of activity has been reclassified from the household/self employed sector to the non-financial corporate sector which may explain part of that mystery.

Anyway, we can see the implications of this reduction in the savings rate in the capital account.

Household Capital Account 2011 2016

The recent rise in household gross capital formation means that household investment expenditure is now greater than household savings so the household sector is a net borrower – and as shown by the last line has been since 2014.  Between current consumption and capital investment Irish household’s spending exceeds their gross disposable income. So much for deleveraging.

Here are the current and previous estimates of household net lending.

Household Net Lending

Is the current estimate a flashing red light that have been largely absent as the Irish economy continues its rapid recovery?  Not particularly.  But maybe with the trend we should look at it as amber.  The trend is down but it is still a long, long way from the heady days of 2006 and 2007 when the household sector was a net borrower to the tune of €20 billion a year – and that was just for consumption and investment in new capital goods, the borrowing for second-hand houses was on top of that.

The revisions to the data are very significant.  Previous is was estimated that between 2010 and 2016 the household sector was a net lender to the tune of €27.4 billion.  Working through the financial account we were able to see how these funds were used to increase household deposits and, most notably, reduce household debts.

Now it is estimated that over the same six years the household sector was a net lender of just €6.9 billion.  Again this €20 billion revision corresponds the changed estimates of value added produced by the household sector which has been revised down by €20 billion.

The issue is that during a period when the household sector is now estimated to have been a net lender of €7 billion household deposits increased by €10 billion and household debts were reduced by €50 billion.  How did we do this with so little funds available from income?

Can asset sales, debt writedowns or other revaluations explain it?  The apparent coherence shown using the figures from April is no more.  Later in the year the CSO will publish updated financial accounts that will be consistent with these non-financial accounts and we will see what story emerges from those. 

Wednesday, August 2, 2017

So what does GNI* tell us about the Irish NFC sector?

A fortnight ago the CSO started the process of publishing adjusted national accounts which are intended to give a better view of developments in the Irish economy as those produced using the internationally-agreed standards become even more distorted by the activities of MNCs operating here. 

The new measures published (as well as the publication of previously suppressed figures) is undoubtedly a step in the right direction but there was some disquiet that the adjusted measure of national income, GNI*, recorded nominal growth of 9.4 per cent in 2016.  With deflators close to zero this implies a real growth rate also around nine per cent which does seem a little high.

Today, we get some insight into that growth figure with the publication of the Institutional Sector Accounts consistent with the figures in the National Income and Expenditure Accounts.  Here is the sectoral breakdown of GNI* for each year since 2010.

GNI star by sector

The overall growth of GNI* of 9.4 per cent can be seen and we can now see the sectors this arose in.  The growth of GNI for the households and government sectors of five per cent seems about right while the financial sector records a small drop the sector itself makes up a small proportion of the total and can be volatile.  The standout figure is the 22.5 per cent increase in the adjusted GNI of the non-financial corporate sector.

The adjusted NFC measure accounts for the net income of redomiciled PLCs and the depreciation of foreign-owned aircraft for leasing and intangible assets.  The NFC sector is the only sector to which adjustments are made.  The recent growth in the adjusted GNI for the NFC sector is remarkable.  It was €18.4 billion in 2011 and rose to €55.2 billion last year – an increase of 200 per cent.  So let’s dig a little deeper in the NFC sector. 

Here is the current account of the NFC sector since 2011.

NFC Sector Accounts 2010-2016

Is it possible to see how the 200 per cent rise over the past five years in GNI* for NFCs has come about? Not especially.  But we can see what is not in the €55 billion figure for 2016.

Starting with the €188 billion figure of GDP, or Gross Value Added, of the NFC sector in Ireland we see that:

  • €51.3 billion went on the compensation of employees, an increase of seven per cent on 2015.
  • around €49 billion accrued to other sectors through dividends paid or retained earnings owed with most of this likely to foreign direct investors in the rest of the world sector.
  • we need to add €14 billion for dividends received and retained earnings owed to entities in the Irish NFC sector from the rest of the world
  • and subtract the €6.5 billion of interest paid (after the FISIM adjustment)
  • and subtract the €5.8 billion of net income (dividends and retained earnings) which accrued to redomiciled PLCs from the rest of the world
  • and finally subtract the €33.8 billion of gross value added consumed by the depreciation of aircraft for leasing and foreign-owned intangible assets.

So, the increase is not the net profits of foreign direct investors, the gross profits from the aircraft or intangible assets that foreign-owned companies have located here, the net income of redomiciled PLCs.  Back in April we wondered if the Irish business sector is doing better than we think and maybe it is but the GNI* figures suggest it is doing remarkably well.  Here is adjusted GNI for the NFC sector for the entire time series available:

Graph

Hmmm. Celtic Tiger how are ya?  The adjusted and unadjusted measures are shown here.  Between 1999 and 2006 GNI* for NFCs grew by 128 per cent (the unadjusted measure grew 144 per cent). Pretty impressive.  Between 2009 and 2016 the same measure grew by 308 per cent (with 444 per cent growth in the unadjusted measure). 

There is no doubt the steps taken by the CSO are getting us closer to what is happening in the Irish economy but do we really believe the Gross National Income of Irish business sector is more than twice what it was at the peak of the bubble? It could be that there is still something in GNI* (and also the current account) that means we haven’t quite yet reached our destination.

What could it be?  Impossible to say.  Is there an issue with the treatment of redomiciled PLCs?  The adjustment takes a Balance of Payments approach but what about the profits these companies earn in Ireland?  For most foreign-owned companies these would be recorded as a factor outflow in the Balance of Payments but for companies that are Irish-headquartered their Irish-source profits are not counted as a outflow unless they are actually paid out to foreign shareholders as a dividend.  It is hard to know if this is even a significant factor. 

What else could it be? Foreign profits of Irish MNCs?  Is there anything to indicate that they are doing remarkably well outside of Ireland?  Maybe it's profit shifting but that would have offsetting effects on GNI (domestic valued added down, foreign income up).  Any other suggestions?

It must be remembered that what we have so far is just the first step.  If we look at the CSO response to the report of the ESRG we note that they say:

  • The CSO proposes to include in the annual Institutional Sector Accounts (ISA) publication a breakdown of the non-financial corporations (NFC) sector into two broadly-defined, foreign and domestic, sub-sectors. The NFC sector accounts for 5 most of the multinational enterprises (MNEs) operating in Ireland. Initially, the breakdown will be between the companies covered by the CSO’s Large Cases Unit, i.e. the largest and most complex MNEs, and the remainder.
  • This initial work is scheduled for publication at the time of the annual sector accounts results in October 2017, following which the CSO will investigate extending this analysis to a quarterly basis.
  • The breakdown by Large Cases firms and the remainder in the sector accounts is an initial step; during 2018, we will develop the basis for the breakdown by ownership into MNE and other sectors and we will review other possibilities such as the feasibility of implementing this foreign / domestic split in other presentations of the national accounts data.
  • In addition, we will explore the data classifications proposed in the FitzGerald (2016) and Honohan (2016) papers.
  • The publication of Table 1 of the QNA in current prices is a longer term project; it is dependent upon the work already underway on the calculation of an output-based annual estimate of GDP to complement the existing income and expenditure measures. The schedule for this work extends into 2018.

If we had the NFC table above on a foreign firms (including redomiciled) / domestic firms basis it would really shine a light on what is going on. Hopefully.

Monday, July 31, 2017

The extra-ordinary volatility in GNP

Here are the quarterly growth rates of GNP from the latest CSO figures.

Quarterly GNP Growth Rates

The largest quarterly growth rate in the series is the 12 per cent recorded in Q4 2016.  And this is followed by the largest quarterly fall – the 7 per cent drop recorded in Q1 2017.  The series have always been volatile but this is on a different scale altogether.

What is going on?  It is hard to know.  MNCs are undoubtedly having an effect and it could be that some of these distortions (intangibles, inversions etc.) are being amplified by the seasonal adjustment applied to quarterly data.  Do they wash out if we look an annual growth rates? Not really.

Annual GNP Growth Rates

There is little that can be learned from these headline figures.  The CSO are working on producing modified measures, such as GNI*, on a quarterly basis which should be provide a better indication of what is going on.

Saturday, July 29, 2017

Ireland’s Positive and Improving Underlying Net International Investment Position

The last post looked at flows in the current account and concluded that this may be a good indication of what is happening to the current account balance once some of the distorting effects of MNCs are removed.

Adjusted Modified Current Account Annual over GNI star

This post looks at the stock position and as is frequently the case with Irish macro statistics the starting position is heavily distorted.   The CSO publish figures that remove the impact of IFSC activities but some MNC distortions remain.  You can go through the detail if you want but here is where we end up – a measure of Ireland’s underlying net international investment position.

Underlying Net International Investment Position

As can be seen this has been improving pretty much consistently since the current data series began in 2012.  The underlying NIIP became positive in 2014 and had since continued to become even more so.  The rest of the post shows how we get to this measure starting with the the overall net international investment position (NIIP) which is the balance of foreign financial assets and liabilities:

NIIP Total

The impact of the IFSC is excluded from all the figures.  The impact of the IFSC on the net outcomes is relatively small but does have a massive impact on the gross figures with huge levels of financial assets offset by a similar level of financial liabilities.

In Q1 2017 our NIIP was minus –€375 billion. Ouch.  Even before the event which caused the level shift in Q1 2015 it was around –€180 billion and was improving at a very moderate rate.  But we need to go under the hood to get any idea of what is going on.  The first thing to do is look at the gross totals that give rise to the net figure shown above.  Here are our total foreign financial assets and liabilities.

Total Foreign Assets and Liabilities

Whoa!  By Q1 2017 we had €1.4 trillion of foreign liabilities and €1.0 trillion of foreign financial assets.  And this is excluding the effect of the IFSC – include that and the figures are €5.0 trillion and €4.5 trillion.

Anyway, let’s just take the non-IFSC figures which on their own seem completely oversized for the Irish economy. So who has external liabilities of €1.4 trillion?

Foreign Liabilities

And there is our pollutant.  Around 90 per cent of the foreign liabilities are due to the non-financial corporate sector.  Do Irish companies have €1.2 trillion of external liabilities?  No, but companies resident in Ireland do.  It is pretty safe to assume that almost of the external liabilities of the NFC sector arise through foreign-owned MNCs. 

The NFC numbers don’t tell us anything about the underlying position of the Irish economy.  There will be information in figures for the other four sectors shown above but the scale of the chart means it is hard to see what is going on.

There may be many factors driving the increase in MNC-related foreign liabilities but one will be the onshoring of intangible assets to Ireland.  The Irish-resident entity that onshores the intangible does so with money borrowed from another (offshore) entity within the MNC structure.

And we see much the same when we look at the €1 trillion of foreign financial assets.

Foreign Assets

Here nearly 80 per cent is due to the NFC sector.  Do Irish companies have €800 billion of foreign financial assets.  Again, no, but companies resident in Ireland do.  In this instance we are looking at liabilities owed to Irish-resident entities within foreign-owned MNC structures.  It is possible that this is related to redomiciled or inverted companies.  Again, the underlying position of the other sectors is hard to identify given the scale of the graph.

If we just isolate the external debt liabilities and assets associated with direct investment we see the following (there will also be equity liabilities and assets associated with direct investment).

Direct Investment Debt

They have got there by different paths but both the gross external debt and external debt assets related to direct investment were about €500 billion in Q1 2017.  As we have pointed out before these huge increases in direct investment debt liabilities and assets have not been reflected in increases in interest flows related to direct investment debts.

Direct Investment Income on Debt

Anyway, that’s for another day.  What we want to do here is assess Ireland’s underlying net international investment position.  What the above shows is that to do this we need to remove the impact of the NFC sector which through the activities of MNCs is distorting the overall position.  This does remove the cross-border positions of genuine Irish companies but these are unlikely to change to general picture that emerges – though we can’t forget this.

So what is our Net IIP excluding NFCs?

Net International Investment Position

Ah, that’s better.  The navy line gives our underlying Net IIP excluding NFCs (and also the IFSC).  This has shown steady improvement since the start of 2012 when the current data series begins.  It has gone from –€90 billion in Q1 2012 to +€80 billion in Q1 2017.  We have gone from a net liability position to a net asset position – we have more external financial assets than we have external financial liabilities.

Net International Investment Position by Sector

Most of the improvement has been effected through the financial system.  In the early years of the crisis many of the external creditors of the banks were repaid with liquidity from the Central Bank which itself generated a negative Target2 balance.  While the banks had a relative small net position in 2012 the net position of the Central Bank, i.e the monetary authority, was –€91 billion at that time.  Since then the banks have reduced their reliance on central bank funding and the external position of the Central Bank has improved with that and stood at +€9 billion in Q1 2017.

Of the remaining sectors, financial intermediaries have a NIIP position of +€190 billion.  This, in large part, reflects the foreign financial assets of Irish-owned investment and pension funds.  The government sector has a negative position of –€129 billion representing the international nature of much of the borrowing it undertook in the crisis.  Add up all those and you get our underlying net international investment position of +€80 billion – which excludes the impact of NFCs (mainly MNCs).

So it seems the stocks as well as the flows in the Balance of Payments data is a positive indicator that continues to move in that direction.

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