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A Modified Current Account Balance for Ireland 1998-2016

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Current Account Balance (CA) Modified Current Account Balance (CA*)
19980.6270.627
19990.2260.226
20000.6670.618
20010.2150.079
20020.3370.039
20030.7130.193
2004-0.153-0.89
2005-6.026-7.339
2006-9.905-11.742
2007-12.826-14.751
2008-11.716-13.936
2009-7.904-11.616
2010-2.012-9.774
2011-2.81-11.103
2012-4.605-14.946
20133.855-6.333
20143.203-8.205
201528.603-5.752
20169.193-29.387

Why a modified Current Account Balance?

Ireland is a good case study of the effects of globalisation on a country's national economic statistics due to its status as a small and open economy with a high concentration of multinational enterprises. This was shown in the 2015 National Accounts and Balance of Payments data which were published in July 2016. For some time, it has been understood that GNP/GNI has provided a superior indicator of domestic income in the Irish economy than GDP; however in 2015 the GNI measure became increasingly difficult to interpret due to the impact of mobile international assets and global firms redomiciling their headquarters to Ireland. Consequently, supplementary statistics that are more appropriate to the measurement of domestic economic activity were requested by the CSO’s Economic Statistics Review Group (ESRG).

In this context, the ESRG recommended:
- the development of a supplementary GNI level indicator (GNI*) that subtracts the retained earnings of redomiciled firms and adjusts for the depreciation of categories of foreign-owned domestic capital assets (such as Intellectual Property capital assets).
- the development of a corresponding adjusted current account measure that records the retained earnings of redomiciled firms as functionally equivalent to foreign factor income outflows and a corresponding adjusted stock of foreign portfolio equity liabilities.

The response from the CSO to the above recommendations concerning Balance of Payments (BOP) data has been the development of a modified current account balance, CA*. CA* is the current account balance (CA) adjusted for the depreciation of capital assets sometimes held outside Ireland owned by Irish resident foreign-owned firms, e.g. Intellectual Property (IP) and Aircraft Leasing, alongside the repatriated global income of companies that moved their headquarters to Ireland (e.g. redomiciled firms or corporate inversions).

CA* excludes the depreciation of foreign-owned domestic capital (such as IP and Aircraft Leasing). The depreciation on the foreign-owned capital is borne by foreign investors; consequently it does not affect CA*, which is intended to capture the resources generated by domestic residents. This is especially the case if the relocated capital is not deployed in combination with domestic labour but in combination with overseas workers through contract manufacturing arrangements.

The retained earnings of firms (e.g. redomiciled firms) that are predominantly owned by foreign portfolio investors are not taken into account by CA* either. In fact, in relation to portfolio-type ownership, the net income earned is only recorded as a factor income outflow when a dividend is actually paid to the shareholders. Otherwise, if the entity decides to retain the earnings, the value of the foreign portfolio equity liability increases with the increase in the stock of retained earnings. Since the choice between paying a dividend versus retaining earnings only affects timing of the pay-out to the ultimate foreign owners CA* is not affected by this decision. For more see the Report of the Economic Statistics Review Group (CSO, 2016).

What is the size of the adjustment?

Redomiciled IncomesAircraft Leasing depreciationIP depreciation
1998000
1999000
200000.0490
200100.1340.002
200200.2880.01
200300.4690.051
200400.630.107
200501.1860.127
200601.7230.114
200701.8270.098
20080.2921.8430.085
20091.5941.9280.19
20105.262.1630.339
20115.5482.3660.379
20127.1022.6530.586
20136.4773.0060.705
20146.8553.7820.771
20154.6664.64225.047
20165.7865.00127.793

From 2009 to 2010 there was a substantial increase in the global income returned to the Irish headquarters of redomiciled firms as continued amounts of firms moved to Ireland from the UK, US, and Bermuda. For more detail see the information note on Redomiciled PLCs in the Irish Balance of Payments (PDF 183KB) (CSO, 2016).

From 2014 to 2015, the contribution of IP depreciation increased from €771m to €25,047m, again centred around the relocation of these assets to Ireland. In 2015, the sum of IP and Aircraft Leasing depreciation and Redomiciled Incomes was €34,355m. In 2016 it increased to €38,580m.

Show Table: Table 1 Effect on Current Account Balance of Depreciation of IP and Aircraft Leasing and Redomiciled Incomes, 1998-2016

From 2014 to 2015, the gap between CA and CA* increased from €11,408m to €34,355m. This is strongly related to the increase in depreciation of IP. The increase in the current account balance from 2014 (€3,203m) to 2015 (€28,603m) is adjusted to -€8,205m and -€5,752m respectively under the modified measure, CA*.

Where precisely does this affect the CSO’s Balance of Payments data?

The ESRG recommended showing the cost of the types of depreciation discussed above for outside of Ireland. This would give rise to higher multinational profits in Ireland, which would then be shown flowing out under direct investment rules (BPM6). Similarly the global income of redomiciled headquartered firms was recommended to be redistributed to non-resident owners, whether paid out under dividends or not. This also adds to increased outflows of direct investment income. These adjustments and their effect on CA* by BOP component for 2016 are shown in Table 2.

Show Table: Table 2 CA* derivation, 2016

Enquiries to:

Mavo Ralazamahaleo, Balance of Payments, 01 498 4259
Christopher Sibley, Balance of Payments, 01 498 4305

Email: bop@cso.ie

Central Statistics Office
Ardee Road
Rathmines
Dublin 6
D06FX52