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Modified Current Account 2019

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Modified current account shows surplus of €16.5bn in 2019

CACA*
2009-7.904-5.749
2010-2.012-4.491
2011-2.81-2.808
2012-5.934-5.33
20132.787-1.07
20142.0930.692
201511.5565.33
2016-11.3735.86
20171.45710.662
201819.61712.142
2019-40.40416.495

The modified current account (CA*) shows a surplus for 2019 of €16.5bn in comparison to a deficit of €40.4bn in the unadjusted current account balance (see Figure 2.1). This represents an increase of €4.4bn on the 2018 CA* surplus of €12.1bn  

Modified Current Account Adjustment

The modified current account (CA*) is calculated as:

CA*=CA less (depreciation on R&D service imports and trade in IP + aircraft leasing depreciation + redomiciled incomes + R&D related IP exports) adding back (net aircraft related to leasing + R&D related IP imports + R&D service imports)

Due to the small and open nature of the Irish economy with a high concentration of multinational enterprises the effects of globalisation can have a significant impact on Ireland’s economic statistics. This was shown in the 2015 National Accounts and Balance of Payments data which were published in July 2016. 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). This included the development of Modified Gross National Income (GNI*) and Modified Current Account (CA*). For more on the development of CA* see our previous information note A Modified Current Account Balance for Ireland 2008-2018.

CA* excludes the depreciation of foreign-owned domestic capital (such as net imports of IP and imports of research and development (R&D) services). 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).

A further change was made to CA* in November 2017 to exclude the cost of investment in aircraft related to leasing and the cost of R&D related IP from the current account balance. Some firms borrow money abroad from their parent company to finance investment in IP. In the long term this debt is repaid from the profit on the IP or the aircraft being leased. It means that this borrowing is not a liability of residents of Ireland and the purchase of this IP needs to be excluded when deriving CA*.

Since November 2017, it was decided that the revenue from R&D related IP exports and the investment of R&D service imports should to be considered when calculating CA*. Moreover, depreciation on net imports of IP and imports of R&D services (e.g. depreciation on R&D service imports and trade in IP) will be used instead of depreciation of IP only. Depreciation of exports of R&D will not be taken into consideration because of the presence of domestic companies providing R&D services within and outside Ireland.

What is the size of the adjustment?

Depreciation on R&D service imports and trade in IPAircraft depreciationRedomiciled PLCs IncomeNet aircraft related to LeasingR&D related IP importsR&D related IP exportsR&D service importsDifference between CA and CA*
2009-3.835-1.928-1.5943.872005.642.155
2010-4.157-2.163-5.263.871005.23-2.479
2011-4.181-2.425-5.5486.567005.5890.002
2012-4.82-2.755-7.0977.27008.0060.604
2013-5.094-3.06-6.4744.8070.234-0.0495.779-3.857
2014-5.093-3.783-6.8516.6961.992-1.0746.712-1.401
2015-30.128-4.607-4.6635.16817.804-0.15410.354-6.226
2016-35.341-4.868-5.787.13746.053-1.96711.99917.233
2017-42.532-6.002-4.45711.54741.477-4.50813.689.205
2018-46.444-7.309-5.00114.57619.757-0.7417.686-7.475
2019-49.672-7.854-4.22914.19584.059-0.62221.02256.899

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 chapter on Redomiciled PLCs 2019.

From 2014 to 2015, the contribution of depreciation on R&D service imports and trade in IP increased from €5,093m to €30,128m, again centred around the relocation of these assets to Ireland. From 2018 to 2019, the sum of both depreciation of R&D service imports and trade in IP and aircraft leasing depreciation, redomiciled incomes and the disinvestment in R&D related IP exports increased gradually from €59,494m to €62,377m.

This is then offset when the investment in R&D service imports, the cost of investment in net aircraft related to leasing and the cost of R&D related to IP imports are added. The net effect of the adjustment to CA* has changed from -€7,475m in 2018 to €56,899m in 2019.

Show Table: Table 2.1 Effect on CA of IP Depreciation, Aircraft Leasing Depreciation, Redomiciled PLCs Income, Imports of Aircraft related to Leasing and R&D related IP Imports

From 2015 to 2016, the gap between CA and CA* increased from -€6,226m to €17,233m. This is strongly associated with the imports of R&D related IP. The decrease in the current account balance from 2015 (€11,556m) to 2016 (-€11,373m) is adjusted to €5,330m and €5,860m under the modified measure, CA*. Finally, the decrease in the current account balance from 2018 (€19,617m) to 2019 (-€40,404m), mainly due to the increase of R&D related IP imports, is adjusted to €12,142m and €16,495m 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 outside 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. The adjusted current account measure also removes R&D service imports and R&D related IP exports from the current account balance resulting in the reduction of imports in the balance of payments. These adjustments and their effect on CA* by component for 2019 are shown in the Table 2.2.

Show Table: Table 2.2 CA* derivation, 2019


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