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A Modified Current Account Balance for Ireland 1998-2016

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Updated: November 2017
Current Account Balance (CA) Modified Current Account Balance (CA*)

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 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 leased aircraft, 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).

Please note: This information note, originally published in July 2017, was updated in November 2017. Since the original publication the CSO has made a further change to CA* 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 to finance their investment by purchasing IP from their parent company. 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*.

CA*=CA less (IP Depreciation+Aircraft Leasing Depreciation+Redomiciled Incomes) adding back (Imports of related to Leasing Aircraft+R&D related IP Imports)

What is the size of the adjustment?

R&D related IP ImportsAircraft related to Leasing ImportsAircraft Leasing DepreciationRedomiciled IncomesIP DepreciationDifference between CA and CA*

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 (CSO, 2017).

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. Then in 2016 it increased to €38,580m.

This is then offset when the cost of investment in aircraft related to leasing and the cost of R&D related to IP are added. The net effect of the adjustment to CA* went from -€20,921m in 2015 to +€4,188m in 2016.

Table 1 Effect on CA of IP Depreciation, Aircraft Leasing Depreciation, Redomiciled Incomes, Imports of Aircraft related to Leasing, and R&D related IP Imports (€ million) 1998-2016

From 2014 to 2015, the gap between CA and CA* increased from -€2,720m to -€20,921m. This is strongly related to the increase in depreciation of IP. The increase in the Current Account from 2014 (€3,203m) to 2015 (€28,603m) is adjusted to €483m and €7,682m under the modified measure, CA*. Then in 2016 an adjustment of +€4,188m is observed between CA and CA*, mainly due to the upfront investment in IP being greater than the IP depreciation.

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 with a further change 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 resulting in the reduction of services imports in the Balance of Payments. These adjustments and their effect on CA* by BOP component for 2016 are shown in the Table 2.

Table 2 CA* derivation, 2016

Enquiries to:

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


Central Statistics Office
Ardee Road
Dublin 6

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