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 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 and 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 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).
Update November 2017
This information note was updated in November 2017 with 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 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*.
CA* = CA less (IP depreciation + aircraft leasing depreciation + redomiciled incomes) adding back (net aircraft related to leasing + R&D related IP imports)
Update July 2018
Since November 2017, it has been decided that the revenue from R&D related IP exports and the investment of R&D service imports should 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.
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)
What is the size of the adjustment?
|Depreciation on R&D service imports and trade in IP||Aircraft depreciation||Redomiciled Income||Net aircraft related to Leasing||R&D related IP imports||R&D related IP exports||R&D service imports||Difference 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, 2019).
From 2014 to 2015, the contribution of depreciation on R&D service imports and trade in IP increased from €5,083m to €30,109m, again centred around the relocation of these assets to Ireland. From 2017 to 2018, 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 €56,504m to €57,414m.
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 €5,260m in 2017 to -€21,359m in 2018.
|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 2008-2018||€ million|
|Current Account Balance (CA)||Depreciation on R&D Service Imports and trade in IP||Aircraft Leasing Depreciation||Redomiciled Income||Net Aircraft related to Leasing||R&D related IP Imports1||R&D related IP Exports1||R&D Service Imports||Modified Current Account Balance (CA*)|
|1From 2008-2012 both R&D related imports and exports are shown as zero due to confidentiality reasons and are included as part of R&D service imports.|
From 2015 to 2016, the gap between CA and CA* increased from -€6,206m to €17,257m. 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 €5,350m and €5,884m under the modified measure, CA*. The increase in the current account balance from 2017 (€1,457m) to 2018 (€34,292m), mainly due to the reduction of R&D related IP imports, is adjusted to €6,717m and €12,933m 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 with a further change in July 2018 to take into consideration the investment in R&D service imports and the cost of 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 BOP component for 2018 are shown in the Table 2.
|Table 2 CA* derivation, 2018||€ million|
|Current Account merchandise Exports||216,307||216,307|
|R&D related IP Exports||-692|
|Primary Income Inflows||83,098||83,098|
|Secondary Income Inflows||4,996||4,996|
|Current Account Merchandise Imports||103,346||90,192|
|Net Aircraft related to Leasing||-13,154|
|R&D related IP Imports||-5,353|
|R&D Service Imports||-17,548|
|Primary Income Outflows (of which)||152,828||209,550|
|Direct Investment Income Outflows (of which)|
|Reinvested Earnings Outflows (of which)|
|R&D service imports and trade in IP depreciation||46,303|
|Aircraft Leasing Depreciation||5,418|
|Secondary Income Outflows||8,361||8,361|