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Information Notice -Developments and Revisions in the National Income and Expenditure 2017 and the Balance of Payments Quarter 1 2018 Results

1. Introduction

National Income and Expenditure (NIE) results for 2017 will be published on 19th July 2018, along with Quarterly National Accounts and Balance of Payments results for Quarter 1 2018. The results will include the revisions routinely incorporated at the time of the annual results due to the availability of more comprehensive and detailed data. The results will also include the outcome of work to develop and improve the suite of macro-economic statistics available for users.

Work on the globalisation indicators recommended by the Economic Statistics Review Group (ESRG)1 continues and the upcoming results will include further developments of the GNI* and Modified Domestic Demand indicators first published at this time last year.

Outlines of these developments and of other important changes follow below and are being made available in advance of publication of the results, to help users understand the changes in the upcoming results. Where possible, an indication is given as to the directional impact of developments on key aggregates.

1Report of the Economic Statistics Review Group

2. Consistency of treatment of Research and Development in Ireland’s National Accounts and Balance of Payments Statistics

Under the ESA 2010 standards for National Accounts, Research and Development (R&D) expenditure is recognised as an investment and is included as Gross Fixed Capital Formation in the National Accounts, adding to a country’s capital stock. As a consequence, R&D expenditure is not considered to be part of intermediate consumption in the National Accounts and is not deducted in the calculation of National Accounts gross operating surplus. Additionally, because R&D is treated as an investment and is capitalised under ESA 2010 standards, the depreciation of capitalised R&D assets is considered an expense when calculating net operating surplus (a measure similar to company profits).

While symmetrical treatment of R&D across the standards for National Accounts and Balance of Payments statistics is the objective, the latest version of the Balance of Payments standards (BPM6) is silent on the impact of the capitalisation of R&D on the calculation of profits. To clarify the intent of the standards, the CSO has confirmed the treatment of all aspects of R&D-related expenditure in the Balance of Payments results with Eurostat and other compilers.

Following this consultation on the standards, the CSO are now implementing a modification to the treatment of R&D expenditure and related depreciation in Balance of Payments profits that is consistent with their treatment in the National Accounts framework. In the upcoming results, Balance of Payments profits will be increased by the value of R&D expenditure in the period and decreased by the depreciation on the accumulation of R&D assets purchased over previous periods.

This modification will be visible in the results as an increase in the reinvested earnings of multi-national enterprises (MNEs) in the Current Account, with a corresponding balancing flow in the Financial Accounts of the Balance of Payments. Also, the modification will increase net factor flows in the National Accounts results, leading to a decrease in GNI in recent years and consequently, to a decrease in GNI*. There is no impact on GDP as a result of this methodological change.

A detailed note will be available at the time of release of the NIE 2017 and Balance of Payments Quarter 1 2018 results.

3. Improved estimates of Trade in Financial Services

Increased trade in financial services between 2012 and 2017 has led to an examination of the source data in conjunction with colleagues in the Central Bank of Ireland.

The outcome of the examination and the subsequent contact with data providers confirms that in some cases, financial services provided ultimately by non-residents were included in the results as trade in financial services with resident providers.

The correct treatment of these financial services as additional imports of services will be incorporated in the upcoming Balance of Payments and National Accounts results. The net impact of the correction will be a reduction of the Balance of Payments Current Account balance and a net addition to Imports of Goods and Services in the National Accounts. The impact of this change on GDP growth rates is limited.

4. Further developments of Globalisation Indicators

4.1 Further development of the GNI* level indicator

In its February 2017 report, the ESRG recommended the development of a modified GNI indicator that would exclude significant globalisation activity disproportionately affecting Irish macro-economic statistics. This new indicator, GNI*, was designed to be a supplementary indicator of the level or size of the Irish economy that excluded the retained earnings of re-domiciled firms and the depreciation of categories of foreign-owned domestic capital assets, such as Intellectual Property (IP) capital assets. The time series for the GNI* indicator was first published by the CSO in mid-2017 as part of the NIE 2016 results.

The CSO’s Large Cases Unit (LCU) continues to work with data providers on their R&D-related activity. As part of this work, additional purchases of R&D-related IP assets have been identified in recent years and will be included as imports of services in the upcoming National Accounts and Balance of Payments results, with offsetting additions to the capital stock in the National Accounts. As a result of these new additions to the stock of intangible assets, the GNI* indicator will also include revisions to its depreciation adjustment for R&D-related IP assets in recent years.

Also, as our understanding of the complex nature of R&D-related activity develops, and to ensure that GNI* is a reflective indicator of the level of the domestic economy, the calculation of the GNI* indicator will be modified in the NIE 2017 annual results, through an expansion of the base used when calculating the depreciation related to intangibles. The basis for the GNI* depreciation adjustment will be extended to include trade in R&D-related IP products and imports of R&D services, increasing the depreciation amount subtracted as part of the transition from GNI to GNI*.

In summary, the GNI* series in the upcoming results will be reduced in all years due to:

  • the effect of data revisions for R&D-related IP products
  • the expansion of the basis for the R&D-related depreciation calculation to include all trade in R&D-related IP and imports of R&D services, resulting in a larger deduction in the migration from GNI to GNI*
  • the move to a consistent treatment of R&D-related expenditure and depreciation in National Accounts and Balance of Payments profits as outlined in Section 2 of this note

The trend in the GNI* series will not be greatly affected by these changes and the amended GNI* series will describe a similar comparison between the GNI and GNI* series published in last year’s NIE results.

4.2 Developments to the Modified Domestic Demand indicator and new detail in the National Accounts and Balance of Payments

To better support analysis of domestic expenditure and investment in the Irish economy, the ESRG recommended the publication of a new structural indicator for quarterly underlying domestic demand that would exclude the impact of large gross flows related to activities of MNEs and aircraft leasing companies. This new Modified Domestic Demand (MDD) indicator was first published by the CSO in July 2017 and excluded trade in aircraft related to aircraft leasing companies and R&D-related IP imports from the traditional Total Domestic Demand indicator.

Following further analysis of the components of MDD and ongoing consultation with users, further developments to the MDD indicator will be published in the Quarterly National Accounts Quarter 1 2018 results. In the upcoming results, the globalisation effects removed when calculating MDD will be expanded to cover all exports and imports of R&D services and of R&D-related IP Products (effectively, all trade in R&D-related intangibles). There are no changes to the treatment of aircraft leasing companies in the MDD indicator.

The ESRG recommendations for structural indicators also proposed the publication of a current prices version of the existing Quarterly National Accounts Table 1 - Constant Price Gross Value Added by Industry Group and GDP/GNP. New current prices tables, both Unadjusted (new Table 2) and Seasonally Adjusted (new Table 6), will be included in the Quarterly National Accounts Release for Quarter 1 2018, and the back series will extend to Q1 1995 on Statbank.

For users of the databank, the Quarterly Tables NQQ31 and NQQ32 will both be extended to provide the current prices estimates, both seasonally adjusted and unadjusted, for GVA by Industry Group and for GDP and GNP respectively.

In the Balance of Payments results, additional detail on contract manufacturing and trade in royalties by MNEs will be available in the Current Account, providing users with improved insight on these globalisation-related activities.

5. Other improvements

5.1 Review of Merchanting of Services

Following a review of ongoing activity of MNEs engaged in exports of computer services, a small number of companies were found to have very limited local costs and Irish activity. Where service imports and service exports are observed without a change to the service in Ireland, the correct methodological treatment of this activity under the BPM6 standards is to record a net transaction in the Balance of Payments statistics.

The incorporation of these changes in the upcoming Balance of Payments results for Quarter 1 2018, will lead to a reduction in exports of computer services and a corresponding reduction in imports of royalties. The net activity will now be shown as Merchanting of Services and included in the category “Other business services” in the Irish Balance of Payments results. This change has no effect on the overall Trade in Services or Current Account balances.

5.2 New Estimates of Dwellings within Capital Formation

The statistics on New Dwellings Completions published by the CSO in June 2018 will be used to improve the estimate of the Dwellings sub-component of Capital Formation in the NIE 2017 results.

Total Building and Construction is estimated using the CSO’s Quarterly Survey of Construction. The New Dwellings Completions series will be used to improve the allocation of construction activity across the Dwellings and Other Building and Construction sub-components. Total Building and Construction results in the National Accounts will be unaffected by this change.

 

For further information contact:

email: nat_acc@cso.ie or bop@cso.ie