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 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 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)

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)

What is the size of the adjustment?

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 2018).

From 2014 to 2015, the contribution of depreciation on R&D service imports and trade in IP increased from €5,667m to €31,016m, again centred around the relocation of these assets to Ireland. In 2016, the sum of both R&D service imports and trade in IP and aircraft Leasing depreciation, redomiciled incomes and the disinvestment in R&D related exports was €49,291m. Then in 2017 it increased to €56,124m. 

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* decreased from €15,898m in 2016 to -€22,685m in 2017.