ESRI calls for new set of ‘deglobalised’ national accounts

The Economic and Social Research Institute (ESRI) wants the Government to adopt a new set of national accounts to weed out the distorting effects of multinational activity on the Irish economy.

In a research paper commissioned by the think tank, Trinity College economist John FitzGerald argues that the traditional national accounts, published by the Central Statistics Office (CSO), are failing to capture "the complexities of globalisation".

The ESRI said the additional data would help policymakers understand what is driving growth in the Republic. It would also provide a better picture of whether the output produced by labour and physical capital here was growing, and, if so, by how much.

Prof FitzGerald highlighted that goods and services in the modern era were being produced across complicated supply chains, while intellectual property (IP) had become a key input in many products.

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These issues, along with the operation of US tax law – which stipulates that all profits of US companies, wherever earned, are taxable eventually in the US – presented particular problems for the national accounts.

To remedy this, he suggests the standard accounts, centred around gross domestic product (GDP), should be supplemented by “satellite accounts” which would separate out the activities of foreign multinationals in each sector of the Irish economy.

“This is necessary to understand the contribution of domestic and foreign multinational enterprises (MNEs) to growth in individual sectors of the economy, such as manufacturing,” he said.

Unreliable guide

The ESRI study comes in the wake of concern that the Irish accounts have become an unreliable guide to economic activity here. In 2015, the figures suggested national income, as measured by GDP, jumped by nearly 26 per cent, a figure that was derided as “leprechaun economics” by Nobel prize-winning economist Paul Krugman.

The main driver of this increase was the transfer of intellectual property (IP) assets here, Prof FitzGerald noted.

"The revision last year to US tax law is unlikely to alter this pattern of behaviour, and it may even see significant further relocation to Ireland, " he said, while observing that firms headquartered in countries such as the UK and Germany do not seem to face the same incentives to relocate profits to Ireland because they face a different domestic tax regime.

A new study by economists in the US and Denmark has described Ireland as the biggest “tax haven” in the world.

Research from the University California, Berkeley and the University of Copenhagen estimated that foreign multinationals shifted $106 billion (€90 billion) of corporate profits to Ireland in 2015. This was more than all of the islands of the Caribbean combined.

The Department of Finance rejected the findings of the study as “overly simplistic” and said the Republic was not a tax haven.

Prof FitzGerald noted that the CSO had recently introduced a more reliable measure – modified gross national income (GNI*), which excluded the depreciation on foreign-owned IP and leased aircraft, and also makes an adjustment for the profits of redomiciled plcs.

However, he said the measure may still be exaggerating the true level of growth.

“Globalisation has changed the model that traditionally underpinned the national accounts. Economic activity in one country is now linked to activity in other countries through many different channels,” he concluded.

“While developing national solutions to these problems can meet the needs of domestic policymakers, this is not ideal: it lacks transparency at an international level,” he said, noting that such national accounting problems are not unique to Ireland and some international co-ordination may be possible.