John FitzGerald: Still fumbling in the dark on growth data

Traditionally the publication of the CSO’s national accounts provided a useful benchmark of progress, or lack of progress, in the Irish economy. However, last year’s unbelievable and exceptional headline growth of 27 per cent, memorably captured in Krugman’s phrase “leprechaun economics”, didn’t mean that Ireland had discovered the elixir of eternal growth. Rather, it highlighted a problem with how the new international standards for national accounts portray an economy like Ireland’s with such a scale of multinational activity.

Following on last year's experience, the Central Statistics Office has done a lot to provide meaningful additional information on the economy. In its publication last week there are a number of different measures of output. However, no one metric provides a true measure of the underlying performance of the Irish economy.

It is really important to know what that is because of the danger that public policy, misled as to the true picture, could overheat the Irish economy.

A new measure of output has been introduced this year, GNI*, or modified GNI [Gross National Income]. This provides a reasonable estimate of the size of the economy, a necessary benchmark against which to measure things like our national debt.

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Getting a fix on multinational input to Irish economy

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However, as modified GNI still has elements which are interwoven with the multinational sector of the economy, it does not provide a fully accurate way to measure the true increase in output or income belonging to the people of Ireland.

So, there is no agreed headline growth figure for 2016 because we are not yet able to disentangle all the complex multinational relationships affecting the economy in that year.

Global economy

The major obstacle to understanding what is happening in the Irish economy is one of its key successes – its engagement with the global economy.

The presence of many multinationals is very important. These firms account for around 15 per cent of our output and employment, and the wages they pay are approximately twice those paid by domestic firms. However, they bring huge complexity to the accounts.

The direct value to Ireland from these firms is the wage bill they pay and the corporation tax they remit to the government. They account for 80 per cent of all corporation tax paid.

However, all of their profits flow back out of Ireland to their owners. The production of goods and services in Ireland by these firms only constitutes a small part of the final product that they sell to consumers. Thus the gross value of their sales is huge relative to the value added for Ireland.

To get a true picture we need to separate out the value added produced in each sector between that attributable to multinationals and to domestic producers. To calculate what income benefits Ireland, along with the output of domestic firms, we need to add the contribution of the multinational sector – their wage bill and the corporation tax they pay.

The CSO has the information to do this. It has a special team that collects, on a fully confidential basis, a vast range of information on multinationals.

Dominant

However, where problems begin to arise is where multinationals are dominant in a sector of the economy. This can mean that separating out details of multinationals would disclose information on individual firms. The task for the CSO is to devise a set of accounts that will not disclose any confidential information but will instead tell us what is going on in the economy.

In the absence of official figures on growth last year one has to make the best of the wide range of measures among the recently-published figures. It is a bit like Goldilocks trying to choose between three bowls of porridge.

The new measure, modified GNI, would suggest that the economy grew in size by between 8 per cent and 9 per cent in 2016: the more traditional measure, GNP, grew by 9.6 per cent.

These measures are definitely too “hot” as they do not fit with the fact that employment grew by almost 3 per cent and the wage bill by almost 5.5 per cent in 2016.

For me, looking at the composition of the growth, and taking account of the role of multinationals in different sectors, the figure which is “just right” would be growth of just over 5 per cent, coincidentally what the GDP figure shows.

The reason why the growth rate is important is that it is an essential guide as to what should happen in the next budget. If, as I believe, the economy has been growing rapidly since 2013, then, for safety, the next budget should attempt to slow this pace.