National accounts have a number of important purposes. They provide key information for those responsible for fiscal and monetary policy on whether an economy is operating at capacity or below it. They are also crucial in understanding what sectors of the economy are performing well and are driving economic growth. However, the recently introduced revision of the international standard for national accounts has proved very imperfect in dealing with the reality of an economy as globalised as that of Ireland, rendering the resulting accounts seriously deficient for both of these two key roles.
The new accounting standard means that measured GNP rose by almost 20 per cent in 2015, primarily due to the relocation to Ireland of intellectual property owned by a very small number of multinational enterprises (MNEs). However, this relocation of intellectual property had no impact on the economic welfare of those living in Ireland. The sheer magnitude of the distortion this has caused in the national accounts triggered the search for new statistical measures of domestic economic welfare.
The CSO Economic Statistics Review Group, which reported last week, was set up to try and find a durable solution to these national accounting issues. The report makes clear that the problems with the national accounting numbers for Ireland potentially affect many other countries, though in a less extreme form. Because of the global nature of the accounting problems, the UN and the EU statistical office (Eurostat), together with the IMF and OECD, participated in the deliberations of the review group.
Due to the many problems with GNP, as currently measured, the group suggests the publication of alternative measures, in particular an adjusted gross national income (GNI) figure. This measure will exclude key aspects of the activity of MNEs in Ireland, such as depreciation on foreign-owned intellectual property. It will also deal with the problem of “redomiciled plcs”. These are foreign-owned companies that undertake no economic activity in Ireland but receive their profits in Ireland, adding to GNP. The retained profits of these companies will also be excluded from the adjusted GNI figure.
As a result, the new measure of GNI will better reflect changes in the economic welfare of those living in Ireland and give a more accurate picture of what is happening in the domestic economy. Over the coming 18 months, the CSO plans to develop new indicators along the lines of the review group’s recommendations.
However, the more detailed accounts prepared to the new accounting standard suffer from a range of other globalisation-related problems that render them very difficult to interpret.
The presence in Ireland of major aircraft leasing companies results in a high level of investment in aircraft in Ireland, counterbalanced by high imports of aircraft. The Central Bank last month showed that these companies have only a small effect on GNP, but they greatly complicate the interpretation of trade and investment data.
As a result, to meet the need for accounts that explain the true pattern of growth in the Irish economy it will also be necessary for the CSO to publish separate accounts for MNEs for each major sector of the economy, identifying the aggregate wage bill of the MNEs and the aggregate corporation tax paid. These two items represent the value added to the Irish economy from the activity of the MNEs. It is only with such additional detail that we will understand how policies to enhance economic growth can best be targeted.
The need to protect confidentiality will limit the amount of sectoral detail that can be published but the CSO will, hopefully, still be able to publish significant additional information. Already the office publishes separate data for MNEs and for the rest of the economy at an aggregate level. These data show that the domestic sector (non-MNEs) has grown in real terms by 5 per cent a year since 2012. However, without data on the wage bill and corporation tax paid by the MNEs we don’t know their real contribution to overall growth. While their role in the economy is undoubtedly very important, more detailed information is vital for policymakers.
The report of the review group also has implications for economic forecasters in the Department of Finance, the Central Bank and the ESRI. While in the past such forecasts concentrated on the components of expenditure, including investment and trade, in the future, because of the problems with these data, much more attention will have to be given to the parallel measures of output.