Irish Economy: The Economic and Social Research Institute (ESRI) says today that the 2013 Balance of Payments surplus turns into a deficit when the impact on the national accounts of tax inversions are excluded. The institute also notes that new trade data standards have "apparently had a significant effect on the national accounts for recent quarters."
The ESRI says in its Quarterly Economic Commentary (QEC) that for 2014 and 2015 it sees a further improvement in the current account surplus to 5.5% of GNP in 2014 and 6.8% of GNP in 2015. When account is taken of the redomiciled PLCs (public limited companies), there was a current account deficit, expressed as a percentage of GNP, of 0.5% in 2013. This is forecast to become a current account surplus of 0.7% in 2014, rising to 2.3% in 2015.
When Medtronic, the US medical devices firm, with a payroll of 77,000 becomes Irish in coming months and relocates its headquarters to Ireland (it will continue to be run from the US), it will join other companies that have become Irish for tax purposes who together will have a total global payroll of over 600,000.
Prof John FitzGerald of the ESRI in 2013 wrote on the impact of redomiciled PLCs, known in the US as tax inversions:
These companies, referred to technically as redomiciled plcs, hold major investments elsewhere in the world but they have established a legal presence in Ireland. This means that their profits are paid to them in Ireland even though, under double taxation agreements, their tax liability arises in other jurisdictions. While they receive large profits in Ireland, because they are head quartered here, they pay out only some of these profits to their shareholders abroad when they declare a dividend. The retained earnings in Ireland enhance the value of the companies. As a result, the recorded inflows into the economy which these firms generate are much larger than the recorded outflows. However, the benefits of the retained profits of redomiciled plcs are attributed to their foreign owners – there is no benefit to the Irish economy.
Nonetheless, this has the effect of raising the measured current account surplus in the Balance of Payments and increasing the level of nominal GNP arising in Ireland."
The ESRI in its latest QEC does not quantify the impact on annual GNP rises.
It also says that the "fact that the current account surplus is forecast to continue to rise through 2014 and 2015, in spite of some growth in domestic demand, reflects the fact that external demand is expected to continue to play a significant role in driving growth in the economy."
However, it notes a further uncertainty in the national accounts:
New problems are arising in interpreting the published data on trade. In particular, some goods are being processed in Ireland on contract for foreign-based firms and the related import of the materials and the export of the final product are excluded from merchandise trade in the national accounts. This is because the goods at all time remained the property of a foreign owner. The net payment to the Irish processor may then be included in services trade. A similar issue arises with goods processed abroad for Irish based manufacturers. This has apparently had a significant effect on the National Accounts for recent quarters."
In early September we queried PMI reports and other distortions.
Update Oct 07 2014: Irish industrial production + services fell in August; Recall the excitable PMIs? - - Finfacts was right to be sceptical.
The idiot/ eejit's guide to distorted Irish national economic data