Deglobalised GDP etc Michael Connolly CSO Ireland National

Deglobalised GDP etc Michael Connolly CSO (Ireland) National Accounts Integration and LCU December 2017 AEG on National Accounts

The coincidence of ESA 2010 and BEPS / Irish legislation major consequences for Irish economy in 2015……. • Published NIE 2015 – July 12, 2016 • GDP Constant Prices – growth 26. 3% • GNP Constant Prices – growth 18. 7% • Represented a level shift in our figures www. cso. ie 2

Corporate Relocations Increase the Stock of Capital Assets Increased Production of Goods and Services Increased Exports www. cso. ie Increased Depreciation Increased Profits 3

Thousands Balance Sheet Impact: Impact on Capital Stocks (Incl. transactions and reclassifications) 1400 1200 1000 800 600 400 200 0 2011 2012 2013 www. cso. ie 2014 2015 2016 4

Thousands Changes in Stock of Capital Assets 350 300 250 200 150 100 50 0 -50 -100 2011 2012 2013 2014 2015 2016 Price change GFCF Volume changes Catastrophic Losses Retirements Change in position www. cso. ie 5

Balance Sheet Impact – Intl Accounts 0 -100 -200 -300 -400 -500 Net IIP, July 2016 15 20 14 20 13 20 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20 03 20 02 20 01 20 00 -600 20 €Billions Ireland’s Net International Investment Position

Centre of Economic Interest – Residency • Management and Control • Ownership of lands and buildings • Engage in production, finance, insurance or redistribution • Can incur liabilities and take on other obligations • Produce a complete set of accounts • Tax resident - Permanent Establishment 7

Some Details • National Accounts data related to relocations were based on hard data from respondents • Important role of CSO’s Large Cases Unit (LCU) – quality and consistency across macro and business statistics • Changes driven by globalisation activities • Ongoing trend – but scale was different • Significantly – a small number of entities involved • Figures compiled in compliance with ESA 2010 • Figures were verified by Eurostat 8

Contract Manufacturing in Ireland where IP is located abroad www. cso. ie 9

Contract Manufacturing in Ireland IP located in Ireland www. cso. ie 10

Business Services: Research and Development

1. Challenges of Globalisation 2. Globalisation in the Standards 3. Unexpected consequences ESRG Recommendations www. cso. ie 12

Impact of relocations on GDP – GNI transition • BOP Primary income is calculated after depreciation • Impact of additional depreciation Year GDP Depreciation Net Factor Flows GNI NNI 2014 193, 160 30, 891 -29, 715 161, 759 130, 868 2015 255, 815 61, 558 -53, 173 200, 762 139, 204 Diff 62, 655 30, 667 -23, 458 39, 003 8, 336 Change 32. 4% 24. 1% 6. 4% www. cso. ie 13

Unintended Impact of Changes • Depreciation and Income • New standards for R&D • Alignment of Operating Surplus and Primary Income in BOP €bn 70 60 50 NNI discrepancy 40 30 20 PIM CFC € 10 m Accounting Depreciation € 15 m Accounting Net Profit € 50 m Net Operating Surplus € 55 m 10 Total Gross Profit from Admin and Survey Sources, € 65 m Net Profit and PIM CFC, € 65 m

1. Challenges of Globalisation 2. Globalisation in the Standards 3. Unexpected consequences ESRG convened www. cso. ie 15

Expert Group • Increasingly difficult to represent the complexities of Irish economic activity usingle headline indicators such as GDP or GNP • Expert group focus on recommendations for the improvement and development of indicators and analyses giving additional insight to the domestic economy • First meeting of the group September 19 th and the group met six times between mid-September and November 2016 • Group reported to the Director General of CSO on 23 December 2016

Level Indicator An adjusted indicator (GNI*) of the size of the economy should be published, appropriately adjusted for the retained earnings of redomiciled firms and depreciation on foreign-owned domestic capital assets. Structural Indicators CSO to implement Large Cases Unit/Remainder presentation to elements of National Income and Expenditure accounts and the Non-Financial Sector of the Institutional Sector Accounts. Cyclical Indicators Quarterly publication of underlying investment and underlying domestic demand measures that take account of the impact of IP relocations, contract manufacturing, aircraft leasing and re-domiciled firms.

2017: Implementation of Modified GNI (GNI*)

Thousands Modified GNI (GNI*) - 2016 300 € 275, 567 m 250 € 227, 742 m € 226, 749 m 200 € 189, 163 m 150 100 50 0 GDP € 275, 567 m Net Factor Flows - € 48, 818 m GNP € 226, 749 m GNI EU Taxes and Subsidies + € 994 m GNI € 227, 742 m GNI* Adj. for aircraft, IP depreciation and redomiciled companies - € 38, 579 m GNI* € 189, 163 m

Debt to GDP/GNI* Ratios 180 160 140 120 100 % 80 60 40 2012 2013 Debt/GDP Ratio 2014 Debt/GNI* Ratio 2015 2016

Total Exports and Imports v’s Trends in Net Exports, Total Domestic Demand Modified Domestic Demand 2014 Q 1 = 100

Contribution of Domestic Demand Net Exports to Annual GDP 30 25 20 15 % 10 5 0 -5 -10 Total Domestic Demand Net Exports 2012 2013 2014 2015 2016 30 20 % Modified Total Domestic Demand 10 Net Exports, adjusted for IP imports 0 -10 2012 2013 2014 2015 2016

Large Foreign-Owned Multi-Nationals in the Non-Financial Corporation Sector Gross Value Added Gross Operating Surplus 42% 44% 56% Other 58% Other Large MNE Compensation of Employees Large MNE Taxes on Income and Wealth 92% 42% 8% 58% Other Large MNE www. cso. ie Large MNE 23

Growth of Household Gross Disposable Income by Component 8% 6% 4% 2% 0% -2% -4% -6% 2011 2012 2013 2014 2015 COE Net property inc , adj in pension entitlements and other curr transfers Self-Employed inc Net Soc benefits Current taxes Actual GDI 2016

An Alternative Solution • Could IP assets be regarded as Financial Assets ? • As a type of securitised asset? • Attractive solution in terms of – Intl Investment Position recording – impact on depreciation and income/services www. cso. ie 25

Impact of relocations on GDP – GNI transition • BOP Primary income is calculated after depreciation • Impact of additional depreciation Year GDP Depreciation Net Factor Flows GNI NNI 2014 193, 160 30, 891 -29, 715 161, 759 130, 868 2015 255, 815 31, 558 -83, 037 172, 778 139, 204 Diff 62, 655 9, 333 -53, 322 11, 019 8, 336 Change 32. 4% 6. 8% 6. 4% www. cso. ie 26

Thousands Balance Sheet Impact: Impact on Capital Stocks (Incl. transactions and reclassifications) 900 800 700 600 500 400 300 200 100 0 2011 2012 2013 www. cso. ie 2014 2015 2016 27

€bn Thousands 0 Revisions to Irelands Net International Investment Position -100 -200 -300 -400 -500 -600 2001 2002 2003 2004 2005 2006 2007 2008 Net IIP, March 2016 www. cso. ie 2009 2010 2011 2012 2013 2014 2015 Net IIP, July 2016 28

An Alternative Solution • Difficult to justify – IP is involved in production – Essential element of productivity calculations - capital services www. cso. ie 29

20 -Q 1 11 20 -Q 2 11 20 -Q 3 11 20 -Q 4 12 20 -Q 1 12 20 -Q 2 12 20 -Q 3 12 20 -Q 4 13 20 -Q 1 13 20 -Q 2 13 20 -Q 3 13 20 -Q 4 14 20 -Q 1 14 20 -Q 2 14 20 -Q 3 14 20 -Q 4 15 20 -Q 1 15 20 -Q 2 15 20 -Q 3 15 20 -Q 4 16 20 -Q 1 16 20 -Q 2 16 -Q 3 11 20 €million Net National Product 60, 000 GNP and NNP 55, 000 50, 000 45, 000 40, 000 35, 000 30, 000 25, 000 20, 000 NNP Total Economy GNP Total Economy www. cso. ie 30

Overall Conclusions • The cross border movements of IP or corporate relocations such as that experienced in Ireland was probably not foreseen or anticipated when agreeing SNA 2008/ESA 2010 • When these Globalisation events occur - need to ensure a consistent and coordinated set of results across the accounting framework – the impact of depreciation being a case in point • New Standards did recognise what activities needed to be included in the National Accounts i. e. R&D • ESRG and Irish Case highlighted show introduction of new indicators to address the impact of globalisation in the short term assist users understanding but ultimately the next standards should consider how to address these events within the framework • Is a Net presentation the only answer - such as NNI ? www. cso. ie 31

The AEG is requested to: • Express their views on the usefulness of GNI* and the other analytical indicators discussed in helping users arrive at a more informed understanding of developments in the underlying economic conditions particularly in extreme scenarios for the economy such as the GDP and GNI results for Ireland in 2015. • Express their views on the proposed alternative approach to the recording of the inter affiliate flows of Intellectual Property as described in the paper. www. cso. ie 32

michael. connolly@cso. ie