Don't go down the statistics glen, for fear of little men
Published 01/09/2016 | 02:30
WELL, that didn't take long. Just the other week, the Central Bank published data showing that private sector debt as a percentage of GDP had fallen by almost a quarter. Leprechaun alert!
The bank did indeed warn us to beware of little men, although not quite in those words. The data "incorporate recent CSO revisions to the National Accounts and International Investment Position", it said. Indeed they do.
The change in the statistical treatment of national accounts did not just grossly inflate figures for GDP, by adding the assets of multinational companies claiming theoretical residence in Ireland. The countervailing debt landed on the Irish books as well.
Total private debt was then calculated as four times GDP at the beginning of last year. The boosting of GDP by a quarter then reduced the ratio to 315pc of GDP. A marked improvement.
Except, of course, it wasn't.
Market traders know how to separate data wheat from the chaff and, as we know, Irish bond yields were unmoved by the changes.
But what are the rest of us supposed to do? Ireland, as anyone who takes any interest in these matters knows, is heavily indebted but it is now impossible to say exactly how indebted without abstruse explanations of how the tax-driven activities of mutlinational are distorting the statistics. (Wake up at the back there!)
I have to confess that the first reaction was to blame Eurostat. It is the system which the CSO must apply but it turns out this is part of a global attempt at harmonisation from the United Nations. That rings a bell.
The UN was also the progenitor of those global comparisons which found that Ireland was the most unequal country in Europe. Anyone who believed that must have taken all their holidays at home.
Such exercises are best confined to researchers doing deep mining on the details. No sane investment manager would rely upon them - not without soon becoming a former investment manager. Like making sausages, they are best kept hidden from the public gaze. Yet not only are they published, and become hot topics in the blogosphere, the search for the holy grail of common standards means they are used as tools of official policy.
The Central Bank document neatly encapsulates the implications for debt. "The EU Commission sets an indicative threshold of 160pc of GDP for private sector debt sustainability; substantially lower than Ireland's 315pc.
"However this threshold does not take account of the large multinational company sector in Ireland."
Not taking account of the MNC sector in Ireland is the equivalent of not taking account of rain when packing for a holiday in Ireland. Perhaps we should be glad that MNC distortion of GDP makes the ratio look better than it really is, but one cannot feel good about living in, or analysing, a country whose fiscal rules are as fantastic as crocks of gold at the end of the rainbow.
We now have to look elsewhere than GDP for glimpses of the real world. Fortunately, in this particular case, elsewhere is handily in the same document. It includes what I have always thought was one of the most useful indicators - household debt as a percentage of disposable income. This is the kind we will have to rely on in future. Disposable income matters, both for debt and mortgage repayments. Debt to income surged ahead of household total assets (mostly house values) in 2005-2009, before both fell dramatically.
On that basis, Irish households' balance sheets are healthier than 2005. They still owe a hefty 18 months' disposable income, although it was more than two years' income in 2011. That leaves them as the fourth most indebted but there is some comfort from the finding that the other three are the well-managed economies of Denmark, Netherlands and Sweden, and that Britain is next in line - although the pattern of debt and assets will be quite different in Ireland's young population.
That is the end of the handy bit in the document. We have to do our own calculations to get a realistic measure of company debt as a proportion of the economy, but the 300pc of GDP recorded in 2015 may be a better guide than the current calculation of 250pc. Then we must do the same for government debt, officially put at around 90pc of GDP but, unofficially, much higher.
Al this means we are in trouble - more trouble, I suspect, than is generally acknowledged. If all these corrections are required just to get a handle on the critical question of the country's indebtedness there seems less chance than ever of having informed debate about the matter.
Even if they are saying very little, the powers-that-be seem to be taking it seriously. A team from Eurostat will specifically analyse the Irish GDP figures - but one notices there has been no suggestion that the €280m increase in Ireland's EU contributions be postponed until the analysis is completed.
The payout will be reduced by an commensurate increase in corporation tax revenues from re-located multinationals, but that opens the way to another kind of trouble.
No country's GDP has been distorted on the Irish scale, which reflects the fact that much of it is due to corporations protecting themselves from the international crackdown on tax avoidance.
The crackdown may therefore focus even more on Ireland. At the very least these distortions will not help attempts to overturn the unfavourable EU ruling on Apple's Irish tax arrangements.
As for the data itself, the statisticians are obliged to follow the new convention and may be reluctant to provide alternative, "unofficial" figures.
If they do not, an October Budget presented on this basis would be little more than gibberish, but it will not be easy to get anything done - certainly not in that space of time.
The best that can be hoped is that, with some mathematical legerdemain, Irish GDP figures can be modified. It is a faint hope and in the meantime, the Commission apparently intends operating on the new figures, but the ECB is expected to ignore them in decisions on monetary policy.
It is not easy to kill two birds with one stone, and certainly not in this case. As economist John FitzGerald out it, the operations may be in China but the legal ownership is in Ireland.
Counting the operations where the ownership resides may help with tax collection but bang goes any meaningful measure of GDP. The Chinese curse is upon us. We truly live in interesting times.