Tuesday 15 October 2019

GDP or GNP? It's an ecumenical matter

There is no measure of Irish economic performance which accords with reality – so the figures don't stack up

Brendan Keenan

Brendan Keenan

WHO now remembers the "Black Hole"? It was a big story in its day. And, like the big story of the moment, it was all about the actions of foreign multi-nationals based in Ireland.

Billions were disappearing from the national accounts and for a while no one seemed sure where they had gone.

Amid much obfuscation, it emerged that the foreign companies sent much of their profits abroad, and this had not been fully recognised in the national accounts. The Central Statistics Office (CSO) dealt with the problem by treating all such profits as if they had left the country. Any that were not sent abroad could be treated as inflows later.

It meant that the country was not as well off as the earlier statistics suggested. This caused quite a rumpus, as did the fact that the companies were sending all these billions abroad. Like Father Ted's bank account, the money was merely "resting" for a while – just long enough to qualify for Ireland's low profits tax.

Global tax planning has multiplied in scale and complexity since then, and we know a lot more about how it operates – but the problem of counting what belongs to Irish citizens remains. Not only does it remain; it has got worse, for new reasons which are as little recognised as was the original black hole.

The accounting regime to close the black hole opened up a big gap between the value of goods and services produced in the country (GDP) and the value of that production belonging to Irish residents (GNP).

The rule of thumb was that GNP was about 20 per cent smaller than GDP. The difference in most EU countries is just a couple of percentage points. This peculiarity of the Irish economy has had some pretty dire consequences, for what should have been just a statistical artefact.

It may yet have more.

The reason was the use which was made of these peculiarities. Some of the loudest critics of the banks and the last government were also among the loudest claimants for public spending to rise in line with GDP – a figure which was being artificially boosted by excessive bank lending and the global bubble.

That does not excuse the banks or Fianna Fail – which more than met the cries for faster spending – but one might have expected a few more mea culpas from the enthusiasts than has been evident. Even public spending rising in line with GNP would have been too much, but it would have been about 30 per cent less than it was, which would have avoided crisis.

So far, so bad, but something equally awkward has now happened. The rule of thumb no longer applies. There is now no commonly used measure of Irish economic performance which accords with reality.

This is because of a phenomenon which is the opposite of a black hole. (What is the opposite of a black hole? A black hill?)

It consists of foreign firms bringing money in, rather than sending it out like the Apples and Googles. But the drawback is the same. It appears in the national accounts, but does not belong to the nation.

These are the so-called "brass plate" operations – technically "re-domiciled plcs" – which make Ireland their headquarters. The most famous was WPP, the world's biggest advertising agency, which set up here in 2008 but left last year when controversial UK corporate tax changes were reversed.

Its departure was generally regarded as a bad thing but, as economist John FitzGerald pointed out in the recent quarterly release from the ESRI, these brass plates contribute even less – in fact far less – to the economy than the multi-national techies, cloudies and pharmas. Their major contribution is to skew the statistics in an even more alarming way.

WPP may have gone, but the phenomenon has grown. FitzGerald reckons global profits re-domiciled in Ireland added almost €7.5bn to recorded GNP last year, making it look 5 per cent bigger than it is, in any meaningful sense of the word.

Even worse, perhaps, the surplus on Ireland's payment flows with the rest of the world, officially 6 per cent of GNP, may in reality be more like half a per cent.

Thankfully, the same voices have not yet called for more public spending to use up the 6 per cent payments surplus. Even more thankfully, the bond markets seem not to be bothered that our debt burden and deficit are about a quarter bigger than the commonly used percentage of GDP.

All that may yet change, but FitzGerald notes one area where real money is being lost. Ireland cleverly persuaded the EU to use GNP rather than GDP in assessing its contributions to the EU budget, but the brass plates mean the payment is now €100m more than it ought to be.

The unfortunate CSO has to operate within international standards, to allow for proper comparisons. These are now delivering improper comparisons. Tax haven or not, the numbers themselves don't stack up.

Irish Independent

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