Deputy Pat Rabbitte gave me notice of his intention to raise the matter as to the discovery of major inaccuracies in official Government statistics which overstated the strength of the Irish economy in the past five years.
Adjournment Debate. - Compilation of Official Statistics.
I am grateful to you, a Cheann Comhairle, for giving me the opportunity to raise this important matter. The eternal puzzle as to why our apparently respectable growth rate figures over recent years have not translated into commensurate job creation has finally been answered by two official reports published recently. The first is the CSO disclosures of last week of major inaccuracies in our trade statistics, forcing drastic revisions in our balance of payments figures since 1986 and, second, the NESC report, entitled Association between Economic Growth and Employment Growth in Ireland, published in December 1992.
Talk about Ireland's economic fundamentals being sound is now proven nonsense, as has been suspected by the lay person looking at the ever-lengthening dole queues. Alarm bells clearly went off in October 1990 when the NESC report of 1989, entitled A Strategy for the Nineties, was published. That report commented: “Huge outflows of profits, dividends and royalties reflect the remarkable structure of Irish industry”. The remarkable structure described by the NESC refers to the role of the multinational corporations in the Irish economy and their extraordinarily high levels of profits repatriation. The report concludes: “There is a sense in which Ireland's trading balance should be calculated net of this profits repatriation. To do so would show an unambiguous trade deficit for every year between 1976 and 1989”, the years covered by the report.
We now know we do indeed have an unambiguous trade deficit. If we take, for example, the corrected trade figures as published by the CSO last week for 1990, the original CSO methodology would have given, under CSO table 1A, an apparent balance of payments surplus of £1,814 million from which must be subtracted £213 million for services, leaving an apparent surplus of £1,601 million for 1990. However, the new CSO methodology shows that in 1990 the multinationals repatriated £2,507 million in profits, dividends and royalties. When these outflows are reconciled with our assumed surplus of £1,601 million we get a deficit of £906 million for 1990.
I listened with disbelief to "Saturday View" last Saturday when Fianna Fáil, Fine Gael and Progressive Democrats politicians were falling over themselves in an attempt to claim that the revelations of what the NESC calls an unambiguous trade deficit does not really matter. If you tried telling your bank manager that the profit you reported for last year was really a deficit you would see whether or not it matters. The CSO is not to be blamed. The remarkable structure of Irish industry, as described by the NESC, means we cannot take macro-economic aggregate at face value without looking behind them. The new CSO methodology will do that. Unfortunately, what crawls out from under this CSO rock does not recommend itself to those parties who sold us Maastricht and monetary union on the basis that our fundamentals are sound.
When the CSO disclosures are taken together with the findings of the NESC report, entitled The Association between Economic Growth and Employment Growth in Ireland, the full implications for our economic performance are horrifying. When I questioned the Taoiseach on this at Question Time yesterday his defence was to resort to self-delusion about our otherwise sound economic progress. The time for self-delusion is over. These reports help explain why the jobs are not materialising. It is time to go back to the drawing board.
On Friday, 26 February 1993, the Central Statistics Office published new balance of payments data for the second half of 1991 and the first half of 1992. The publication also contained revisions for previous periods back to 1986. The new data showed that for the 12 month period to end-June 1992 there was an estimated net credit balance on the current account of almost £1.8 billion. This arose from a surplus of over £2.9 billion for merchandise trade offset by a deficit of almost £1.2 billion for invisibles, that is services, factor incomes and international transfers. This was an excellent performance on the part of the economy by any standards.
The release also contained revisions for earlier periods back to 1986. These revisions reduced the previously estimated culumative current account surplus of over £2.5 billion for the six year period 1986-1991 to virtually nil. These revisions were necessary because of new information, obtained directly from companies, which disclosed unexpectedly large imports of services, that is R & D, management fees, IT and so on, which appear to be connected with changes in the American corporate tax regime since 1986.
The background to the revisions is that in the latter half of the 1980s it was recognised that problems were emerging for the balance of payments data collection and compilation system on a number of grounds, but particularly in relation to the gradual relaxation of exchange controls and their complete elimination in January 1993. Early in 1990 the CSO requested the standing interdepartmental committee on balance of payments statistics to carry out an in-depth examination of alternative balance of payments systems.
The committee, which comprises representatives of the Central Statistics Office, Central Bank, Department of Finance and the Office of the Revenue Commissioners, consulted extensively with other countries and international experts. Its report in September 1991 recommended that a new, comprehensive data collection system should be developed, based largely on the reporting of transactions with nonresidents settled through the banking system.
This type of general direct reporting system is used in all other EC countries with the exception of the United Kingdom. The committee also recommended that, as is the practice in most countries using a GDRS approach, administration and responsibility for balance of payments statistics on the new basis should be assumed by the Central Bank. The various institutions involved accepted the recommendation of the committee and the Central Bank is progressing with the necessary legislative preparations. However, the establishment of this new system is a major undertaking and it is unlikely that it will be in place before 1996.
In the interim period the CSO initiated a range of new statutory surveys to maintain the balance of payments estimates. The highest priority was given to surveys relating to certain current account items which had deteriorated, both in quality and coverage, as the exchange controls were progressively relaxed. Three surveys fell into this category, namely: (1) profits, dividends and interest of inward direct investment; (2) international trade in services and royalties; (3) outward portfolio investment by Irish institutional investors.
The response to these surveys has been very satisfactory and a first set of revisions, based on surveys (1) and (3), was published in the April 1992 balance of payments release. This release also signalled very clearly that large revisions were in prospect arising from survey (2); these are the revisions which have now been published. The current account estimates for these items are now firmly based on the survey data and are of a much higher quality than heretofore.
A considerable amount of work is still required on the capital account. A statutory survey of foreign assets and liabilities was initiated in mid-1992, but because of its complexity this is still being developed. It is expected that the estimates for private capital in particular will be substantially improved when the results of this survey are finalised.
The net residual is a balancing item which captures all omissions and errors elsewhere in the balance of payments. It should ideally oscillate randomly around zero. At the time of the previous "Black Hole" controversy to which Deputy Rabbitte referred, in the early 1980s this residual was consistently a large negative figure. For the three years 1989-1991 the net residual has been large and consistently positive. This implies that for these years the statistical system has not been adequately covering some large net inflows into the State. It is expected that the planned improvements to the private capital item referred to earlier will reduce the size of the net residual.
There are no budgetary implications inherent in the revisions. The Department of Finance was represented on the interdepartmental committee and was aware of the underlying concerns about the quality of the balance of payments data. Furthermore, following the previous release in April 1992, all users have been aware that large revisions were in prospect. Finally, the CSO was able to indicate a broad order of magnitude for the revisions to the Department of Finance in advance of the recent budget.
In the national accounts, gross domestic product is calculated by adding estimates of trading profits to wages and salaries. Estimates of the trading profits of companies are derived from the company accounts submitted for corporate tax purposes and have already fully discounted the extra service imports identified in the new balance of payments surveys. Accordingly, the revisions in the balance of payments do not change the level of GDP. The increased value of net factor outflows will reduce the level of gross national product, but the amounts involved are small and have very minor implications for economic growth rates.
In conclusion, I want to stress that because of the new surveys the balance of payments current account is now much more firmly based than previously. There is a strong surplus on the current account since 1991 and, though the revisions for earlier periods are sizeable, they are now fairly historic. They have insignificant budgetary, GNP and growth rate implications and no impact on our reserves.