Mr. Pádraig Dalton:

I wish to register my condolences to the family of Peter Mathews on behalf of the CSO.

I thank the Chairman and the committee for inviting the chairperson of the economic statistics review group, Philip Lane, and the Central Statistics Office before the committee today to discuss the group's report and recommendations. The CSO welcomes its publication and thanks the chairperson and group members for their comprehensive and considered report.

The highly globalised nature of the Irish economy was demonstrated clearly in July 2016 with the publication of the national accounts and balance of payments statistics for 2015. The 26% level shift in gross domestic product in 2015 was driven by relocations of entire balance sheets to Ireland, with the activity related to these relocations having significant consequential impacts on the results. The relocated balance sheets were dominated by intellectual property categorised as intangible assets. While the practice of relocating intellectual property to Ireland has been growing in recent years, the scale of the relocations in 2015 was substantial and added €300 billion to Ireland's capital stocks. In consequence, there were significant increases in the estimates for depreciation of assets in the national accounts.

Associated with the relocations were significant increases in contract manufacturing activity attributable to Ireland. When the net effect of sales of products produced abroad under contract were added to Ireland's trade in goods, the balance of trade in goods and services in the national accounts doubled from €35 billion to €70 billion between 2014 and 2015, driving the level shift in GDP.

In the past, the impact of contract manufacturing activities on exports of goods was largely offset by imports of research and development services, as Irish companies made payments to non-resident parts of the group for the use of intellectual property. However, when the intellectual property is located in Ireland, these offsetting charges do not occur and the full effect of contract manufacturing is attributed to GDP, as seen in the results for 2015.

To illustrate the impact of the relocations on GDP and GNP results for 2015, net national product grew by 6.5% between 2014 and 2015. Net national product is an alternative indicator also published by the CSO from the national accounts framework. It measures economic activity with many of the effects of globalisation activities removed.

The CSO compiles, and will continue to compile, national accounts and balance of payments statistics in accordance with the standards set by the United Nations, the IMF and as required under EU legislation. Adhering to the international standards ensures the provision of results that can be compared across countries and across time. In this context, the figures currently published are highly relevant and play an important role in describing the complexity of our economy. However, the growth in globalisation activities presents a significant measurement challenge for all compilers of economic and business statistics, especially given the need to provide users with insight into domestic economic performance. It is increasingly difficult to represent the complexities of economic activity in highly globalised economies, such as the economy of Ireland, in single headline indicators such as GDP and GNP.

Following the publication of the 2015 results in July 2016, and as part of its commitment to meeting user needs, the CSO convened the economic statistics review group in September 2016. The mandate of the group was to develop recommendations on how best to meet the statistical needs of users of CSO statistics, especially national users, and to provide guidance on the development of a broader suite of domestically-focused economic indicators and information to supplement internationally agreed measures of economic activity, including GDP and GNP. Statistics currently published by the CSO, such as data on employment and earnings, as well as information on personal consumption and expenditure, are important indicators of the domestic economy. However, the discussions of the group also covered the need for additional indicators or for developments of detail in existing indicators.

The group met between September and November 2016 and submitted its report to me, as director general of the CSO, on 23 December 2016. The report and the contributions to the work of the group were published on the CSO website on 3 February 2017, along with the initial response of the CSO to the report.

The report from the ESRG sets outs comprehensively the challenges for users of Ireland's economic and business statistics and makes 13 recommendations across five main themes. Overall, the CSO will be taking an incremental approach to implementing the recommendations of the group. Moreover, the CSO will take a top-down approach and plans to deliver a number of the key recommendations in 2017. Work will extend into 2018. In respect of this phase, the delivery of certain requirements for more detailed or more frequent results requires significant modifications to current processes. There is a need to build new analyses from the bottom up using the most detailed micro-data available.

I will take the committee through some of the detail from the CSO response to the key recommendations across the five themes. The first relates to the level indicators. While levels of GDP and GNP continue to be important indicators of the size of an economy, the development of a new level indicator, GNI*, or modified GNI level, has been proposed by the group to measure the size of the complex and highly-globalised Irish economy. This modified GNI indicator will exclude many of the effects of globalisation on Irish economic aggregates and will be a useful input for analytical and economic modelling work. Ratio analysis where GDP or GNP is used as the denominator will continue to be required but users will now be able to complement this analysis by using GNI* as a denominator in the calculation of supplementary ratios.

The CSO intends to take a top-down approach. Initially, the office plans to adjust the existing GNI and corresponding balance of payment measures for the retained earnings of re-domiciled firms, as well as for the depreciation related to intellectual property capital assets. We will publish an annual time series of this indicator as part of the annual national income and expenditure, NIE and balance of payments, BOP, results in mid-2017.

During 2017 and into 2018, we will also work to develop quarterly and constant price series for GNI* and to quantify the effect of intellectual property asset relocation on individual components of the international investment position, IIP, data.

The report also recommends further development in the longer term of annual and quarterly net national product, NNP, at current and constant and prices. Work to provide quarterly NNP at current prices has started and will continue during 2017. Constant price estimates of NNP will be developed in 2018.

Regarding structural indicators, the highly globalised nature of the Irish economy makes interpretation of the economic statistics difficult for users who are interested in the role of domestic firms in the Irish economic statistics. Separating results by foreign-owned multinational enterprises, MNEs, and other sectors will help to give users insight into how ownership structures impact the statistics. The group has identified this structural insight as an important deliverable in its recommendations.

To make progress on this recommendation, the CSO will include a breakdown of the non-financial sector into large cases and other firms in the October 2017 annual sector accounts. This new view in the sector accounts will include a breakdown of GDP and GNI for large cases and other firms. The large case firms dominate Ireland’s key business and economic aggregates, typically accounting for 80% of turnover in the economy and for 70% of exports of goods. This new breakdown planned for the annual sector accounts will be a significant start towards providing the insight needed by users on the structure of the Irish economy. In the longer term, 2018 and beyond, the CSO will work to expand the breakdown for foreign-owned MNEs beyond the large case firms and into other presentations of the national accounts data.

Regarding the cyclical indicators, it is important to recognise that globalisation activities are not limited to multinational enterprises. Activities related to globalisation, such as contract manufacturing, are carried out by all types of firms and happen in both directions. Irish-owned firms are involved in contract manufacturing and Irish firms are also providers of contract manufacturing services to foreign customers. The additional detail on activities related to globalisation such as intellectual property relocation, contract manufacturing and aircraft leasing proposed under the cyclical indicator theme will provide important information on how these activities contribute to the aggregates. The CSO plans to publish initial breakdowns of these details in mid-2017 at the time of the national income and expenditure release. Along with the analyses in the structural indicators recommendations, these additional details on the activities identified will help to give users a comprehensive view of the effect of globalisation on the Irish economy.

Regarding co-operation nationally and internationally, the CSO's focus will continue to be on the compilation of consistent macro-financial statistics in its collaboration with other domestic institutions. In addition, the international organisations co-operate closely on globalisation issues and the CSO will continue to be closely involved with this work, including participating, by invitation, in the advisory expert group to the UN Intersecretariat Working Group on National Accounts, the body responsible for the multi-year programme of development of the next generation of standards for national accounts statistics.

The CSO has appointed a head of communications and plans to establish a press office function and to restructure the existing information unit in line with the CSO’s new communications policy.

Delivery of the recommendations by the CSO will be incremental with new key measures - GNI* and additional detail on globalisation activities - included with the annual national income and expenditure, NIE, results, scheduled for mid-2017. By the end of 2018, the measures will be extended in stages to the various quarterly series where feasible. Progress will be kept under review and feedback will be sought from users on developments. Compilation of national accounts and balance of payments statistics will continue in line with the international standards and the new indicators and analyses will further develop within the existing frameworks for the statistics.

The CSO operates under the terms of the Statistics Act 1993, which sets out the mandate of the CSO and the standards by which we conduct our business. Independent, objective, trusted and high-quality official statistics are the cornerstone of any developed democratic society. A key element in ensuring that trust and quality is the legal guarantee in respect of the confidentiality of statistical returns made to the CSO. This commitment to confidentiality is also established in the European statistical framework legislation and in the European statistics code of practice. The legally binding guarantee of confidentiality given to all CSO data providers is essential to our ability to collect the data required to produce accurate outputs.

As a result, to ensure the proposed new measures will be, and can remain, robust, repeatable, consistent and comparable, the CSO will have to balance the additional detail made available against its commitment to ensure the confidentiality of data provided by respondents.