John Lahart (Dublin South West, Fianna Fail)
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I welcome Professor Philip Lane, Governor, and Mr. John Flynn, head of the Irish economic analysis division, in the Central Bank of Ireland. I also welcome Mr. Pádraig Dalton, Director General, Ms Jennifer Banim, Assistant Director General CSO and the Economic and Environment Statistics section, and Ms Gillian Roche, head of Government accounts division, from the Central Statistics Office. They will discuss the December 2016 report of the Economic Statistics Review Group, ESRG.

Before we begin, I remind the members and witnesses to turn off their mobile phones because the interference by phones affects the sound quality and transmission of the meeting.

Witnesses are protected by absolute privilege in respect of the evidence that they give to the committee. However, if they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the longstanding parliamentary practice to the effect that members should not comment on, criticise or make charges against either a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

Before proceeding some of the members wanted to comment on the origins of the Committee on Budgetary Oversight.

Dara Calleary (Mayo, Fianna Fail)
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This morning we have heard of the sad passing of former Deputy Peter Mathews. On behalf of Fianna Fáil, I extend our deepest sympathies to his wife Susan and his family. This committee and the notion of increased oversight of the budget and national accounts were one of his pet projects that he enthusiastically pursued at all times. Were he a member of this Dáil he would most definitely have been a member of this committee. He is somebody who championed the role of Parliament in further scrutiny as one of the lessons of the crash. Ar dheis Dé go raibh a anam an-uasal.

David Cullinane (Waterford, Sinn Fein)
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I wish to extend sympathy to the family of Peter Mathews on behalf of myself and my party. I echo the comments made by my colleague, Deputy Calleary.

Tommy Broughan (Dublin Bay North, Independent)
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On behalf of Independents 4 Change and Independents generally, I wish to remember Peter Mathews on this sad day.

He obviously had an interest in banking and finance and he had some very interesting views. People might remember he came to public prominence when he joined the public debate around the time of the lead-up to the blanket bank guarantee, with which I believe he disagreed profoundly. Over the years, he indicated ways in which we could ease the burden on our people from the serious austerity they have suffered. Like myself, he was a member of a party and then became an Independent, and he lost his place on the finance committee at that time. We were both hoping the budgetary oversight office would be established, as well as this committee, to provide for ex antestudy of budgets. While we have the Committee of Public Accounts system at the moment, it is intended that we would, like many other European parliaments, be able to seriously examine what Governments are doing. The achievement of that office and this committee will be part of the achievement of Peter Mathews. Ar dheis Dé go raibh a anam.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I was shocked to hear that Peter had passed away. Obviously, the most important thing is to pass on our sympathies and condolences to his wife and family. Peter was somebody who was incredibly passionate about his particular area of interest, which was the whole area of banking. He had a passionate belief that the way in which we dealt with the financial crisis, given the responsibility of the banking sector and, for that matter, the regulators, was not the way we should have dealt with it. He was relentless, frankly, in his pursuit of those arguments. We have to give him great credit because it was motivated by a genuine belief. While there were some issues on which I would have disagreed with him quite profoundly, there were some, particularly in that area, where he did illuminate our understanding significantly. His dedication was extremely impressive. I remember him travelling with us to meet the finance committee of the Bundestag to make the case that the treatment of Ireland was despicable and mistaken, as he saw it, and he put a very persuasive and passionate case on that. It is a significant loss. All we can do is pay tribute to the man and the efforts he made while he was still here.

John Lahart (Dublin South West, Fianna Fail)
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As Acting Chairman, I want to echo those views. The clerk might pass on the views of the committee to the Mathews family. We might pause for a few seconds as we remember the passing of Peter today.

John Lahart (Dublin South West, Fianna Fail)
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I thank Professor Philip Lane for his attendance. I invite him to make his opening statement.

Professor Philip Lane:

Before I come to my statement, on my own behalf and on behalf of the Central Bank, I want to join in expressing my condolences. Peter Mathews made a valuable contribution to the important public debate about how to resolve the crisis. I can recall that throughout that period, he, along with others, stood up and became actively engaged in working out different strategies for managing the crisis. That speaks to his sense of civic duty. I and the Central Bank want to recognise that important contribution.

I am here today in my capacity as the chair of the economic statistics review group, the ESRG. This group was formed last summer to provide guidance to the CSO on how best to meet user needs for greater insight into Irish economic activity, taking account of the challenges inherent in providing a comprehensive picture of the highly globalised Irish economy.

The membership included policymakers, analysts, regulators, business and trade union representatives, as well as academics. We also had input from the international statistics community, for example, EUROSTAT, the United Nations, the OECD and the IMF. In addition, the ESRG benefited from written comments and presentations made by various members of the group and also by external contributors. All of this material can be found on the CSO's website which includes the report and all of the ancillary material.

The CSO compiles national accounts and balance of payments data in accordance with global standards, which is essential if results are to be comparable across countries and over time. EUROSTAT has also affirmed that the 2015 national income and expenditure accounts comply with these international standards. However, it is increasingly difficult to interpret the complexities of activity in highly globalised economies by reference to the most familiar indicators such as gross domestic product, GDP, and gross national income, GNI. Reflecting the increasingly interconnected nature of business and its growing fragmentation across national borders, it has become much more challenging to fully understand the impact of globalisation on national statistics. We can think of particular issues relating to intangible assets such as intellectual property, the globalisation of production processes and the residential location of the corporate structures of global firms. That is the backdrop. Given all of this, it is critical to generate reliable measures of the aggregate size of the economy. This is important for private sector decisions. It is also essential for fiscal planning and, from the Central Bank's point of view, in assessing the sustainability of private and public debt levels. For macro-prudential policy, the size of the economy is a necessary scaling factor in assessing the sustainability of the level of credit issued by the financial system.

As indicated, the CSO is mandated by international requirements to produce gross domestic product, gross national income and related measures. However, it is the view of the ESRG that supplementary or extra statistics are more appropriate in the measurement of domestic economic activity. These supplementary indicators need to be accessible and publishable in order that the confidentiality of data from individual firms is not compromised. They also need to be sufficiently robust in order that possible future globalisation-related changes will not damage the relevance of the series.

One core recommendation of the group is the development of what we call an adjusted level indicator, GNI*. Let me explain about the concept of GNI*. A basic principle of national accounting is that in order to have a stable measure of economic performance it should be robust to cover alternative accounting approaches by multinational firms. This is at the heart of one of the strands of the work we did. For decades it has been recognised that GDP is an inadequate indicator in Ireland, given the size of measured factor income flows for multinational firms. For this reason, gross national income or its close cousin, gross national product, has been widely employed since the 1980s as an alternative indicator, since these measures strip out net international factor income flows. The profits paid to multinational firms are stripped out when going from GDP to gross national income. However, we now find that even GNI is no longer a sufficiently reliable indicator. In particular, there are two significant measurement issues, one of which is the treatment of depreciation in the foreign-owned component of the domestic capital stock. The second which has been flagged in recent years is the treatment of the retained earnings of re-domiciled firms. These are firms that have located their headquarters in Ireland and moved a lot of activity onto its balance sheet.

In both cases, measuring Irish economic activity on a gross basis as embedded in GDP or GNI now includes sizeable elements which, ultimately, are not accruing to domestic residents but are borne by or accrue to non-residents.

In the context of depreciation on the foreign-owned portion of the domestic capital stock, that is treated as being part of the overall indicators when it comes to GDP or GNI. This is misleading because who bears the cost of that depreciation? It will not be domestic residents but, rather, the owners of these foreign firms. It should not, therefore, affect a measure that is intended to capture the resources available to domestic residents. This is especially the case if the relocated capital assets are not deployed in combination with domestic workers but are used in combination with overseas workers through contract manufacturing arrangements. For example, one could have intellectual property assets in Ireland which are being used for production elsewhere. Essentially, it is just entering Ireland through the accounts of these multinational firms. It is not something that is visible in the Irish economy.

This is why we have recommended the alternative GNI*, or GNI star, measurement, which, in the first instance, would exclude the depreciation of foreign-owned domestic capital assets. This would prevent corporate re-organisations having an impact on measures of domestic economic activity and would recognise the reality that the ultimate owners of these assets are those who bear the depreciation costs relating to those capital assets.

With regard to re-domiciled firms, it is well recognised that issues arise because the accounting treatment of net income depends on whether a firm is classified as a directly owned foreign firm or as a domestic firm headquartered here which, in turn, is owned by foreign shareholders. Substantially, it should make no difference but, because of global conventions relating to the rules in terms of recording capital income, it does. The current position for a re-domiciled firm is that a firm here might accumulate net global income and it is recorded as part of GDP and GNI. Eventually, it will leave the accounts if the firms declare a dividend. However, many corporations are holding on to cash at present. If they hold on to cash they are accumulating cash on the balance sheet here. It is not flowing out of the economy but, at the same time, it is not really a part of the domestic resource base because ultimately the foreign owners will take the money out. This is essentially the second adjustment. We believe that rather than wait for the cash to be paid out, it should be recorded upon accrual if these firms are making profits. We already do it for foreign direct investment, for this second category of re-domiciled firms. Once the earnings are accruing here, they should be recognised as ultimately accruing to the foreign investor and should not affect important measures such as GDP or GNI. Since we cannot affect the measurement of the GDP or GNI what we can do is create an extra indicator, GNI*. That is the core recommendation regarding measuring the size of the economy.

In addition, in order to strategise for the economy and to think about its structure it is important to learn more about the breakdown between the domestic and foreign sectors in the economy. Of course, any analytical presentation must respect the confidentiality of the data supplied by firms to the Central Statistics Office, CSO, which constrains the level of detail that can be presented. In addition, as I mentioned earlier it is important that any presentation is forward looking and is set up in such a way that it does not rule out future revisions by these corporations in how they do business. Given those constraints, it is never going to be the case that one can go below a certain level of aggregation and, therefore, what can be possible is a set of other splits of the data. Incidentally, this is also relevant in thinking about measures such as the current account balance of the economy and the international investment position of the economy. Having more detailed splits of those data is important for analysis.

A third dimension of the report relates to understanding the cycle. My colleague, John Flynn, is involved in our forecasting exercise. We have to work out whether the economy is overheating or under-heating and so on. More data revision is needed in this area. When forecasting a high frequency activity, the focus is on expenditure measures such as investment, consumption and so on. The problem is that at present the data, including the trade and investment data, are distorted by the massive gross flows related to the activity of multinational firms and aircraft leasing. For practical purposes, those of us in the Central Bank and all other professional analysts have to make adjustments to come to something that is more related to the domestic economy. For example, we try to strip out the impact of intellectual property investment and investment in aircraft that are used elsewhere and so on. Essentially, we are recommending that the Central Statistics Office could publish adjusted measures rather than each individual analyst having to make decisions about these things. This would then be the gold standard measures that domestic and global analysts could examine in considering the business cycle in Ireland. Essentially, it involves netting out the impact of contract manufacturing and royalty payments for intellectual property and so on.

We also have some recommendations for conduct and how the CSO manages the national accounts. One relates to communication. The report identifies recommendations about how to enhance user understanding of Ireland's major releases in terms of the presentations, briefings, questions and answers and so on at the time of major data releases. We note that it is essential to build on the ongoing co-operation at international and domestic level. Internationally, the CSO is plugged in to various global initiatives to grapple with globalisation topics. Domestically, we believe there is room for improvement in terms of the joint activities of the CSO and those of us in the Central Bank in respect of collection of relevant financial data.

Essentially, the message of this report is that the headline numbers are not adequate. They are measured correctly, as affirmed by EUROSTAT, but they do not tell us what we need to know. That is why having these extra indicators is important. It is also important to be realistic in terms of what can be achieved in a given timeframe. The most important point is to have a revision in terms of the annual data and adapting the quarterly data at a later period.

John Lahart (Dublin South West, Fianna Fail)
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Thank you, Governor. The director general, Ms Banim, will make an opening statement. I am sorry - Mr. Pádraig Dalton will speak. I beg your pardon.

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.

John Lahart (Dublin South West, Fianna Fail)
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Thank you assistant director. My apologies; I had an Oscars, "La La Land" moment. I thank the director general of the CSO, Mr. Dalton, and the Governor of the Central Bank, Professor Lane.

David Cullinane (Waterford, Sinn Fein)
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I welcome Professor Lane, Mr. Dalton and their colleagues. I would love to say they brought clarity; however, I have more questions now than I had before they came in. I do not think this will be on the 6 p.m. news either.

There is concern about measurements, given what happened in recent times when we had headline figures for leprechaun economics which created real problems. There was a big spike in GDP figures and most people saw that they were not reliable. At school I was not good at maths. As it is not my strong point, I ask Mr. Lane to bear with me. In his written submission he stated, "It has long been recognised that GDP is an inadequate indicator of the level of economic activity for Ireland." Is that peculiar to Ireland? He also stated:

For this reason, GNI has been widely employed as an alternative indicator, since GNI strips out net international factor income flows. However, several factors suggest GNI is no longer a sufficiently reliable indicator.

Given that GDP and GNI are insufficient, we must devise some bespoke measurement.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Do not forget about GNP.

David Cullinane (Waterford, Sinn Fein)
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This bespoke measurement, according to Professor Lane, is "the publication of an adjusted indicator of the size of the economy, GNI*, which would subtract from GNI both the retained earnings of re-domiciled firms and adjust for the depreciation of foreign-owned domestic capital assets". What standing does any of these bespoke measurements have internationally? The international measurements are GDP and GNP. Can Professor Lane understand the confusion about which figures are real and to which ones people should lend weight? If they do not like one set of figures, they can refer to another. Can he understand how it is a concern for people who examine these issues? The measurements are not immaterial or inconsequential. They impact on how we implement and apply the fiscal rules. Is it the case that the fiscal rules can be applied only using the more traditional measurement, GDP, and not any of the alternative measurements being examined here?

Professor Philip Lane:

The Deputy has asked the obvious set of questions which many people will ask. I will differentiate those whose job it is to closely track the Irish economy. I refer to people working in the Central Bank, the Department of Finance, the staff of committees such as this and, when the parliamentary budget office is up and running, the people who will work in it. I also include people working for global banks which hold Irish sovereign debt, the IMF, the OECD and so on. They all have a high degree of understanding. Part of the process involved bringing them in. We had people from the OECD, the United Nations, the IMF and EUROSTAT. They were all very interested in keeping up with the committee's work. At the level of the experts or professional economists, those who have to track the Irish economy understand the issues involved. When the IMF mission or representatives of the European Commission come to evaluate the economy, they will pay attention to them.

David Cullinane (Waterford, Sinn Fein)
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It is not so much that they understand them but how they use the figures and which ones they will use and apply in calculating, for example, the fiscal space.

Professor Philip Lane:

This is going to be an ongoing issue. In many cases, including those in which we have to report to our colleagues in Europe on the financial system, the regulations will refer to "relative to GDP". My prediction is that in the surrounding commentary they will state that, relative to GDP, the numbers might look okay but because the figures for gross national income and GNI* are far below those for GDP, if we use the alternative indicators, our credit and fiscal position does not look so healthy. This has been an ongoing issue for decades. Gross national income and gross national product are stable at around 20% below GDP. This has been true for a long time. When we make this additional adjustment - I will wait to see what the CSO reports in mid-summer - it will be significantly below that figure again. Therefore, they are big adjustments. When we think about the public debt-to-GDP ratio, it will look a lot higher when we scale it using GNI*, while the stock of household and corporate debt will look a lot worse relative to this indicator. For me, however, it will be more realistic. The paradox, if one likes, is that this big bump in GDP makes the numbers look better. However, when we actually look at what is going on and exclude depreciation and the profits of re-domiciled firms, while more reflective indicators such as GNI* will still show that the economy is performing well - just this morning we saw the unemployment number coming down to 6.6% - it is not doing well to the extent of the headline GDP number. That is crucial and I am glad that the committee is paying attention to the topic and raising the awareness level in the wider Oireachtas. It will be essential in debates because anything we say relative to GDP will look a lot different relative to GNI or GNI*.

David Cullinane (Waterford, Sinn Fein)
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I acknowledge Professor Lane's response. I note what he says that, whether it is the European Commission, the European Central Bank or otherwise, when they look, for example, at the debt-to-GDP ratio, there may be a footnote that when one takes GNI* into account, the position might be somewhat different. The point is that the fiscal rules are worked out on the basis of the debt-to-GDP ratio. Is Professor Lane suggesting they may use a different set of measurements in calculating the rules or that they will still work on the basis of the debt-to-GDP ratio? If that is the case, they will be working from a false premise. What value do the new measurements have, other than telling us something else?

Professor Philip Lane:

Fiscal policy is a national-domestic responsibility. There are many countries involved and perhaps, at some point, they will change the legislation. Under current regulations it is scaled by GDP. Even if they can do nothing about it, domestically, whether it be the Irish Fiscal Advisory Council or the Oireachtas, when we think about fiscal policy, if we do not want to fool ourselves by using an inflated GDP number, we should be thinking about other scaling factors such as GNI*, even though it is a tough message. It will be a tough message in the sense that the true state of the public finances will look tougher when one uses GNI* compared to GDP.

Dara Calleary (Mayo, Fianna Fail)
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I welcome the delegates. To continue Deputy David Cullinane's line of questioning, we are looking at threats to the economy. Whether it be GDP, GNP, GNI or GNI*, one of the biggest blockages being spoken about by delegates to the committee is capital expenditure and our inability to spend money on creaky infrastructure, be it roads, public transport, health services or anything else. There is a list of demands that need to met in terms of basic maintenance, but we are absolutely constrained by the rules which are GDP-based in spending or borrowing money for capital infrastructure projects.

IBEC and ICTU are at each other's throats at the moment on many issues but, on this issue, they are at one. IBEC is saying we need to change the rules. Is this just a grand little academic discussion between Dame Street and Cork, or a Cork-Dublin discussion, or is it actually going to have relevance to the real lives of people? Beforehand, I thought this was going to lead to some sort of a change but from listening to Professor Lane, there will not be any change in Europe. It is just a little discussion to make Ireland feel real about itself but all we are is a footnote.

Professor Philip Lane:

Let me emphasise that it is going to go in the other direction. In a discussion where we say the underlying true level of income in the economy is given by a number like GNI*, all of the fiscal numbers are going to look worse, so the amount of fiscal space, if one uses similar principles, will be less. It is a separate debate. Of course, there is an ongoing European debate about the current fiscal rules and the advisability or otherwise of including public investment in the calculations. No one is saying the European fiscal rules tell one what a country should be doing. In 2010 I was the rapporteur to a predecessor to this committee and we discussed the important role of a parliamentary budget office, an independent fiscal council and so on. It is very important that we understand that where those rules matter, we should discuss them but more important than that is thinking about what is the best for the country. We should be trying to think about fiscal numbers relative to GDP and when GDP is so inflated, we should also be saying, "Hold on a second, compared to GNI* what do the numbers look like?", even though it is going to paint a less flattering picture.

Dara Calleary (Mayo, Fianna Fail)
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What is best for the country is that we address our infrastructural bottlenecks, create employment and make long-term investment but not be constrained from doing that by rules, which are needed but which are really focused on short-term, day-to-day expenditure. However, that is another day's debate.

Deputy Cullinane mentioned that we took a huge international hit with the phrase "leprechaun economics" last July. Given the reputation of the man who invented the phrase, that hit was bigger again. Does GNI* address the disparity on that issue?

Professor Philip Lane:

I think it will have greater force once the CSO reports the data in mid-summer. My hope would be that, at that point, we will see the graph for GNI* being much more normal and we are not going to get the spike we saw in the 2015 GDP data. Essentially, people like Paul Krugman who understand these issues will understand why GNI* is a preferable, more stable and better series. Of course, it is very hard to walk back from that headline. Even after a few weeks, across the international community people understood very well why that headline number was essentially not giving a good picture of the Irish economy and they understood the nature of the corrections needed. Of course, in the wider public discourse, it is a headline that will not be forgotten.

Dara Calleary (Mayo, Fianna Fail)
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Professor Lane mentioned a spike. There also was a major spike in our corporate tax receipts in 2015. Is there a link between the unreliability of these figures and corporate tax? What consequence would that have for-----

Professor Philip Lane:

Let me emphasise the figures are not unreliable. They are reliable. There are multiple forces driving the corporate tax revenue but, as Mr. Dalton said, the fact these balance sheets were relocated to Ireland may well have a pay-off in terms of higher corporate tax - there is no doubt about that. These are perfectly reliable numbers-----

Dara Calleary (Mayo, Fianna Fail)
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Can I use the word "distorted"?

Professor Philip Lane:

Sure. To an extent these assets remain in Ireland. My bet is they will continue to generate recorded profits and, therefore, some degree of corporate tax revenue. There is a benefit to having these international capital assets here.

It should involve higher corporate tax payments, there is no doubt about that. The actual corporate tax revenues are included in GNI* so we allow for that benefit in this calculation.

David Cullinane (Waterford, Sinn Fein)
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Could Mr. Dalton respond to some of the observations?

Dara Calleary (Mayo, Fianna Fail)
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I have one other question for Mr. Dalton. He mentioned the Statistics Act which is the CSO's guiding body. It struck me that one of its innovations is an information office and a press office. Does Mr. Dalton see any need for changes in the Statistics Act to reflect the different ways of information, the different ways of doing figures now compared to when that Act was introduced?

Mr. Pádraig Dalton:

The Statistics Act is not a barrier to the work the CSO does. What we were trying to identify here was the balance between confidentiality and provision of detailed information. The trust that respondents have in us has a direct impact on the quality of the data that we compile. For example, in April, when the members filled out their census forms, they did so because of the guarantee of confidentiality that the CSO gave them. When they were filling out that form, they knew that the data they were giving to the CSO was going to be safe and secure. That same guarantee of confidentiality has to exist for our business surveys as well and particularly for all of the enterprises or entities who respond to us. Due to the impact of a relatively small number of multinational enterprises in our statistics, sometimes when we produce aggregate data we cannot publish it because it would be disclosive and therefore it would be a breach of official statistics. If we publish data that leads to the identification of an individual company or entity, the likelihood of them providing us with data in the future is significantly reduced, just as if I breached members' confidentiality with a census form, I am sure they would be very slow to respond to us the next time around. Maintaining that trust of respondents is critical, not just to the CSO but to any national statistical institute.

On the value of the data, someone mentioned the soundbite of some years ago, but it does not capture the complexity of the issue. What gave rise to the figures in 2016, was that there was a relocation of entire balance sheets containing intellectual property rights back into Ireland. The soundbite suggested that did not happen and it was not real. It did happen and it was real and it was the consequential knock-on effect on how we had to treat the associated contract manufacturing in the statistics. It is unfortunate in one sense that it gives the suggestion that those events did not happen. From a statistical and from an economic perspective, Ireland is quite unique. We are an extremely open and highly globalised economy, probably one of the most globalised economies in the world. The figures we compiled last year accurately captured what happened and the comment from the IMF when we met them in Washington was the national accounts framework did its job.

The national accounts framework produced official statistics that clearly highlighted the hugely globalised nature of the Irish economy. That was really important; the job of official statisticians is to shine a light on issues that are relevant to the State. In doing so, the problem was that it made it very difficult for commentators and analysts nationally to get a sense of what was happening in the underlying economy domestically and that is why we engaged the users and, in particular, we set up the Economic Statistics Review Group, because we felt it was important. Users were telling us that they wanted more and better information to give them an insight into what is happening in the domestic economy, to net out the globalisation effects. That is really important for national policy perspectives and for monitoring the sustainability of debt and so on.

The group chaired by Professor Lane has come up with a suite of recommendations that the CSO will now implement. We have been doing a lot of work over the last four or five years on this and we have already published a broader suite of publications. We have an annual report on the multinational enterprise sector vis-à-vis the domestic sector and we have done specific publications on aircraft leasing which have an impact on the national accounts.

We have done an increasing amount of work on labour and capital-based productivity. We have also put together specific statistics on the re-domiciled plcs issue and how that impacts on the Irish national accounts. What the economic statistics review group does is provides a more formal framework to pull together a broader suite of relevant indicators. These are relevant in the sense that they give better insight into what is happening in the domestic economy. That is what we are trying to do and that is what we have to continue to do. Legally, we have to continue to produce GDP and GNP figures in accordance with international standards. That is a legal requirement for Ireland Inc. in the same way as it is a legal requirement for all EU member states but we will also now produce a broader range of indicators that help domestic policymakers and people such as Professor Lane who need that data to get a better sense of what is happening in the domestic economy.

John Lahart (Dublin South West, Fianna Fail)
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Mr. Dalton referred to the figures spiking in 2015 and 2016. Does he have any intelligence as to why they spiked? He stated that a large number of companies domiciled their accounts here, but why did it happen in those years?

Mr. Pádraig Dalton:

What happened in 2015 did not happen for the first time then. There has been a trend in our national accounts towards the relocation of entire balance sheets, primarily made up of intangible assets, into Ireland since around 2011. What was different in 2015 was the absolute scale of it. What gave rise to this in 2015 was there were a couple of events that were of a scale we had never seen before.

John Lahart (Dublin South West, Fianna Fail)
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I get that, but what prompted it?

Mr. Pádraig Dalton:

The motivation is not something that statisticians query companies on. Our job is to compile-----

John Lahart (Dublin South West, Fianna Fail)
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Could Mr. Dalton even just make a guess at why?

Mr. Pádraig Dalton:

Neither the director general of the CSO nor or anyone in the office gets into the role of guessing. However, the economists and others can, perhaps, answer that better.

Professor Philip Lane:

Without knowing the details of exactly what happened in Ireland, it is part of the broader global debate about corporations trying to decide where it makes sense to put their activities. There have been repeated debates regarding, for example, the base erosion and profit shifting, BEPS, process with a greater focus on offshore centres and on having visibility regarding the organisation of global corporations. The Central Bank sees, in the context of the IFSC, that there has been an increase in financial activity in Ireland because there has been a migration in various sectors away from offshore centres towards high-level financial sectors like Ireland. That is one global trend, although I am not sure if it corresponds exactly with the 2015 event here. Essentially, that is one element. A second element is the rise in the world of the value of intangible assets. We know that brand value, the value of intellectual property in the world of the Internet and so on are more important for an increasing number of corporations than machines. The nature of corporations has moved in a way that puts a greater premium on these intangibles compared to physical assets.

John Lahart (Dublin South West, Fianna Fail)
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When does GNI* become active and live in the decisions that are made by the Department of Finance in terms of budgetary planning?

Professor Philip Lane:

The committee will have to put that question to the Department. The CSO is going to report mid-summer, so it is something that could be used as an input by autumn. There are two ways to think about it. One would be to start talking about ratios to GNI*. The other way to approach it would be to still use ratio to GDP but use a different target. For example, last year, the Minister for Finance, Deputy Noonan, indicated that it might be a better target for the debt-to-GDP ratio should be 45% rather than 60%. That would be another way to approach it. In other words, given that the GDP numbers may be too high, perhaps we should use a lower ratio.

To that extent it is already embedded by arguing that the target debt ratio is lower than the typical European 60% target.

John Lahart (Dublin South West, Fianna Fail)
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On what Deputy Calleary raised, what would its impact be on the capacity of the State to invest in capital infrastructure projects, for example, if the measurement was implemented?

Professor Philip Lane:

For any fiscal dimension, any form of expenditure or revenue, certain deficits will look worse scaling by GNI* relative to GDP, because it is a smaller number. The numbers for expenditure relative to GNI* and revenue relative to GNI* will look higher. It will alter the way we think about it. In the world as is, we have autonomy over fiscal decisions. It is up to the political system and wider society to decide how much they are going to take on board the message that the underlying level of income in the economy is more accurately recorded by GNI* rather than GDP. If we do not want to fool ourselves, we should be accepting that.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I thank everyone who has contributed today. I welcome the new measurements, because they help to give a more accurate picture of what is happening in the economy. People have already made the point about the practical problem that poses for how Europe measures us and what that means for official debt ratios, fiscal space and all of that. That is one dilemma but at least we now have information. It throws responsibility back on political authorities here, to some extent, to be prudent and realistic about where we are. My fear is that the debate will then be an austerity debate.

The difference between GNI* and GDP given by Professor Lane is quite dramatic, at about 20%. That is a huge amount. That means that, far from Ireland being one of the fastest growing economies in Europe and a model economy, we are in a much worse, incredibly vulnerable position. That is what I would conclude from those numbers. Would Professor Lane agree that that is a more accurate picture? To use a football analogy, if one judged British football from the premiership, which is packed full of international stars which they buy in from elsewhere, one would think that English football is in a great state, but of course the domestic game in Britain is at its lowest ebb ever. There is a connection between these two. The standard of the domestic game has collapsed because they import all their quality. One might argue that is not a bad analogy for the economy.

The incredible over-dependence on foreign direct investment, multinational investment and so on, and the distorting impact that it has, means we are extraordinarily vulnerable here and the domestic economy is in a very poor position. I know Professor Lane is somewhat restricted in comments he can make on politics, but he and the Central Bank have a responsibility for stability - not so much the Central Statistics Office, CSO, which just provides the figures. What would he say about the stability of that kind of scenario? It seems to me that it is not a good scenario.

Professor Philip Lane:

It is a good news, bad news story. I may steal the Deputy's analogy for future use elsewhere. The good news is that no matter what indicator one looks at at the moment, the news is good. There are core numbers like unemployment coming down to 6.6%. Mr. Dalton talked about the net national product growing by around 6% in 2015.

The Central Statistics Office, CSO, came up with another number in October when it differentiated the growth rate between the foreign dominated sectors and the domestically dominated sectors. The foreign dominated sectors grew by 100% in 2015 - the figure doubled - whereas the domestically dominated sectors grew by around 4.5%. That 4.5% is still at the top of the European league. The direction is good on all indicators but, coming back to the Deputy's point, the size of the economy is critical. That dominates how much public investment we can afford and how we think about ourselves in a relative European sense, about how rich we are as an economy. The message there is quite stark. There is a big difference when one drills down to a more realistic number like GNI*.

This is not really news. The Organisation for Economic Co-operation and Development, OECD, publishes household consumption levels across the OECD, which our committee looks at. We are just below the OECD average on that. That is, in a way, asking how people feel. Are people feeling well off or not? It is great that more people are finding full-time work. It is good that wages are eventually starting to creep up. However, nobody believes that the economy is growing at the headline rate. It is good news, bad news. The good news is that all the numbers are growing, so we are not in a stagnation situation, but living standards in the economy are much more modest than the headline number.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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What would Professor Lane say on the vulnerability argument? We are much more vulnerable. I do not know how far he can venture into opinions on what is partly-----

Professor Philip Lane:

That is part of my job. Part of our financial stability role is to make assessments. When I spoke in Cork last week, I pointed out that one of the risk factors for the economy is the rise in global protectionism, and also possible changes to tax systems in various countries. To the extent that that poses a risk factor for the multinational sector is a major risk for the economy. It is hard to put a probability on it. The commitment of Ireland to this globalisation strategy has many benefits, but it is also a vulnerability because what can come in can also go out.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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The vulnerability is heightened now because the race to the bottom on corporate tax has intensified. I do not think anybody would dispute that. Whether one thinks it is good or bad, and I think it is very bad and dangerous, it has definitely intensified. The lights are flashing even more brightly in terms of our potential vulnerability. I do not know what Professor Lane thinks about that.

The other interesting thing in what Professor Lane said, which struck me very strongly, is about the value ascribed to intellectual property. It seems to me that that is a political debate which needs to be had but is not being had. It is about how much value is put on intellectual property as against sales, many of which are done here or in Europe, or the manufacturing process, because they are all different things. That is a highly political argument. It suits a certain political view, or corporate view for some companies, to say that all the value is in the idea. One could easily say that it is not really, because the idea without a product or sale does not mean anything at all. Is one of the ways we could lessen the vulnerability on this to be to the forefront, which we are not, in arguing for some sort of international, not just European-wide, consolidated tax base where we assign, and have a serious debate about, relative value of intellectual property versus other parts of the production chain?

Professor Philip Lane:

The Deputy signalled the context in which that debate is being held, which is to ask what the appropriate tax base is for taxing corporations, which is a political decision.

Is it where production takes place, should it be based on where the customer is or should it be based where the intellectual property is held? That is definitely a global and European tax debate which is in the hands of political systems.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Perhaps this is a question for both witnesses but it seems to me that on the statistics side, if there is a significant disparity between GNI* and GDP, and I welcome the new measurement as it at least gives us a fleshed out picture, does is it not also mean that to facilitate the full spectrum of debate around how we respond to the real state of the Irish economy, we need more statistics on the distribution of wealth? I would also like to ask for statistics on wage share, which should be included in figures. There is a very definite trajectory, which is not good as far as I am concerned, in terms of wage share as a proportion of national income as against profits. That should be measured and be included in the figures. We should see it and see what the pattern is. Perhaps the witnesses could respond to that point.

If the real fiscal space that we can depend on is much narrower than GDP would allow us, the other side of that is if we are going to find money for investment in capital or anything else, we have to look at other possible ways of getting revenue. That means a much more forensic set of figures and statistics in terms of the distribution of different aspects of wealth, income, property, resources and all that kind of stuff. Perhaps the witnesses would comment on that.

Professor Philip Lane:

In addition to national level data, neither I nor the CSO will say that more data are not helpful in knowing much more about the distribution of income between labour and capital across different cohorts in society, helping to understand what is going on and helping decision-makers in terms of allocation. Of course more data are helpful. That said, this would be much more effective if it was part of a co-ordinated international effort, because many corporations here are global. For Europe collectively to understand what is going on, it needs cross-border data as well as understanding what is going on in each individual jurisdiction. We are very far away from making much progress on that.

Dara Calleary (Mayo, Fianna Fail)
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On that issue of co-ordinated corporate effort, is it necessarily in the interests of states or Government-----

Professor Philip Lane:

It is or is not?

Dara Calleary (Mayo, Fianna Fail)
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-----to drill down through the spin of these figures and see where we really are at?

Professor Philip Lane:

Countries may have different perspectives on whether it is in their net bottom line interests and whether more information would help or not.

Mr. Pádraig Dalton:

Internationally comparable data is always more welcome than something that happens at a national level because it gives a better perspective. One of the big discussions at a European level at the minute is around the issue of income consumption and wealth. That is a key discussion, and the CSO has plans to create a new area, a new division, focusing on income consumption and wealth, which is a direct attempt to address the issues the Deputy has raised. For example, on the distribution analysis that we already do, if one looks at the EU survey on income and living conditions, we do an income distribution across the ten deciles, but within each decile we break it down between direct income and social transfers in order that the impact of direct income, which is primarily employed or self-employed income, can be seen.

One can see the impact of that at an overall level in the State but can also get it for each decile across the income distribution, which partially references the wage issue to which the Deputy referred. The more information and details we can provide the better. We are already doing some of that.

On the wealth side, the CSO carried out a wealth survey that was funded by the Central Bank of Ireland for the first time three years ago and we are going to do it again. The CSO wants to formally make this a part of its statistical work programme in order that it is carried out every three years on an ongoing basis. Wealth is seen as the missing piece. We have data on income and consumption but traditionally we have not had data on wealth. We want to introduce that, which will allow us to produce a linked picture between the macro and the micro, which to an extent is missing at present. We also will invest in trying to produce those horizontal outputs that link macro and micro. Rather than having stovepipe publications on national accounts and employment and unemployment and retail sales, we will try to do horizontal pieces that build a picture and link between the macro and the micro.

Sometimes we can drown in the amount of data available and sometimes, before seeking more data we should ask ourselves whether we actually are using all the data we currently have. That is not to state the Deputy's proposal is not a good idea but one thing we always like to see is an increased usage and reliance on the evidence and data that are produced by compilers.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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At present, the CSO does not produce figures on wage share specifically. Mr. Dalton mentioned income and income distribution and I accept that but I refer to the measurement of wage share as a proportion of national income.

Ms Jennifer Banim:

For completeness I would say that in our annual figures on national income and expenditure, there is a disaggregation across the different sectors of the value added, and we split it into remuneration or compensation of employees and other. It is interesting because when one looks across the different sectors, for instance, in industry, the remuneration of employees is relatively small compared with the other, which essentially are the profits. It is at a very aggregate level and it is an annual exercise that we carry out at a high level. There is a bit of sector detail but it is not very detailed. It is there but it is a high level figure. It returns to the need from the users to go from something like that, as identified by the Deputy, and relate it back down to employment and earnings and so on. It is that walk from macro back to micro or from micro up to macro. It is there, it is interesting but perhaps it is not as useful as it could be with more detail.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I have a one-liner-----

John Lahart (Dublin South West, Fianna Fail)
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This is your fourth supplementary.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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-----to throw in. This might be useful information for all of us. I presume the levels of overcrowding in Irish housing is available in the census material. Has that been extrapolated?

Mr. Pádraig Dalton:

We produce statistics on average household size from the census data, so one can look at the trend over time and see if that is increasing. What might be particularly interesting is to look at that at small area level, not just at an aggregate level, because sometimes the devil is in the detail. When this is segregated down by region, by electoral division and by small area, one can really drill into details on those types of statistics. We will produce a publication on households and families from the census on 27 July and another on homeless persons in Ireland on 10 August.

John Lahart (Dublin South West, Fianna Fail)
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It falls to me to thank the Governor, Professor Lane, Mr. Flynn, the director general, Mr. Dalton, Ms Banim and Ms Roche for their attendance and for their fascinating presentation to the committee. I thought of a steroid model when I thought of GDP versus GNI*. When the steroids are taken away, this is what is left. That concludes our proceedings today.