Next week we get to see what the Central Statistics Office Review Group into the so called Leprechaun Economics affair comes up with, writes RTÉ's Economics Correspondent Sean Whelan.
The problem confronting the committee – chaired by Central Bank Governor Philip Lane – is to devise a set of indicators or measures that will give the authorities and others here information they can use in managing the economy.
Because GNP and GDP are no use in Ireland (as the Fiscal Advisory Council said in their pre-budget report last September).
In a way it’s a problem of success: the sheer scale of the operations of multinational corporations in Ireland - and the associated accounting flows – render GDP and GNP almost meaningless as tools to assess the Irish economy, as understood (and experienced) by most Irish people living in Ireland.
And its not just the Multinationals – Irish aircraft leasing companies – which have a 50% share of the global market - are also having a destabilising effect on the national accounts.
Think Leprechauns on a plane. The Central Bank is sufficiently concerned to have compiled its own database on the aircraft leasing industry. And that research has thrown up some very interesting results, which it published this week.
"If you can’t measure it you can’t manage it" is old, wise business advice, and in the context of the national accounts, if you can’t measure the real size of and activity in the economy with the internationally accepted norms of GDP and GNP, then a whole lot of things start to go out of whack – most importantly the debt to GDP ratio.
Which means the national accounts can say your debt ratio is fine, below the EU average, and heading swiftly towards the Maastrict criteria – but in reality (where cash is king) your debt pile has hardly budged, and nor has your enduring tax base.
While the debt/GDP ratio might give foreigners comfort in investing in Ireland, the flip side is that the public becomes more relaxed about the fragility of the public finances, demanding pay increases and spending rises that sap the political will to sustain the kind of budget surpluses needed to really address the debt pile.
And really addressing it means making the country more resilient to economic shocks: having a big debt pile acts as an amplifier for economic shocks, increasing the damage that is done in the event of a downturn. That’s bad enough, but when you don’t really know how big that impact could be – because the statistical treatment in current use conceals instead of reveals - its kind of terrifying.
Hence the value of the Central Bank’s deep dive into the aircraft leasing industry. As industrial stories go it’s certainly a success. Ireland and the US are the two centres of the global aviation leasing industry, with studies indicating Ireland’s share of the industry worldwide at 50%.
As leased planes make up about 40% of the planes in the sky, you could say that Irish companies own one plane in every five flaying in the world today (and PwC estimates that means an Irish owned plane takes off every two seconds somewhere on the planet – how do they come up with these numbers?).
Using several data sources, including the Companies Registration Office, the Central Bank compiled its own database of the Aircraft (and engine) leasing industry here.
It found some 1,132 Irish registered entities in the sector. Data limitations mean the useable database is 848 companies. Of these 147 are SPV’s classified as section 110 companies (the Finance Act 2011 brought in a change to count aircraft and aircraft engines as qualifying assets under section 110, and an SPV can claim tax deductions for all financing expenses).
The sector was estimated in previous studies to have assets under management in the region of €83 billion to €113 billion. The Central Bank’s research comes up with a book value of €81 billion in 2014, covering about 1,400 aircraft. Since then there has been an expansion, with more aircraft acquired, and one big re-domiciling – Aercap. So the current size of the industry is even bigger.
The Central Bank points to the growth in revenues (recorded as services exports in the national accounts) of $2.4 billion between 2014 (€9.4 billion) and 2015 (€11.8 billion)
So what are the factors that have made Ireland such a big player in this sector. Firstly the famous low headline-rate corporation tax. But probably more important – a depreciation write off period of eight years. This is really important, because the average economic life of a commercial jet is 25 years – and industry studies (like one from Avolon) suggest this retirement age is increasing.
Which means the useful economic life of the asset is considerably longer than the depreciation period allowable for tax purposes. The final factor is Ireland’s comprehensive tax treaty network, with 70 countries, many of which have a 0% withholding tax on inbound lease rentals.
But when it comes to the national accounts (and the international accounting rules) success brings problems too. Aircraft purchases by leasing firms here count as investment in plant and machinery in the national accounts. But the sheer scale of the industry (and the high cost of the assets) leads to big variations in quarterly statistics, depending on whether or not any aircraft have been delivered.
The national accounts related statistical problems of this industrial success may well get worse (The issues are well teased out for the technically minded in the Central Bank paper.)
Boeing and Airbus forecasts estimate the future demand pipeline for new aircraft over the next 20 years will be worth some $5-€6 trillion. About half of this is to be leased, according to KPMG.
Assuming Ireland retains its 50% share of this business, the Central Bank says this implies some €1.4 trillion in new assets will be held by the industry in Ireland. This works out at a staggering €68bn a year addition to the balance sheet imports of the Irish aircraft leasing sector.
The Central Banks says that if this were to occur it would have significant implications for the National Accounts and Balance of Payments/International Investment Position in terms of metrics like depreciation, investment, imports, exports and operating lease income.
Jenny Osborne-Kinch, senior economist at the Central Bank, gives the short version of the research on this YouTube video from the Bank: