A key indicator of the health of any economy is the current account of the balance of payments. This covers the financial flows relating to the difference in value between what we export and what we import.

Importantly, it also covers national debt interest paid abroad and the profits on capital in Ireland that is owned by foreigners. For decades much of our trade has involved not only physical goods but also services: today services account for more than half of all exports.

A deficit on the current account means a country is borrowing abroad to finance itself, resulting in a build-up in foreign liabilities. If these liabilities get too large, a country faces major problems. However, there are many reasons why a country can and should run a deficit so that the balance of payments should be seen as just one of a number of measures of whether an economy is out of kilter.

Productive capital

An obvious case where a deficit is sustainable is if a country is investing heavily in productive capital: the future output from the investment will pay off the debt.

In the lead-up to the financial crisis, Ireland was investing heavily, but much of the investment was in housing and related infrastructure. While this capital is producing valuable services today, it did not generate additional exports and income to pay for the foreign borrowing.

In addition, the foreign borrowing undertaken by the banks to finance the deficit was on a short-term basis, and when access to short-term credit dried up in 2008 the result was a financial crunch.

In the late 1970s and early 1980s, a major deficit built up on the current account as expansionary fiscal policy stimulated huge imports and the economy lost competitiveness. The deficit peaked in 1981 at 14.5 per cent of gross national product (GNP). However, the full magnitude of the problem was not recognised at the time because of what was later appropriately called the “black hole”.

That hole arose because the Central Statistics Office was not counting the very large profits from multinational enterprises which belonged to the foreign owners, not people in Ireland. When this information gap was filled, the critical position of the economy became clear. The defects in the information available contributed to the policy mistakes of the time.

Large deficit

With the advent of economic and monetary union, some economists suggested that there was no further need to worry about the current account of the balance of payments. However, when the large deficit that emerged in 2008 needed to be financed, and funding was not readily available, we learned to our cost that domestic imbalances, such as a large current account deficit, need to be taken very seriously, irrespective of being in a monetary union.

The recent revisions to the national accounts, as well as producing a dramatic growth rate, also resulted in a major change to the measure of the current account of the balance of payments.

Under new international rules for compiling national accounts, the surplus on the balance of payments for 2015 was revised upwards from 4.4 per cent of gross domestic product (GDP) to 10.2 per cent, on the face of it suggesting Ireland was repaying its debts very rapidly.

However, we know the revision to the figures was not the result of real growth in economic activity here but rather because of the relocation to Ireland of a small number of multinational enterprises.

Intellectual capital

While profits of these relocated companies flow out of Ireland, the depreciation on their huge intellectual capital is treated as being retained in Ireland. This shows up in the accounts as gross savings by Ireland whereas, in fact, it is capital of foreign companies that has been used up.

An additional distortion of the true balances arises from activities of a few other companies that book their profits here but have no activity in Ireland.

So the international rules on compiling national accounts not only distort our apparent GDP, they also distort our apparent balance of payments figures, making it difficult to discern whether, in reality, we are running a deficit or a surplus.

If we have been running a significant deficit in 2016, the right response should be a very tough budget while, if we were running a large surplus, this would allow a more generous budget. It is urgent that we get a better read on the true surplus or deficit situation.