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UK National Accounts and Public Sector Finances sector and transaction classification: A summary of the classification process

September 2013

1. The National Accounts provide a framework for describing what is happening in national economies. All institutional units operating within an economy are classified to an institutional sector (for example as non-financial corporations, general government or households). All transactions between the sectors of the economy are also categorised as part of the National Accounts framework. Work on classification of sectors and transactions is a key input in the production of National Accounts.

2. The classification of institutional units and transactions between them also inform other statistics produced by the ONS. These include labour market statistics, Public Sector Finances and Government Deficit and Debt under the Maastricht Treaty.

3. This document describes the process the UK Office for National Statistics (ONS) uses to make classification decisions. It also describes the way additional classification decisions are made specifically for the UK Public Sector Finances Statistical Bulletin, the UK’s monthly publication that describes levels of public sector debt and deficit.

4. It was first published in February 2008 as an annex to the National Statistics Code of Practice Protocol on Statistical Integration and Classification and has been updated, following a public consultation, in January 2012. Following feedback and further internal reviews of the classification process, the document was updated and expanded in September 2013.

Context

5. Robust classifications are needed to produce good quality National Accounts, which are internally consistent and comparable across the world. In addition, because of the wide use of National Accounts statistics (and those based on them) as the basis for distributing large sums of money, classification issues can and do take on political significance.

6. This is particularly relevant in the area of public expenditure, revenues, borrowing and debt. This applies both domestically, for example HM Treasury’s fiscal mandate is based upon the public sector surplus on current budget, and within the European Union. For example, in the European Union statistics based on the European System of Accounts 1995 (ESA95) are used in:

  • the Maastricht Treaty measures, particularly of government debt and deficit, where they determine the convergence criteria for monetary union for non-members, and performance against the Growth and Stability Pact for eurozone members, and

  • the measurement of Gross National Income (GNI), one of the main determinants of member states' contributions to the European Union's budget

7. It is a legal requirement for European Union countries to compile statistical returns on the basis of ESA95 and from September 2014 on the basis of ESA 2010. The United Kingdom National Accounts are produced by ONS on this basis. Further guidance is contained in Eurostat’s Manual on Government Deficit and Debt.

8. In the UK, the Government has also decided to base its fiscal policy framework on the National Accounts. Achieving the Government’s objectives for fiscal policy is set out in the Charter for Budget Responsibility. These are achieved through the Government’s fiscal mandate and are dependent on National Accounts definitions and classifications.

The classification process

9. The international statistical manuals ((System of National Accounts 1993 (SNA93) or in Europe, the European System of Accounts 1995 (ESA95) and the accompanying Manual on Government Debt and Deficit (MGDD)) provide the broad framework and principles for deciding classifications. Statistical offices throughout the world have to interpret these manuals. From September 2014, statistical offices in the European Union are required to move to a new statistical manual, the European System of Accounts 2010 (ESA 10), which is based upon a new international manual, the System of National Accounts 2008.

10. It is important to have a clear agreement on the boundary between the public and the private sectors and ONS, in conjunction with European partners, has developed a comprehensive set of guidelines. These guidelines focus largely on the boundaries of the general government sector (comprising central government, state government and local government) and the public corporations sectors (comprising public non-financial corporations and public financial corporations), which together define the public sector.

11. Most of the financial information needed to produce the central government sector accounts is provided by government departments and agencies and routed through HM Treasury. ONS and HM Treasury have produced guidelines to help government departments classify their activities for National Accounts purposes. These have been circulated to departments with the expectation that most cases in departments will be settled by reference to the guidelines without the need for any consultation.

12. For cases not clearly covered by this guidance, policy departments – including HM Treasury – will refer issues to HM Treasury’s classification branch who act as technical experts and answer the straightforward queries on behalf of ONS. For those queries that are not straightforward, HM Treasury classification branch will ask ONS to interpret the guidance and to make a classification decision.

13. Other than in those cases where Eurostat provide specific advice and guidance, ONS is, the final arbiter of National Accounts classification decisions in the UK and can examine cases on its own initiative at any time.

14. In some cases ONS will consult Eurostat, the statistical office of the European Union (see paragraph 19). Examples include where a case has an international dimension or consistency with the Manual on Government Deficit and Debt requires clarification.

National Accounts Classification Committee

15. Decisions on the sector classification of bodies/institutions and their transactions, in line with the international statistical guidance, are made by the Executive Director of the ONS Directorate responsible for National Accounts, subject to the following criteria for delegated decision making and for ensuring technical advice. Advice is provided by the National Accounts Classification Committee (NACC), a committee of experts

The criteria for delegated decision making are:

  • Cases where the facts are straightforward, there are no novel or contentious issues in interpreting international statistical guidance, the impact on fiscal aggregates is expected to be small and there are no other reasons to expect public interest will be delegated to the Chair of NACC, who may also delegate decision making on any such case to an executive member of NACC;

  • Cases which do not meet one or more of these criteria will be decided by the Executive Director on the basis of a written recommendation by the Chair of NACC. The Executive Director may ask for further factual evidence or advice from NACC before taking a final decision;

  • Decisions which have a significant impact on fiscal aggregates or are judged by the NACC Chair and / or Executive director to be a matter of public interest will be taken by the Executive Director of Collection and Production following consultation with National Accounts Classification Committee and the Director General of the ONS.

16. NACC has a membership of around 15. The Chair of NACC will be a senior member of staff in the ONS Directorate responsible for the National Accounts, appointed by the Executive Director. The Chair of NACC appoints ONS staff with relevant expertise as members, including up to five executive members who may resolve cases which meet the criteria for delegated decision making. The Executive Director may also appoint external experts to join NACC, regularly or for a particular case, where their expertise will be helpful in interpreting statistical guidance. External members will be unpaid and will not advise on any cases in which they might have a commercial interest or other conflict of interest.

17. More information on the NACC decisions and the decision-making process is provided below, and in the decision tree at Annex A.

NACC classification decision process

18. Classification cases can be initiated either by ONS or, following a departmental classification request, through HM Treasury’s classification branch. Typically the cases initiated by ONS would relate to the classification of existing organisations or transactions or new developments in the economy. In many classification cases the answers will be straightforward and will be decided by an executive member of NACC.

19. HM Treasury may also submit policy proposals for classification by NACC, either on its own behalf if it has the policy lead, or on behalf of another department. Paragraphs 29 to 35 provide further information on the handling of these proposals.

20. The usual sequence of events for NACC classification cases would be:

a) A classification request comes to the NACC secretariat. The secretariat prepares a document that summarises the facts of the classification case and puts forward the different interpretations that could be made. This will often involve additional research and requests for further detailed information.

b) The NACC Chair and secretariat review regularly the cases awaiting decision against the criteria for delegated decision making set out in paragraph 13 above, to plan appropriate handling.

c) Cases which involve complex analysis of facts or are open to varying interpretation of statistical guidance are circulated to NACC members (a NACC consultation) with a structured format for responding to key questions and a deadline for responses. The Chair may call a meeting of the committee to discuss the issue, or may base a recommendation to the Executive Director on written responses. The Chair of NACC is responsible for presenting a recommendation to the Executive Director, reflecting the views of NACC.

d) Cases which have significant impact on fiscal aggregates and/or otherwise are a matter of public interest. Decisions in such cases will be made by the Executive Director responsible for National Accounts on the basis of a recommendation from the Chair of NACC, whether or not there has been a NACC consultation. Such cases will also be reported to the Director General of ONS before the decision is published. Their role is to be satisfied that all relevant facts have been taken into account and that the decision can be explained clearly and persuasively.

Once the decision has been made, the NACC secretariat will send a reply to HM Treasury with full reasons for the decision. The decision will be published as soon as possible, subject to any concerns if information used in the classification is commercial or policy in confidence.

21. In some cases ONS may consult Eurostat. Eurostat will only consider cases related to the Excessive Deficit Procedure (EDP) of the Maastricht Treaty. If it decides to give an opinion on a case, Eurostat will either take a straightforward decision, or go through a consultation process involving the Committee on Monetary, Financial and Balance of Payments Statistics (CMFB). CMFB brings together statistical experts from all member states’ national statistical institutes and central banks, Eurostat and the European Central Bank. A description of CMFB’s procedures for consultation and provision of an opinion can be found on the Excessive Deficit Procedure page of their website. The CMFB acts in an advisory capacity and Eurostat is responsible for the final decisions. In exceptional circumstances (such as the classification of 3G mobile phone spectrum receipts), ONS may refer a case to the United Nations Statistical Commission.

Classification criteria: the basic approach to National Accounts classification

22. Each classification decision is taken on its own merits and in line with international statistical guidance. Cases of public interest tend to be one of two types:

a) whether an entity, an organisation or financing vehicle for example, is in the private or public sector;

b) whether government receipts are a charge for a service or a tax.

i. Classification of an entity to the public or private sector

23. The guidance is extensive but two main stages can be identified when classifying an entity to an institutional sector. The first involves a decision on whether the entity is within the public or private sectors, and the second a decision on whether it is a market or non-market producer.

24. In summary, the difference between the public and private sectors is determined by where control lies, rather than by ownership or whether or not the entity is publicly financed. International guidance defines control as the ability to determine general corporate policy. For example, this control can be exercised through the appointment of directors, control of over half of the shareholders’ voting power, through special legislation or decree, or through regulation.

25. In determining whether a body is controlled by the public sector, NACC apply a list of indicators of public sector control. These are:

  • The ability to determine aspects of how the body delivers its outputs;

  • The ability to have a final say in sale/acquisition of fixed assets;

  • The ability to be entitled to a share of proceeds of asset disposals that goes beyond the repayment of previous government support for capital formation;

  • The ability to close the body.

  • The ability to prevent the body from ending its relationship with the public sector;

  • The ability to veto any takeover (except in the case of an conventional special share);

  • The ability to change the constitution of the body, or veto changes to it;

  • The ability to decide what sort of financial transactions the body can undertake, or limit them;

  • The ability to prevent the body from receiving certain types of income from other sources;

  • The ability to exert numerous minor controls over how the body is run;

  • The ability to exert financial control (n.b. this is different from funding) as part of a general system of controlling public expenditure;

  • The ability to control dividend policy;

  • The ability to set pay rates; 

  • The ability to (for non-regulatory reasons) approve acquisitions.

26. As a result NACC will examine an entity to see whether there are any factors that enable any part of the public sector, either individually or collectively, to determine the general corporate policy of the entity. This includes recognition that government, or other sectors, may also control a unit through contractual arrangements. If this control is established, the entity is classified to the public sector.

27. Having decided whether an entity is part of the public or private sectors, the second important aspect for sector classification is to determine whether it is a market or non-market entity. Public sector market entities are classified as public corporations (for example, Channel 4 and London Underground) ); public sector non-market entities are classified in the general government sector (for example, government departments and the BBC). General government is then subdivided into sub-sectors, including central government, state government and local government. Private sector market entities are classified as private corporations, and private sector non-market entities are generally classified to a sector known as Non-profit Institutions Serving Households.

28. The borderline between market and non-market classification is defined in the international guidance by whether more than 50 per cent of the production costs are covered by sales of goods and services – the “market test”.

ii. Classification of receipts as either a tax or service charge

29. For entities within the public sector, classification as a market or non-market entity is typically dependent on how the entity is funded. Majority funding through grant-in-aid or taxation will result in classification as a non-market entity and allocation to the general government sector. Where an entity is majority funded by receipts, it is necessary to classify those receipts.

30. On the whole, government receipts are mainly divided into taxes or service charges. Taxes are compulsory unrequited payments, where unrequited means that the payer does not receive anything directly in return. Service payments are requited in that they include the delivery of a service in exchange for a payment. In some instances the classification of these receipts can be difficult to interpret and the international statistical manuals recognise that ‘the borderline between taxes and payments for services rendered is not always clear cut in practice’. As a result, NACC will consider the nature of the receipts carefully before reaching a decision.

Review of classification decisions

31. ONS will review existing decisions under the following circumstances:

  • When new legislation, policy proposals or machinery of Government changes impact on the operation of an organisation or on the flows of money to, from or within Government;

  • When there are other changes to the operation of a body which impact on the classification decision;

  • For public non-financial corporations, we will review whether the body passes the market test on a regular basis, and no later than every three years

  • When changes to Eurostat guidance mean that large or specific classification decisions must be reviewed immediately to ensure they are still compliant;

  • For decisions which have sizeable impacts (more than £1bn impact on deficit or £10bn impact on debt – set at just under 1% of debt or deficit) then cases which haven’t been reviewed for one of the reasons above will be reviewed;

32. ONS may from time-to-time review cases for reasons not mentioned above if there is a need for reassurance that nothing has changed which may impact on the classification decision.

33. Reviews are conducted following the same process as for other classification decisions. If a review results in a different decision, that is a reclassification, time series for the National Accounts and public sector finances will be revised accordingly.

Post Classification Reviews

34. As part of the ongoing process of quality assurance and checking the validity of classification decisions, classification decisions with a major impact on the public sector deficit or debt will be reviewed, irrespective of whether there have been any manual, legislative or other changes, after five years to ensure the original decision was the right one.

Policy proposals

35. Policy proposals differ from other cases in that they are forward-looking rather than concerned with existing organisations or transactions which have already taken place. Such proposals might involve the creation of a new organisation, the re-structuring of an existing organisation, or the creation of a new type of transaction or financing vehicle.

36. As noted above, ONS is occasionally asked to provide classification decisions on policy proposals so that the Government can understand how these proposals would be treated in the National Accounts and so take account of the potential consequences for public spending, public revenues or debt measures.

37. It is essential that ONS is not drawn into policy discussion and does not participate directly in the policy formulation process. While ONS does provide general advice on the legal basis for classification decisions and the processes to be followed, it is not the role of ONS to provide policy advice on how bodies and transactions should be structured. ONS does not perform this kind of service as this would have the potential to compromise the classification process as detailed here. ONS’s only involvement with these policy proposals is to determine the National Accounts classification of the proposed body or transaction. As a result, it is necessary to ensure that the integrity of the classification process and the resulting National Statistics are protected.

38. ONS will, therefore, remain at arms length from the policy officials and work through HM Treasury’s classification branch following the same classification process as outlined in paragraphs 7 through 19. Consistent with this, if it proves necessary for ONS to request briefing from the department, such briefings will be confined to the provision of the factual information required to inform the classification decision.

39. Most policy proposals will be in a near final form when presented to ONS and will include all the relevant details to enable ONS to make a judgement. Any classification decisions based on a near final policy proposal will be deemed as ‘provisional’ and dependent on the proposal being implemented as described. If the circumstances change it is the responsibility of the department to inform HM Treasury. HM Treasury will then inform ONS.

40. However, on rare occasions, departments might seek a view on a major proposal at an early stage of its development. In such cases, ONS will provide a provisional classification decision in the expectation that it may be asked to examine a more final proposal at a later stage. Exceptionally, in the interim ONS will only consider alternative versions of the same proposal if substantial and significant changes have been made. The explanatory article published on the final policy proposal will note how many versions of the proposal ONS considered.

41. Final classification decisions will be published when the policy is announced by the Government. At this point ONS would expect to include in the explanatory article any relevant declassified material relating to the final proposal which had previously been supplied on a restricted basis.

Publication and reporting of decisions

42. The ONS Public Sector Classification Guide (PSCG) provides a comprehensive list of public sector bodies within the UK economy. Routine sector classification decisions will be published in the monthly update of the Public Sector Classification Guide.

43. For decisions likely to be of public interest, ONS will issue an article explaining the decision. ONS may show relevant sections of the draft article, in confidence, to HM Treasury and the responsible policy department for fact checking. ONS aims to announce the classification decision, with explanatory material, as soon as possible after it has been taken. On some occasions the decision is announced ahead of the explanatory article.

44. Decisions on the recording of transactions in the Public Sector Finances, following consultation of PSFTAG will be announced in the Public Sector Finances Statistical Bulletin.

Implementation of decisions

45. The speed at which classification decisions are implemented in the National Accounts, Public Sector Finances and other ONS publications will vary. There are formal revisions process for all ONS publications, and the need to go through these processes to ensure that they are implemented in methodologically sound ways,. A diagram summarising  the classification process through the various revisions process for National  Accounts and Public Sector Finances is attached at Annex B

46. For classification decisions, we will set out the approximate timescales for implementing the decision in the different statistics at the point at which we announce the classification decision.

Different accounting systems

47. ESA95 is designed as an integrated system of economic accounts for the whole economy. It is not used to produce financial reporting statements for individual entities. As a result, the treatment of organisations and transactions may differ between financial reporting systems and the National Accounts system.

Classification documentation

48. The Public Sector Classification Guide and full documentation detailing major NACC decisions is available on the ONS website.

New classification system process

 

 

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