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National Accounts Classifications, Forward Workplan, December 2013

Released: 31 December 2013 Download PDF

Abstract

The ONS National Accounts Classification Committee, supported by a small secretariat, assesses bodies and transactions against international guidance to decide how they should be treated in the National Accounts. There is high demand for assessments as well as a considerable volume of ad-hoc requests for advice on policy proposals and other issues. Meanwhile, the secretariat are initiating improvements to products such as the classifications information on the ONS website and the Public Sector Classifications Guide. Altogether, this is a demanding work programme. This update lists the cases that ONS currently expects to decide in the coming year (2014). These cases have been prioritised on the basis of the impact they will have on key statistics (an impact of at least £1bn on the government deficit or £10bn on government debt), their importance to public policy, and their priority for Eurostat (the statistical body of the European Union that oversees member states' compliance with the European System of Accounts and other rules which the UK statistics are produced in accordance with). However, this list does not include other cases with smaller impacts which may be assessed in this period.

Introduction

National Accounts provide a framework for describing and analysing what is happening in national economies.  These are compiled according to internationally agreed definitions and standards, and in accordance with guidance issued by Eurostat (the statistical body of the European Union). The ONS is responsible for the production of the National Accounts and Public Sector Finance statistics and hence for applying and interpreting of the rules set out in the international guidance.

A key principle in the accounting frameworks is that the economy is made of a large number of 'institutional units' such as businesses, government bodies, universities, and households. For analytical purposes these individual units are classified into groups according to their characteristics. One of the main classification systems in National Accounts collects units into 'institutional sectors' according to the different economic incentives they face. For example, businesses exist to make profits while some other units, such as government bodies, charities, and households do not, so these each belong to different groups.

Additionally, each of these units engages in financial transactions, paying out and receiving money for reasons such as buying and selling goods, paying taxes, or collecting tax revenues (government) - these are also classified within the statistical system.

In the majority of cases, the classification of units and transactions is straightforward but in some cases further investigation is required to ensure the economic reality is reflected in the statistics. The ONS National Accounts Classifications Committee (NACC) exists to consider such cases and recommend their appropriate treatment in the National Accounts. With support from a small secretariat team, a published formal process is followed to agree the most appropriate treatment. Decisions are authorised by the Chair of the NACC, or at a more senior level depending on the nature of the decision and size of the impact on key statistics such as the government debt or current deficit. More information on the classification process is available on the ONS National Accounts Classification web page.

Common decisions include:

  • whether a body is in the private or public sector

  • for public sector bodies, whether they are government bodies or public corporations

  • how to treat the various flows of money taking place within the economy (such as whether certain flows count as taxes or fees)

Classifications are particularly pertinent in the area of public expenditure, revenues, borrowing and debt.  This applies both domestically, and within the European Union. For example, in the European Union statistics based on the 'European System of Accounts' are used in:

  • the Maastricht Treaty Excessive Deficit Procedure measures, particularly for estimates of government debt and deficit, where they determine the 'convergence criteria' for potential entrants to the monetary union, 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.

It is a legal requirement for European Union countries to compile specified statistical returns on the basis of the 1995 European System of Accounts (ESA95).  The United Kingdom National Accounts are produced by the Office for National Statistics (ONS) on this basis. Further guidance is contained in Eurostat’s 'Manual on Government Deficit and Debt' (MGDD), and additional clarification is contained in the 1993 'System of National Accounts' (SNA93).

From 2014 onward, European states are required to produce National Accounts on the basis of the latest standards - the European System of Accounts 2010 (ESA10). This update is consistent with the 2008 revision of the System of National Accounts (SNA08) and is accompanied by an updated Manual on Government Deficit and Debt. Under these new guidelines, information on classifying units has been extended and strengthened. Changes to the guidance have driven the inclusion of several cases in this Forward Work Plan. The ONS classifications team will be applying these latest guidelines going forward.

In the UK, since 1997 the fiscal policy frameworks have also been based on the National Accounts.  Fiscal policy objectives are described in terms of statistics based on National Accounts aggregates; as a result key fiscal targets are dependent on National Accounts definitions and classifications.

There is high demand for assessments and at any one time the ONS is progressing a number of active cases. This Forward Work Plan highlights only those cases which will be prioritised due to:

  • the significant impact they will have on key statistics (an impact of at least £1bn on the government deficit or £10bn on government debt)

  • their importance to public policy

  • their priority for Eurostat (the statistical body of the European Union that oversees member states' compliance with the European System of Accounts)

As such, this forward workplan does not cover all cases which will arise over the coming year; further minor cases will be decided as resources allow and ONS often has to respond to developments in the economy - including Government policies. If resulting classifications requiring assessment are deemed to be of higher priority, some of the other cases in this workplan may be delayed.

The published classification process allows Government Departments to seek classification advice on policy proposals at an early stage. As a result, a considerable volume of ad-hoc requests for advice on policy proposals and other issues are also received. These will not be included in any published workplan unless details of the proposal are already in the public domain.

This is the second publication of the forward workplan. Some cases have taken longer than initially expected or have been superseded by other cases which have a more significant impact. This workplan therefore provides an up-to-date list of the expected caseload.

Format of this guide

The following section gives an overview of the cases ONS currently expects to decide over the next 12 months, in order of when they are expected to be completed. For each case the following are listed:

Current classification

Reason for assessment - i.e. impact on key aggregates, policy needs, guidance changes, Eurostat request

Impact on Fiscal Aggregates - estimated scale of the potential impact of the decision on the UK or European Fiscal Measures (Public Sector Net Borrowing and Public Sector Net Debt for the UK, General Government Consolidated Gross Debt and  General Government Net Borrowing for European measures). These are roughly classified as:

  • small: less than £100m change

  • medium: between £100m and £1bn change

  • large: more than £1bn change

Impact on National Accounts aggregates (e.g. GDP), roughly classified as:

  • small - an insignificant/minor impact on aggregates

  • large - a significant/noticeable impact on aggregates

  • Period of expected completion

Caseload

1. Review of treatment of 3G license sales

Current classification: transactions in non-produced assets

Reason for assessment: guidance changes and request from Eurostat

Impact on Fiscal Aggregates: large

Impact on National Accounts: large (potential)

Expected completion: January 2014

In the UK National Accounts, 3G license sales are currently treated as transactions on non-produced assets. New guidance issued in the 2010 European System of Accounts and the companion Manual on Government Deficit and Debt suggest that these transactions should instead be treated as D.45 Rent paid for the use of the spectrum. Furthermore, the UK is among a number of EU members asked to re-examine the sales of spectrum licenses on the basis of the new guidance.

 

2. Lloyds Banking Group

Current classification: Public Financial Corporation

Reason for assessment: policy - divestment of government shares

Impact on Fiscal Aggregates: large

Impact on National Accounts: small

Other impacts: significant impact on Public Sector Employment

Expected completion: February 2014

The Government owns a large minority share in Lloyds Banking Group, which ONS judges is sufficient to provide the Government with effective control of the company. On 17 September 2013 the Government announced the sale of part of its shareholding in the company, reducing its shareholding from approximately 38.7% to 32.7%. ONS will review the classification of Lloyds following this (and any further sale prior to our review) to determine if Government retains control of the company.

 

3. Direct Line Group

Current classification: Public Financial Corporation

Reason for assessment: policy - divestment of business from Royal Bank of Scotland (which is currently majority owned by the UK Government)

Impact on Fiscal Aggregates: small

Impact on National Accounts: small

Other impacts: significant impact on Public Sector Employment

Expected completion: February 2014

Direct Line Group, which includes a number of well known insurance companies including Churchill and Direct Line itself was formerly part of The Royal Bank of Scotland (RBS), which is classified as a Public Financial Corporation due to the Government's substantial shareholding in the company. To comply with EU State Aid rules, RBS has been required to sell its insurance business, and floated Direct LIne Group as a separate business in October 2012. Initially, RBS retained a large shareholding in the company, but it recently sold off a further tranche of shares, taking its stake in the company down to below 35%. As with Lloyds Banking Group, ONS will review the classification following this sale to determine if Government retains control of the company.

 

4. Export Credit Guarantee Department

Current classification: Public Non-Financial Corporation

Reason for assessment: guidance changes in ESA10 and request from Eurostat

Impact on Fiscal Aggregates: not known

Impact on National Accounts: not known

Expected completion: February 2014

ESA 95 and in particular MGDD had guidance on the recording of financial guarantees offered by Government. This largely treated such guarantees as contingent liabilities (see ESA 95 paragraph 5.05). ESA 10 introduces a distinction between “one-off” guarantees and “standardised” guarantees, with the latter defined as guarantees that are “issued in large numbers, usually for fairly small amounts”. The UK government has not historically granted many of these kinds of guarantees but is involved in Export Guarantees via the Export Credit Guarantee Department (ECGD - currently classified as a public non-financial corporation). We will therefore be considering the specific classification of ECGD within the broader Public Sector against the new guidance.

 

5. Transport for London inter-group loans

Current classification: Loans

Reason for assessment: significant impact on key aggregates

Impact on Fiscal Aggregates: large, (Maastricht Debt and Deficit), small (Public Sector Finances)

Impact on National Accounts: small

Expected completion: February 2014

Transport for London (TfL) is a Local Government classified body responsible for overseeing transport in London. It has a number of subsidiary companies responsible for various parts of London’s transport system, the most well known of which is London Underground Ltd. Most subsidiaries are classified in their own right as public non-financial corporations. TfL provides financial support for some of its subsidiaries, and some of this support is currently treated by TfL as loans. However, ONS is checking the substance of these arrangements against the relevant guidance in the Manual on Government Deficit and Debt, which may require that these “loans” be instead recorded as grants from TfL to their subsidiaries. As all these transactions take place within the public sector there is no impact on the main UK fiscal statistics published in the monthly Public Sector Finances Statistical Bulletin, but as these are transactions between the Government sector and bodies classified outside the government sector, any change in how these flows of money are treated will have an impact on the European Maastricht Treaty measures of debt and deficit, which focus on the Government sector only.

 

6. PF2 Contracts

Current classification: not currently classified

Reason for assessment: impact on fiscal aggregates, and policy - new framework for Private Finance Initiatives

Impact on Fiscal Aggregates: medium

Impact on National Accounts: small

Expected completion: March 2014

Over the past 15 years, the UK Government has commissioned a number of new hospitals, schools, prisons, and other public infrastructures under the Private Finance Initiative (PFI). In accordance with guidance in the Manual on Government Deficit and Debt, most of these have been treated as “off balance sheet” in the National Accounts and Public Sector Finances. The Government has recently announced a change to the standard PFI model - known as PF2 - and ONS will be reviewing how these new, different contractual arrangements fit against the guidance in the manuals. 

 

7. Big Society Capital Group

Current classification: not formally classified

Reason for assessment: Eurostat request

Impact on Fiscal Aggregates: small

Impact on National Accounts: small

Expected completion: March 2014

Big Society Capital Group comprises three bodies, Big Society Trust, Big Society Capital and the Big Society Foundation. The body was set up to channel money from dormant bank accounts in England to provide funding for social enterprises, and more information about the body can be found on their website. The case will be looking at whether the group should be classified in the public or private sector, and if in the public sector, in which sub-sector.

 

8. Financial Services Compensation Scheme (FSCS)

Current classification: Central Government

Reason for assessment: guidance changes, impact on key aggregates

Impact on Fiscal Aggregates: large

Impact on National Accounts: large

Expected completion: Quarter 2 (April-June) 2014

There is no current guidance in the 1995 or 2010 European System of Accounts on the treatment of deposit protection schemes like the Financial Services Compensation Scheme (FSCS) or the similar schemes in other countries. Applying standard ESA95 principles and rules, ONS has classified the FSCS as part of Central Government, and a detailed explanation of the scheme and its classification can be found in Chapter 8 of the November 2009 ONS Article Public Sector Interventions in the Financial Crisis (2.71 Mb Pdf) 

International Discussions at the UN Advisory Expert Group on National Accounts  and at the European Level coordinated by Eurostat have produced new guidance in the ESA10 consistent Manual on Government Deficit and Debt. This may require such bodies to be classified outside Government as Public Financial Corporations in the Financial Auxiliaries sub-sector. The ONS will assess the FSCS against this new guidance.

 

9. Subscriptions to International Organisations

Current classification: Transactions in Equity

Reason for assessment: guidance changes

Impact on Fiscal Aggregates: medium

Impact on National Accounts: small

Expected completion: Quarter 2 (April-June) 2014

The UK government makes a number of payments to a variety of international bodies, including the IMF, World Bank Group, European Union, UN and other organisations. These payments are treated as either D.74 Current International Cooperation Transfers or F.5 transactions in equity. In the 2012 Manual on Government Deficit and Debt Eurostat introduced new rules on payments to certain international multilateral development banks, and consequently we will be reviewing current and historic payments against the revised guidance.

 

10. Energy Companies Obligation (ECO)

Current classification: not formally classified

Reason for assessment: policy, guidance

Impact on Fiscal Aggregates: not known

Impact on National Accounts: not known

Other impacts: statistics on taxation

Expected completion: Quarter 2 (April-June) 2014

ECO was introduced in 2013 as a package of measures aimed at helping to improve the environmental efficiency of UK residential buildings. It requires large energy providers to offer financial support for efficiency measures such as improving insulation or installing a new boiler. It also requires companies to provide assistance to low income and vulnerable households.

The international guidelines on treatment for such schemes are unclear and this has been discussed on several occasions internationally. The issue is that, while financial transactions flow directly from energy providers to consumers. Such redistributive transactions would not occur without Government impetus and it can be argued that such flows should be routed via Government from energy firms to consumers, to reflect the tax-like nature of the situation. This is an accepted practice in the European System of Accounts.

However, due to international variation in the treatment of such transactions, ONS has reached an agreement with Eurostat to present on this topic at the Financial Accounts Working Group in June. This will contribute to achieving a more international consensus on treatment.

 

11. Non-Profit Institutions Serving Households (NPISH)

Current classification: Non-Profit Institutions Serving Households

Reason for assessment: changes to guidance

Impact on Fiscal Aggregates: large

Impact on National Accounts: large

Expected completion: Half 2 (July - December) 2014

From BlueBook 2016, ONS will be required to identify Households and NPSHs as two separate sectors in the National Accounts as part of the developments required under the European System of Accounts 2010. There are a large number of transactions between these sectors which are consolidated out in the current presentation. This review will ensure that they are treated appropriately in the National Accounts .

Background notes

  1. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gsi.gov.uk

Contact

If you wish to hear more about any of the cases discussed in this workplan please email the National Accounts Classifications Team: na.classifications@ons.gsi.gov.uk

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