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National Accounts Classifications, Forward Workplan, June 2014

Released: 30 June 2014 Download PDF

Abstract

The ONS assesses bodies and transactions against international guidance to decide how they should be treated in the National Accounts. A small secretariat team gathers and analyses the information required to enable the National Accounts Classifications Committee (NACC) to reach a decision on the appropriate accounting treatment. There is high demand for assessments as well as a considerable volume of ad-hoc requests for advice on the accounting treatment of 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 expects to assess in the coming year (2014-15). 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 which oversees member states' compliance with the European System of Accounts and other rules under which the UK statistics are produced). 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.  They 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 UK National Accounts and Public Sector Finance statistics and hence for applying and interpreting the guidance to the UK situation.

In these accounting frameworks, it is a fundamental principle that the economy is composed of a large number of 'institutional units' such as businesses, government bodies, universities, hospitals, charities, and households; and that these individual units are classified into groups according to their characteristics for analytical purposes. One of the main classifications systems puts units into 'institutional sectors' according to the different economic incentives they face. For example, businesses exist to make profits while some other units do not (such as government bodies, charities, and households), so this is one reason why these each belong to different institutional sectors.

Additionally, each unit engages in financial transactions, paying out and receiving money for reasons such as buying and selling goods and services, paying taxes, or collecting tax revenues. These transactions are also classified within the statistical system.

In the majority of cases the classification of units and transactions is straightforward but in some cases detailed 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 the appropriate statistical treatment. With support from a small secretariat team which gathers and analyses the relevant information, a published formal process is followed to agree the most appropriate classification of each unit and transaction. Decisions are authorised by the Chair of the NACC, or by the Director of National Accounts, 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 website.

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

  • whether certain transactions count as taxes or service fees

Classifications are particularly pertinent in the areas of public expenditure, revenues, borrowing, debt, and tax burden.  This applies both domestically, and within the European Union where statistics based on the 'European System of Accounts' (ESA) 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 ESA. From September 2014 onward, statistics will be compiled in accordance with the 2010 ESA (which replaces the 1995 ESA). The 2010 update is consistent with the 2008 revision of the System of National Accounts (SNA 2008) and is accompanied by updates to the Eurostat 'Manual on Government Deficit and Debt' (MGDD). 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 and the ONS are applying these latest guidelines going forward.

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

There is high demand for classification assessments and at any one time 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 (with smaller statistical and policy impacts) will be assessed as resources allow. ONS often has to respond to external developments - including developments in government policy; such developments, and unanticipated complexity of the cases being assessed may lead to delays in reaching final classification decisions. Where possible, reasons for delays compared to previous published timescales will be highlighted.

The published classification process allows Government Departments to seek classification advice on policy proposals during their development. 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 work-plan unless details of the proposal are already in the public domain.

Given all of the above, this work-plan provides an up-to-date list of the cases ONS expects to classify over the coming year.

Format of this guide

The following section gives an overview of the cases ONS 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:

            (i)  small: less than £100m change

            (ii)  medium: between £100m and £1bn change

            (iii)  large: more than £1bn change

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

             (i)  small - an insignificant/minor impact on aggregates

             (ii)  large - a significant/noticeable impact on aggregates

             (iii) Period of expected completion

Cases scheduled for assessment

1. Ministry of Defence (MoD) proposal: Logistics Commodities Services Transformation

Current classification: these functions are an integral part of the MoD, which is a Central Government Department

Reason for assessment: policy proposal

Impact on Fiscal Aggregates: not known

Impact on National Accounts: small

Expected completion: July 2014

The MoD has announced its intention to privatise the procurement of non-military supplies. The ONS has been asked to consider the statistical treatment of the units which would be established under the proposed policy in accordance with the published process for providing advice on policy proposals.

2. Disclosure and Barring Service (DBS)

Current classification: not classified

Reason for assessment: formation of DBS

Impact on Fiscal Aggregates: small

Impact on National Accounts: small

Expected completion: July 2014

In 2011, the ONS reviewed the classification of fees paid for criminal records and barring checks. However, before the classification could be finalised it emerged that the functions of the Criminal Records Bureau and the Independent Safeguarding Agency would be merged to form a new Disclosure and Barring Service. The DBS was formed in December 2012 and ONS will finalise this work and consider implications for the sector classification of the DBS.

3. London and Continental Railways (LCR)

Current classification: Central Government

Reason for assessment: change in LCR's operating environment.

Impact on Fiscal Aggregates: medium

Impact on National Accounts: small

Expected completion: July 2014

With the winding-up of the British Railways Board (Residuary), various assets have been transferred to LCR. These include leasable real-estate assets which may affect the degree to which LCR covers its operating costs from sales revenues (the 'market test'). As a result ONS is reviewing the classification of LCR to establish whether it should now be treated as a Public Corporation.

4. Government issue of sukuk

Current classification: not classified

Reason for assessment: issuance of sukuk instruments in June 2014

Impact on Fiscal Aggregates: medium

Impact on National Accounts: small

Expected completion: July 2014

On June 25th 2014, the UK Government sold its debut sukuk. Sukuk are structured to comply with Sharia laws prohibiting the lending and borrowing of money for interest, with returns instead being paid as rental income from three Central Government buildings underpinning the transaction. As this is a new and complex financial structure, ONS will assess how these transactions should be incorporated into the National Accounts and Public Sector Finances.

5. 'Help to Buy' mortgage guarantees

Current classification: not classified

Reason for assessment: introduction of Help to Buy in April 2013, new guidance in ESA 2010

Impact on Fiscal Aggregates: small

Impact on National Accounts: small

Expected completion: August 2014

In April 2013, the Government introduced 'Help to Buy' which includes two schemes of support for the housing market:

  1. equity loans of up to 20% of the value of new-build houses; these are similar to the earlier 'firstbuy' scheme and as such will be treated in the same way (loans with embedded derivatives)

  2. mortgage guarantees; whereby the Government guarantees repayment (to the mortgage provider) on a proportion of each mortgage provided under the scheme

The ONS will establish whether the mortgage guarantees are 'standardised' with reference to the new guidance in chapter 5 of ESA 2010. If these are deemed to be standardised guarantees 'provisions for calls under standardised guarantees' will be recorded as assets in the Government balance sheet, and the payments in (from the mortgage providers taking part in the scheme) and payments out (to the mortgage providers, when guarantees are called) will be recorded. Altogether this treatment would not affect Government debt but would increase Government borrowing.

 6. Export Credit Guarantees

Current classification: Contingent liabilities of Government

Reason for assessment: new guidance in ESA 2010

Impact on Fiscal Aggregates: not known

Impact on National Accounts: not known

Expected completion: August 2014

The ONS will establish how export credit guarantees should be treated in the National Accounts and Public Sector Finances, with particular reference to the new guidance on 'standardised guarantees' in chapter 5 of ESA 2010. Any implications for the classification of the Export Credit Guarantee Department which administers the system will also be established.

7. Flooding Compensation Payments

Current classification: not classified

Reason for assessment: new transactions

Impact on Fiscal Aggregates: not known

Impact on National Accounts: not known

Expected completion: August 2014

In the winter of 2013 flooding affected many areas of the UK. In response, the Government provided various payments and other support to help with restoration. These included grants and Council Tax relief for affected households, and business rate relief for businesses. The ONS will investigate these payments and establish how they should be treated in the National Accounts and Public Sector Finances.

8. Proposed Flood Reinsurance

Current classification: not classified

Reason for assessment: policy proposal

Impact on Fiscal Aggregates: small

Impact on National Accounts: small

Expected completion: September 2014

The expiry of previous agreements between Government and insurers and changing market conditions have led to risks of sharply increased market premiums for flood insurance, rendering such insurance prohibitively expensive in some cases. The Government is proposing to address this through a charge levied across all households as part of property insurance premiums, which will pay for subsidised flooding reinsurance for those at high risk. The ONS has been asked to advise how this would be treated in the National Accounts and Public Sector Finances.

9. PF2 Contracts

Current classification: not classified

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

Impact on Fiscal Aggregates: large

Impact on National Accounts: large

Expected completion: September 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 MGDD, most of these have been treated as “off balance sheet” in the National Accounts and Public Sector Finances. In December 2012, the Government announced a change to the standard PFI model - known as PF2 - and ONS will be reviewing these different contractual arrangements against the latest guidance. 

This case was originally expected to be completed in March 2014 but the contracts being assessed are more complex than originally anticipated. The ONS continues to progress this work and now anticipates announcing a classification decision by the end of September 2014.

10. PhonepayPlus

Current classification: not classified

Reason for assessment: new guidance in the (forthcoming) 2014 MGDD

Impact on Fiscal Aggregates: small

Impact on National Accounts: small

Expected completion: September 2014

The forthcoming 2014 MGDD (expected to be finalised in mid August) will include guidance on the treatment of 'Market Regulatory Bodies' in National Accounts. The ONS will use this guidance to classify PhonepayPlus, the organisation which regulates phone-paid services in the UK.

11. 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: September 2014

There is no current guidance in the 1995 or 2010 European System of Accounts on the treatment of deposit protection schemes such as the Financial Services Compensation Scheme (FSCS) or the similar protection schemes in other countries. Applying standard ESA95 principles and rules, ONS 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)  (2.71 Mb Pdf)

The UN Advisory Expert Group on National Accounts and Eurostat have been coordinating international discussions to develop new guidance for inclusion in a future version of the Manual on Government Deficit and Debt. The ONS will assess the FSCS against this new guidance when it becomes available.


12. Welsh Further Education Colleges

Current classification: Central Government

Reason for assessment: legislative changes

Impact on Fiscal Aggregates: small

Impact on National Accounts: small

Expected completion: Quarter 4 2014

The Welsh Assembly have informed ONS of their intention to make a number of amendments to sections of the Further and Higher Education Act 1992, Learning and Skills Act 2000, and Education Act 2002 which ONS had determined (in 2010) to give the Welsh Government control over Further Education Colleges in the country. The proposals are similar to changes in England which entered force in April 2012 and led to English Further Education Colleges being re-classified to the Non-Profit Institutions Serving Households sector from that point onwards.

13. "Minor" Trust Ports

Current classification: varies (Central Government, Private Non-Financial Corporations)

Reason for assessment: guidance changes, impact on key aggregates

Impact on Fiscal Aggregates: small

Impact on National Accounts: small

Expected completion: Quarter 4 2014 (first cases)

Trust Ports are independent statutory bodies each governed by their own, unique, statutes and controlled by a local independent board. In October 2013, ONS announced that "major" Trust Ports (those which exceed the revenue threshold set out under Section 11 of the Ports Act 1991 - £9.0m in July 2012, with this threshold adjusted for RPI inflation between periods), will continue to be treated as Public Corporations due to the power of the relevant Government sponsoring body can choose to enforce their sale (i.e. privatisation) under Section 10 of the aforementioned Act and furthermore have the right to a legally defined share of the proceeds from such a sale.

At the same time ONS undertook to consider trust ports with annual revenues below this threshold ("minor" Trust Ports) on a case-by case basis. ONS has been contacted by a number of such Trust Ports requesting classification reviews. ONS plans to begin to begin considering these cases in the last quarter of 2014, subject to the demands of cases of higher priority.

14. University Tuition Fees

Current classification: NPISH

Reason for assessment: policy - significant increases in tuition fee maxima

Impact on Fiscal Aggregates: not applicable

Impact on National Accounts: large

Expected completion: Half 1 (Quarter 1 - Quarter 2) 2015

From September 2012, the maximum tuition fees which could be charged by universities in England and Wales were increased from around £3,500 to £9,000. ONS will review the treatment of these fees in light of this change. In particular, ONS will assess whether tuition fees are now charged at 'economically significant prices', which is relevant when assessing whether universities are 'market' or 'non-market' producers.

15. Non-Profit Institutions Serving Households (NPISH)

Current classification: Non-Profit Institutions Serving Households

Reason for assessment: changes to guidance

Impact on Fiscal Aggregates: not applicable

Impact on National Accounts: large

Expected completion: Half 1 (Quarter 1 - Quarter 2) 2015

From Blue Book 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 and Public Sector Finances.

16. Energy Companies Obligation (ECO)

Current classification: not 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: Half 1 (Quarter 1 - Quarter 2) 2015

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. The re-routing of flows to reveal the economic reality of the transactions is an accepted practice in the European System of Accounts.

However, there is international variation in the treatment of such transactions and this impacts the comparability of statistics on the tax burden in different countries. The ONS presented this case to the Eurostat 'Financial Accounts Working Group' in June 2014; though the case stimulated much discussion, the group was not able to reach a decision on how such schemes should be treated. Eurostat have therefore proposed to collect information on similar schemes in other EU member states for discussion at the next meeting in December 2014; it is hoped that this will bring a resolution on this issue closer.

Contact

If you wish to hear more about any of the cases outlined in this work plan, or our other work, please email the National Accounts Classifications Team: na.classifications@ons.gsi.gov.uk

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

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