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National Accounts Classifications, Forward Workplan, September 2013

Released: 30 September 2013 Download PDF

Abstract

This document provides a forward workplan of classification cases being considered by ONS over the next 6 months, and will be subsequently updated each quarter. The cases listed in this document are the major cases, with the potential for a significant impact on the key National Accounts, emplopyment or Public Sector Finance Statistics produced by ONS, but does not include the many, more minor cases that we examine on a regular basis. The next edition of the workplan will be published in December 2013.

Introduction

The UK National Accounts are produced under internationally agreed guidance and rules set out principally in the European System of Accounts 1995 (ESA 95), and the accompanying Manual on Government Deficit and Debt (MGDD).

These rules apply to all countries in the European Union, and the UK is legally required to produce the National Accounts on an ESA 95 basis.

In the UK the Office for National Statistics (ONS) is responsible for the application and interpretation of these rules, and consequently ONS makes decisions on the classifications of entities and transactions in the UK. Typical decisions include whether

  • a body is part of the public or private sector,

  • for public sector bodies whether a body is a government body or a public corporation,

  • and decisions on how to treat the various flows of money that take place within the economy.

The Government has chosen to base its departmental budgeting rules and fiscal statistics on National Accounts principles, consequently ONS decisions on how things are treated in the National Accounts underpin both the outturn figures in the joint HM Treasury (HMT)-ONS Public Sector Finances publications, and the forecast data published by the independent Office of Budget Responsibility (OBR), as well as informing the public sector boundary used in the production of Whole of Government Accounts (WGA).

ONS decisions are made according to a formal classification process (81.9 Kb Pdf) , which is available on the ONS website and decisions are authorized via the Chair of the National Accounts Classification Committee, or at more senior levels dependent upon the size and nature of the decision.

At any one time, the office has a number of active classification cases. These cases have not typically been published before, though the cases under review have been shared with HM Treasury and other stakeholders.  In the interests of providing greater transparency around the classifications process, ONS has taken the decision to publish a forward looking classifications workplan, which will be updated quarterly, setting out the major cases we are planning to review over the next year, approximate timescales for the review to be completed and giving details of why we are looking at this case.

This forward workplan does not cover all classification cases which may arise over the coming year. The ONS makes small, routine classification decisions all the time, and there is a steady trickle of minor cases that have not been included in this document. In addition, ONS often has to make classification decisions in response to events in the economy – including Government policy. If these have an especially large impact these may mean some of the other cases in our workplan are delayed or put on hold. Finally, under our classification process ONS does provide classification advice for government policy proposals at an early stage of the policy’s development. There are not many of these cases, but they will not be included in this workplan unless details of the proposal are already in the public domain.

In September 2014, the UK National Accounts is required to be produced on a different basis, using a new statistical manual – the European System of National Accounts 2010 (ESA 10). This new manual makes a number of changes to the rules governing the classification of entities and transactions, and therefore over the next 6 months ONS will be reviewing the classification of a number of bodies and transactions against the new rules. The workplan includes classification cases that have arisen as part of this ESA 2010. There are many other changes in ESA 2010 which are not related to classifications eg Methodological changes and so these are not covered by this document.

For each case, we have included for guidance an estimate of the potential impact of any decision on the National Accounts or 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). We have characterized the impacts as small, medium or large. For the fiscal aggregates small is loosely defined as something with an impact of less than £100m, medium as something with an impact of between £100m and £1bn and large as something with an impact of more than £1bn. For National Accounts, the impact is considered in terms of whether there is a noticeable impact on the key aggregates (eg GDP), which is not the case for most of the cases in this document.

The workplan is structured as follows:

  • Section 1 sets out the Current Caseload

  • Section 2 sets out Publicly Announced Policy Developments – cases where ONS has a strong expectation of having to consider the classification implications in the next six months and where there is already information in the public domain that these policy changes are being considered

  • Section 3 sets out ESA 10 and Other Manual Changes – these are cases that ONS is reviewing due to changes in the statistical manuals we are required to follow

  • Section 4 – how you can find out more

  • Finally, Section 5 sets out current planned dates for finalisation of these cases.

1. Current Caseload

In the short term, we are actively considering the following classification cases:

A. Classification of Big Society Capital Group

Current Classification: Not formally classified

Impact on Fiscal Aggregates: Small

Impact on National Accounts: Small

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.

B. Review of the classification Major Trust Ports

Current Classification: Public Non-Financial Corporations

Impact on Fiscal Aggregates: Medium

Impact on National Accounts: Small

Trust Ports are sub-set of ports and harbours in the UK, and are described on gov.uk website as " independent statutory bodies, each governed by their own, unique, statutes and controlled by a local independent board. There are no shareholders or owners and any surplus is ploughed back into each port for the benefit of its stakeholders.” There are approximately 100 Trust Ports, most of which are small. Major Trust Ports are defined as those with a turnover of more than £9m, and include the Ports of Dover, Aberdeen, Harwich Haven, Milford Haven and a number of others. The ONS currently judges these major ports to be under public sector control due to provisions in the Ports Act 1991. The Scottish Government and Department for Transport have asked ONS to review the classification of these Trust Ports as a result of the Act, in light of policy changes in how the powers in the Act are applied.

C. Transport for London Inter Group Loans

Current Classification: Loans

Impact on Fiscal Aggregates: Small (Public Sector Finances), Large (Maastricht Debt and Deficit)

Impact on National Accounts: Small

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 MGDD, 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.

D. NHS Community Interest Companies

Current Classification: Private Sector

Impact on Fiscal Aggregates: Small

Impact on National Accounts:  Medium

Other Impacts: Possible noticeable impact on estimates of Public Sector Employment

Related to the changes in the Health and Social Care Act 2012, prior to their abolition and replacement by Clinical Commissioning Groups, a number of Primary Care Trusts (PCTs) split their commissioning and provider arms. While most PCTs transferred the staff in their provider arms to local NHS Trusts and Foundation Trusts, some PCTs established new Community Interest Companies, employee controlled, not for profit companies, to run local health services. These bodies have not been formally classified, and so are currently classified outside the public sector, but may need to be reclassified within the public sector following completion of the case.

E. Met Office Classification Review

Current Classification: Public Non-Financial Corporation

Impact on Fiscal Aggregates: Small

Impact on National Accounts:  Small

As part of our regular, routine review of public non-financial corporations, we plan to review the classification of the Met Office to check it meets the market test i.e. that it covers at least half of its operating costs from the sale of goods and services.

F. Northern Ireland Housing Executive Classification Review

Current Classification: Public Non-Financial Corporation

Impact on Fiscal Aggregates: Small

Impact on National Accounts:  Small

As part of our regular, routine review of public non-financial corporations, we plan to review the classification of the Northern Ireland Housing Executive to check it meets the market test.

G. Sale of Shares in Lloyds Banking Group

Current Classification: Public Financial Corporation

Impact on Fiscal Aggregates: Large

Impact on National Accounts: Small

Other Impacts: Noticeable impact on estimates of Public Sector Employment

The Government owns a large minority share in Lloyds Banking Group, that ONS judges is sufficient to provide the Government with effective control of the company (87.9 Kb Pdf) . 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 sale to determine if Government retains control of the company.

H. Sale of Shares in Direct Line Group

Current Classification: Public Financial Corporation

Impact on Fiscal Aggregates: Small

Impact on National Accounts: Small

Other Impacts: Noticeable impact on estimates of Public Sector Employment

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.

 

2. Policy Proposals under consideration

ONS often has to make classification decisions in response to Government policy announcements. Sometimes these are well known in advance, on other occasions ONS gets no advance notice.

Two policy developments we expect to have to consider in the short to medium term are:

I. Sale of Shares in Royal Mail Group

Current Classification: Public Non-Financial Corporation

Impact on Fiscal Aggregates: Medium

Impact on National Accounts: Small

The government has been investigating options for the sale of shares in Royal Mail Group for some time, since the passage of the Postal Services Act 2011, and the government are now targeting a majority it is likely that a sale of a significant proportion of the company that will take place in the early –mid Autumn 2013. However, the Government is likely to continue to hold a significant minority stake following the IPO also intend to retain a stake in the company. ONS will examine the terms of any sale to check whether any sale is sufficient for the company to be reclassified as a private non-financial corporation.

J. PF2 Contracts

Current Classification: Not currently classified

Impact on Fiscal Aggregates: Medium

Impact on National Accounts: Small

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

3. ESA 10 and other Manual Changes

K. Review of Classification of Network Rail

Current Classification: Private Non Financial Corporation

Impact on Fiscal Aggregates: Large

Impact on National Accounts: Small

The classification of Network Rail was extensively considered by ONS in 2002-2004, and culminated in an ONS decision, under ESA 95, that Network Rail was a private sector company and consequently its debt did not form part of the public sector debt. Eurostat confirmed their agreement with this decision and there is more information on the classification of Network Rail (47.4 Kb Pdf) on the ONS website. ESA 10 provides considerably more guidance on the classification of bodies and how to recognise public sector control, and some specific guidance on how to recognise control in not-for-profit bodies such as Network Rail, which has some differences compared to ONS practice under ESA 95. Consequently ONS are reviewing the classification of Network Rail under the revised guidance in ESA 10 and the accompanying ESA 10 MGDD.

L. Review of the treatment of the transfer of pension obligations to Government from the Royal Mail Pension Plan (RMPP)

Current Classification: Capital Transfer from RMPP to Government

Impact on Fiscal Aggregates: Large

Impact on National Accounts: Large

In April 2012, the Government transferred £37bn of pension obligations from the underfunded Royal Mail Pension Plan to a new, unfunded pension scheme run by the Government, in exchange for the RMPPs £28bn of assets. In National Accounts, this was recorded as a one off transfer of £28bn from the pension to Government which reduced the public sector net borrowing by this amount. As liabilities of unfunded pension schemes are not recorded in National Accounts, there was no impact on public sector net debt. Under ESA 10, Eurostat are considering the treatment of Pension Funds in these circumstances and providing further guidance on this issue. This issue is still being debated within Europe and once a final position has been reached we will be considering the Royal Mail Pension Plan.

M. Review of Financial Services Compensation Scheme

Current Classification: Central Government

Impact on Fiscal Aggregates: Large

Impact on National Accounts: Large

There is no current guidance in ESA 95 and ESA 10 on the treatment of deposit protection schemes like the Financial Services Compensation Scheme (FSCS) or the similar schemes in other countries. Applying standard ESA 95 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 are in the process of finalising specific guidance on the classification of these bodies and may require such bodies to be classified outside Government, as Public Financial Corporations in the Financial Auxiliaries sub-sector.

N. Standardised Guarantees, Export Credit Guarantee Department and Help-to-Buy

Current Classification: Not currently classified

Impact on Fiscal Aggregates: Not known

Impact on National Accounts: Not known

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) and is developing a significant standardised guarantee like policy of mortgage guarantees under its Help-to-Buy scheme. We will therefore be considering the classification of ECGD and the treatment of Help-to-Buy guarantees against the new guidance.

O. Subscriptions to International Organisations

Current Classification: Transactions in Equity

Impact on Fiscal Aggregates: Medium

Impact on National Accounts: Small

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 MGDD 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.

4. Find out more

If you want to know more about any of the cases discussed in this workplan, you can:

  • Contact the NA Classifications Branch Directly by contacting us by email at Philip.stokoe@ons.gsi.gov.uk  , Lee.mallett@ons.gsi.gov.uk   , Daniel.ker@ons.gsi.gov.uk

  • Contact us by telephone  on +44 (0)1633 455805 / +44 (0)1633 455060

  • Contact us in writing at National Accounts Classification, Public Sector and Households Division, Office for National Statistics, Government Buildings, Cardiff Road, Newport, Wales, NP10 8XG

5. Current planned dates for finalisation of these cases

A. Classification of Big Society Capital Group - October 2013

B. Review of the classification Major Trust Ports -  October 2013

I. Sale of Shares in Royal Mail Group - November 2013

C. Transport for London Inter Group Loans - December 2013

J. PF2 Contracts - December 2013

K. Review of Classification of Network Rail - December 2013

L. Review of the treatment of the transfer of pension obligations to Government from the Royal Mail Pension Plan (RMPP) - December 2013

G. Sale of Shares in Lloyds Banking Group - February 2014

H. Sale of Shares in Direct Line Group - February 2014

D. NHS Community Interest Companies - March 2014

E. Met Office Classification Review - March 2014

F. Northern Ireland Housing Executive Classification Review - March 2014

M. Review of Financial Services Compensation Scheme - March 2014

N. Standardised Guarantees, Export Credit Guarantee Department and Help-to-Buy - March 2014

O. Subscriptions to International Organisations - March 2014

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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