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National Accounts Articles - Summary of ESA2010 and BPM6 changes on Sector and Financial Accounts

Released: 09 July 2014 Download PDF

Foreword

This summary is part of a series of articles describing changes to national accounts.

Authors: Phillip Davies, Nicola James and Michael Rizzo, Office for National Statistics

Date: 9 July 2014

Executive Summary

This article sets out changes to the Sector and Financial Accounts being introduced when revised figures for the UK National Accounts, consistent with Blue Book 2014 and Pink Book 2014, are published in September 2014.

Further detail on the numerical impact of the changes, including any changes to the household saving ratio and net lending/borrowing of the sectors, will be published in an article scheduled for release in August 2014.

1. Introduction

On 16 May 2014, the Office for National Statistics (ONS) published an article, Latest Developments to National Accounts, detailing the improvements to National Accounts which will be made in September 2014 to ensure that the UK National Accounts continue to provide the best possible framework for analysing the UK economy and comparing it with those of other countries. That article also indicated that ONS would publish a series of articles setting out methodological details of the changes, topic by topic, and an indication of the impact of these changes.

The first batch of these articles described those changes with an impact on Gross Domestic Product (GDP) in current prices, not related to the introduction of the new National Accounts and Balance of Payments framework (European System of Accounts 2010 (ESA 2010) and sixth edition of the Balance of Payments and International Investment Position Manual  (BMP6)1). These articles were published on 29 May

The second set of articles which described those changes with an impact on Gross Domestic Product (GDP) in current prices related to the introduction of the new National Accounts and Balance of Payments framework ESA 2010 and BMP6. These articles were published on 10 June.

A further article, Impact of National Accounts improvements on headline GDP growth (chained volume measure), gives details of how these changes impact on the headline or real measure of GDP (the ‘chained volume measure’), for the period 1998 to 2009. Also, on 30 June 2014, ONS published articles describing some further changes that only impact on headline GDP.

This article is the first look at both the non-ESA 2010 and ESA 2010 changes impacting the sector and financial accounts for the period 1997 to 2009. There are further changes which only impact on the period from 2010 onwards which will be described in a future article.

Notes for 1. Introduction

  1. For the remainder of this article, the term ‘ESA 2010’ will be used to mean ESA 2010 and BPM6.

2. Method and other changes affecting the sector and financial accounts

ONS set out below both the ESA 2010 and non-ESA 2010 method changes being introduced into the sector and financial accounts when revised figures for the UK National Accounts, consistent with Blue Book 2014 and Pink Book 2014, are published in September 2014.

2.1 Non-ESA 2010 method changes

2.1.1 Review of Non-Profit Institutions Serving Households (NPISH)

A detailed review of sources and methods has been completed covering the NPISH sector. As data sources have improved the coverage and updated the data, there is an upward impact to NPISH final consumption expenditure and an increase to household final consumption expenditure as the households consume the goods and services that NPISH provide.  Further information can be found in the Revised Methodology and Sources for Non-profit Institutions Service Housesholds article published on 29 May 2014.

2.1.2 Financial Intermediation Services Indirectly Measured (FISIM)

ONS fully implemented the concept of FISIM into the UK National Accounts in Blue Book 2008. More recently, ONS in collaboration with the Bank of England, have reviewed the FISIM methodology that was introduced. The European Regulation governing the production of the National Accounts is closely followed both in the calculation of FISIM and in the allocation of FISIM into user sectors.

However, to come fully in line, ONS will be implementing a number of improvements. Firstly, the reference rates used in calculating current price FISIM have been changed, resulting in a new internal reference rate and a new external reference rate. Secondly, interbank FISIM has been removed following clarity in international statistical standards. In addition the level of ‘import FISIM’ has been reduced to bring it into line with published levels of overseas loans and deposits. A detailed description of the new sources and methods was published on 29 May 2014 in the Changes to Financial Intermediation Services indirectly measured article.  The improvements to the FISIM estimates will impact all sectors, the most significant being to the Household sector due to revisions with the consumer deposit FISIM.

2.1.3 Illegal activities (drugs and prostitution)

The National Accounts that will be published in September 2014 will for the first time include estimates for illegal drugs and prostitution. The new estimates cover the import, production and sale of illegal drugs and the provision of prostitution services. They are based on a variety of sources and assumptions. The estimates for prostitution will impact by increasing household expenditure, mixed income and intermediate consumption. The inclusion of estimates of illegal drugs impact will be an increase in household expenditure, intermediate consumption and imports of goods. A detailed description of the new sources and methods was published on 29 May 2014 in the Inclusion of Illegal Drugs and Prostitution in the UK National Accounts article.

2.1.4 Household expenditure on new cars

Around 2.5% of household final consumption expenditure is accounted for by the purchase of new cars. The current method uses list prices to estimate expenditure from the number of new registrations. The new method takes account of discounts that are negotiated and accessories that are included at the point of sale. Information on ‘target price’ (i.e the price that purchasers should hope to pay) published in the magazine ‘What Car?’ is used as the basis for the price paid with an estimate also made for any extras purchased at the point of sale. The impact of this new methodology is to reduce household expenditure on new cars by less than £1 billion in all years from 1997 to 2009 that is balanced by a reduction in companies’ profits in private-non financial corporations. A detailed description of the new sources and methods is described in the Revised Methodology and Sources as a Result of Addressing Gross National Income Reservations article published on 29 May 2014

2.1.5 Own-Account Construction

Own-account construction refers to the production of new dwellings and major repairs and improvements by enterprises and households for their own use. In the National Accounts, these are classified as gross fixed capital formation.

For output of own-account construction by private corporations, the calculation should include a ‘mark up’ in the valuation of the asset produced. The current method is based on calculating the value of the asset produced using the sum of costs.

For output of own-account construction by households, ONS is introducing a new method using a new data source. All data for own-account construction by households comes from a point estimate for 2006 by AMA Research, a private consultancy firm. This study provides estimates for output (the value of self-built houses), intermediate consumption (raw materials) and compensation of employees (labour costs). These values can be varied through time using as a volume index a series for the number of self-built houses based on HMRC tax data, and various price indices. A detailed description of the new sources and methods was published on 29 May 2014 in the Revised Methodology and Sources as a Result of Addressing Gross National Income Reservations article.

2.1.6 Exhaustiveness Adjustments

Measuring the Non-Observed Economy: A Handbook (OECD, 2002) notes that ‘GDP estimates are said to be exhaustive when they include all production activities within the System of National Accounts production boundary’. A review of the methods to ensure exhaustiveness in the UK National Accounts has been carried out including examination of the existing adjustments. A detailed description of the new sources and methods was published on 29 May 2014 in the Revised Methodology and Sources as a Result of Addressing Gross National Income Reservations article. The new methods lead to lower household final consumption expenditure on gambling and digital TV offset in the later years by increased expenditure on fuel.

2.1.7 Gross Fixed Capital Formation (GFCF) Improvements

There are two key improvements that have been made to the methods for calculating GFCF that are not related to the introduction of ESA 2010. In response to user feedback following the changes to GFCF made in Blue Book 2013, a new method has been introduced in respect of allocating some annual supply and use balancing adjustments from the total GFCF adjustment to the lower-level industry and asset components. This has the effect of reducing the volatility in the current quarterly series, and also has some impact on the asset composition of GFCF. In addition, there has been a review of the conversion of survey data from Standard Industrial Classification (SIC) 2003 to SIC 2007. The conversion of survey data, initially carried out in 2011, when the reclassification was introduced, has been re-estimated, as a longer time series of data collected on a SIC 2007 basis is now available. A detailed description of the new sources and methods was published on 29 May 2014 in the Gross Fixed Capital Formation (Investment) – changes for Blue Book 2014 (excluding ESA10)  article.

2.1.8 Change in Inventories Methods Improvements

The revision to changes in inventories is as a result of introducing improved methodologies to meet user needs. This change for Blue Book 2014 was announced in the article GDP Continuous Improvement: summary of improvements to the estimation of changes in inventories in the UK National Accounts, published in March 2013. ONS has undertaken a significant programme of work to improve estimation of changes in inventories. Some improvements were already implemented in Blue Book 2013. The two remaining improvements to be implemented for Blue Book 2014 are:

  • that deflation will take place at a detailed industry level, using a full set of industry deflators. These replace the forecast implied deflators in use since Blue Book 2011 and complete the full set of improvements begun in Blue Book 2013. This has a significant impact on the implied deflator and volume measures for inventories; and

  • are in line with international standards, changes in inventories and holding gains will no longer be adjusted as part of the supply and use balancing process. This has an impact on the current prices series.
    A detailed description of the new sources and methods was described in the article Changes in Inventories – for Blue Book 2014 on 29 May 2014.

2.2 ESA 2010 method changes

2.2.1 Research and development

These are described in the article, Measuring and Capitalising Research and Development published on 10 June 2014. Also published on 10 June 2014 is an article, Implementation framework for Research and Development in the United Kingdom National Accounts, describing the new framework for measuring Research & Development (R&D) in the National Accounts. These articles describe in great detail the change that is being implemented. In summary, ESA 1995 treated R&D as an ‘ancillary activity’ and as a result it was treated as intermediate consumption expenditure on inputs in support of an organisation’s main productive activities. In ESA 2010 the asset boundary is extended to recognise expenditure on R&D as an investment in R&D assets which should be capitalised. It will therefore be included in gross fixed capital formation rather than intermediate consumption. This means that, for the first time, expenditure on R&D will directly contribute to GDP. The impact will also be shown across the relevant sectors within the accounts.

2.2.2 Weapons

The treatment of expenditure on weapons systems changes between ESA 1995 and ESA 2010 are described in the Capitalising Government Spending on Military Weapons article published on 10 June 2014. In ESA 1995, ‘military weapons of destruction and the equipment needed to deliver them’ are recorded as intermediate consumption and thus government final consumption. In ESA 2010, any weapons systems which can be shown to be fixed assets will move from intermediate consumption to gross fixed capital formation. In addition, single use weapons, such as bullets, will be included in estimates of changes in inventories.

2.2.3 Pensions

The new treatment of funded defined benefit pension schemes in the National Accounts was described in Developments to the Treatment of Pensions in the National Accounts article published on 28 April 2014. The article described the impact on the level of GDP.
The impact of the changed treatment on the sector accounts results from two main drivers:

  • there is a revised methodology for calculating the Service Charge associated with these pensions and will impact the output of the Pension Funds;

  • the introduction of Employers’ Imputed Social Contributions series associated with funded defined benefit schemes for the Local Government and Non-Profit Institutions serving Households (NPISH) sectors increases their expenditure and therefore, by convention, their output.
     

2.2.4 Measurement basis of monetary financial institutions’ Foreign Direct Investment profits

The methodological change relating to the measurement of Monetary Financial Institutions (MFIs) profits from an all-inclusive (AI) to a current operating performance (COP) basis as described in the Methodological Changes to the measure of the Balance of payments as a result of the introduction of BPM6 article, published today.  The change will impact on property income for MFIs and the Rest of the World sector.

Plans for Future Updates

The article, Latest developments to National Accounts of 16 May 2014 informed users that ONS planned to give information about the methods used and the likely scale of the impact on the key economic aggregates at the earliest opportunity. Users were promised this information well before publication of the full set of accounts in September. So far, users have been informed of the impact of the planned changes on annual GDP levels in current prices and the chained volume measure in addition to changes impacting the sector and financial accounts. The next update on the impact of the changes is scheduled for August 2014 when we will describe in more detail the impact of the changes on the key sector and financial accounts indicators, including net lending/borrowing and the household saving ratio.

Background notes

  1. 1. A list of those given pre-publication access to the contents of this article is published as part of this release.

  2. 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

Phillip Davies
Email: blue.book.coordination@ons.gsi.gov.uk
Telephone number 01633 456492

This document is also available on our website at www.ons.gov.uk.

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