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National Accounts Articles - Impact of ESA10 changes on current price GDP estimates

Released: 10 June 2014 Download PDF

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 frameworks (European System of Accounts 2010/Balance of Payments Manual 61). These articles were published on 29 May. The latest set of articles describes the ESA 2010 changes and therefore, together with the earlier batch, covers all of the changes that will impact on current price GDP.

Notes

1. For the remainder of this article the term ‘ESA 2010’ will be used to cover BPM6 changes as well.

Summary

The latest estimate of the total impact of all the improvements planned for September 2014 shows an increase in the level of GDP in current prices in 2009 of 4.6% or around £65 billion. Over the period 1997 to 2009 as a whole, the annual impact is on average to raise the level of GDP by 3.6%, rising from +£25 billion (2.6%) in 1999 to +£65 billion (4.6%) in 2009. The detail of how each year is affected is shown in Annex A. At this stage the impact of the changes on the headline real GDP growth figure (the chained volume measure) is not available. Illustrations of these impacts for 1997 to 2009 will be published on 30 June 2014.

The batch of articles being released on 10 June 2014 cover the extent of methodological changes that are being made in this year’s Blue Book that have an impact on the level of GDP and are related to the introduction of ESA 2010.  These new methods are provisionally estimated to account for around half of the total increase in the level of GDP in current prices, raising it by around 2.3% in 2009, or around £32 billion. On average over the period 1997 to 2009, the impact of ESA 2010 changes is to raise the level of GDP by 2.0%. The articles published on 29 May 2014 covered those methodological changes that are being made in Blue Book 2014 but are not related to the new system of accounts.

Figures for 2010 and more recent years are not yet available.  These will not be processed until closer to the time of publication in order to take account of the most recent available data in the usual manner.  They will also be affected by the rebasing of producer and services producer price indices (PPI and SPPI) from 2005 to 2010 prices.  All figures will also be adjusted as a result of the change of base and reference years from 2010 to 2011.

Latest estimates of the impact on key aggregates

The latest estimates of the impact of the planned changes are shown in Table 1.

Table 1: Latest Estimates of the Impact of the Planned Changes on Selected Key Aggregates

Indicator Impact
Provisional estimate of the impact of all changes to the level of GDP in current prices +£65 billion or +4.6% in 2009. For other years, see Annex A. Average revision 1997 to 2009 is +3.6%
Of Which:  
Due to ESA 2010 +£32 billion or +2.3% in 2009. For other years, see Annex A. Average revision 1997 to 2009 is +2.0%
Not related to ESA 2010 +£33 billion or +2.3% in 2009. For other years, see Annex A. Average revision 1997 to 2009 is +1.6%

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Impact on headline GDP

Annex A includes a table giving the impact of the changes being made in Blue Book 2014 on the level of GDP in current prices in the years 1997 to 2009.  This table enables a comparison to be made between the growth of GDP in current prices in Blue Book 2013 and that due to be published in Blue Book 2014.  These estimates include inflation.

The headline measure of GDP relates to the growth between two periods of ‘real GDP’ (or ‘chained volume measure’), that is, with the effect of inflation removed.  ONS will be publishing on 30 June 2014 the impact of the latest estimates on real GDP.  It could be misleading to assume that the revision to growth in the current price estimates will lead to similar revisions to the growth in real GDP. This is because:

  • Some of the new methodologies being introduced in Blue Book 2014 relate to how the current price estimates are deflated and/or chain linked

  • The new concepts being introduced in Blue Book 2014 will be deflated using the most appropriate deflator for the activity.  This may impact on the overall GDP deflator and hence the relationship between current price GDP and real GDP.

What is being released on 10 June 2014?

ONS is releasing details of the methodological changes that are being introduced in order to comply with ESA 2010.  As shown in Table 1, these changes are provisionally estimated to add around £32 billion or 2.3% to the level of GDP in current prices in 2009. 

The impact of these methodological changes in 2009 on the level of GDP in current prices is summarised in Table 2.  Impacts on the level of GDP in other years between 1997 and 2009 are shown in Annex A.

Table 2: Impact on the Level of GDP in Current Prices

  Approximate impact in 2009 Range 1997 to 2009
Research and Development +£22 billion (+1.6%) +£12 billion to +£23 billion
Weapons +£3.5 billion (+0.2%) +£2 billion to +£3.5 billion
Transfer costs (decommissioning) +£0.25 billion (0.0%) Zero to +£1 billion
Pensions +£5 billion (+0.2%) -£1.5 billion to +£7 billion
Small tools +0.25 billion (0.0%) +£0.2 billion to +£0.4 billion

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Individual impacts of ESA 2010 changes

1. Research and Development (R&D)

The new treatment and measurement of R&D as specified under ESA 2010 accounts for the largest change to the level of GDP in current prices as compared with the previous treatment in ESA 1995.  The key methodological changes implemented are:

  • Treatment of most R&D expenditures as investment rather than intermediate consumption

  • Measurement of market R&D output by sum-of costs in place of imputation using Annual Business Survey and Trade in Services data

  • Measurement of businesses’ R&D produced for own-use

  • Specific measurement of non-market producers’ R&D

  • Patents no-longer recognised as assets in the National Accounts

These are described in the article, Measuring and Capitalising Research and Development (349.1 Kb Pdf) published on 10 June 2014.  Also published on 10 June 2014 is an article,  Implementation Framework for Research and Development (206.7 Kb Pdf) , describing the new framework for measuring 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 of these changes is to increase the level of GDP in current prices in 2009 by £22.1 billion.  In all years between 1997 and 2009, the impact ranges from +£12.6 billion to +£23.2 billion. Detailed calculations including impacts on chained volume measures will be published on 30 June 2014. 

2. Weapons

The treatment of expenditure on weapons systems changes between ESA 1995 and ESA 2010.  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.  Additionally, a new classification will be added to the inventories system representing change in military inventories.  The impact of these changes is to increase the level of GDP in current prices in 2009 by £3.5 billion.  In all years between 1997 and 2009, the impact ranges from +£2.0 billion to +£3.5 billion. Detailed calculations are shown in Annex B.

3. Decommissioning costs

ESA 2010 expands on the explanation of the costs of ownership transfer to explicitly include decommissioning or terminal costs.  In accordance with ESA 1995, costs of ownership transfer are currently treated as fixed capital formation and written off as consumption of fixed capital in the year of disposal or acquisition.  As terminal costs were not separately mentioned in ESA 1995, there is currently no special treatment or source for them in the National Accounts.  Decommissioning is carried out in a number of industries covering many assets but, in Blue Book 2014, it is assumed that the majority of decommissioning costs relate to oil and gas or nuclear infrastructure.  Adding decommissioning costs to transfer costs will result in higher levels of gross fixed capital formation and consumption of fixed capital.  The impact of these changes is to increase the level of GDP in current prices in 2009 by £0.3 billion.  In all years between 1997 and 2009, the impact ranges from zero to £1.0 billion.

4. 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' (258.8 Kb Pdf) published on 28 April 2014.   The article described the impact on the level of GDP.
The impact of the changed treatment on the level of GDP results from two main drivers:

  • There is a revised methodology for calculating the Service Charge associated with these pensions and this impacts on 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.

The impact of these changes is to increase the level of GDP in current prices in 2009 by £5.1 billion.  In all years between 1997 and 2009, the impact ranges from -£1.3 billion to +£6.8 billion.

5. Small tools

ESA 1995 set a lower bound of 500 euros at 1995 prices for small tools to be recognised as capital expenditure. Purchase of items below this threshold is classified as intermediate consumption. In ESA 2010 no fixed threshold is given. The criteria used for expenditure to be recognized as capital expenditure is the use in production for more than one year. In practice, items such as “[Expenditure on] inexpensive tools used for common operations ,such as saws, spades, knives, axes, hammers, screwdrivers, wrenches and other hand tools; small devices such as pocket calculators.   . . . is recorded as intermediate consumption.”

The impact of these changes is to increase the level of GDP in current prices in 2009 by £0.2 billion.  In all years between 1997 and 2009, the impact ranges from +£0.2 billion to +£0.4 billion.

Other ESA 2010/BPM6 changes that do not have an impact on the level of total GDP

6. Methodological changes to the measurement of trade due to the introduction of new international standards

A detailed description of the methodological changes being introduced in Blue Book and Pink Book 2014 that affect trade was published on 10 June 2014 in Methodological changes to the measurement of trade due to the introduction of new international trade standards.

The main changes relate to the treatment of:

  • Goods sent abroad for processing

  • Exports of goods that occur without the goods crossing the country’s border (e.g. merchanting)

  • Non-monetary gold

  • Remote gambling

Goods sent abroad for processing covers goods that are exported or imported for processing on the basis of a contract and for a fee, where there is no change of ownership. Under BPM6, goods sent abroad for processing are not to be recorded as an export or an import but rather the fees received for the processing services rendered should be included in ‘manufacturing services on physical inputs owned by others’. The processing fee will be treated as a trade in services whereas previously the value added from this activity was recorded in the total value of the goods imported.  This change has no impact to GDP as the fee will be recorded as a trade in services with an equal and offsetting adjustment made to trade in goods.

Merchanting is described in BPM6 as ‘the purchase of goods by a resident of the compiling economy from a non-resident combined with the resale of the same goods to another non-resident without goods being present in the compiling economy’.  In BPM5 these transactions are treated as ‘trade in services’ but the BPM6 treatment is to record them as ‘trade in goods’, because of the change in ownership. This reclassification reduces trade in services and increases trade in goods by equal amounts so there is no impact on GDP.  

Currently the UK recognises non-monetary gold held for industrial purposes in trade in goods; however, non-monetary gold which is held as a store of wealth is treated separately in the financial accounts. Therefore in order to conform to ESA 2010 and BPM6 requirements, non-monetary gold held in allocated accounts will be considered a good and thus stored under trade in goods and valuables. Subsequently this same gold will be removed from the financial account.  This new treatment will have no impact on the level of total GDP but there will be changes to its composition with offsetting changes between ‘trade in goods’ and ‘valuables’.

The treatment of gambling is described in BPM6. In the UK, remote gambling is a fast-growing e-service; the market is dominated by a few big firms who have over recent years moved offshore. As online gambling activity is not currently measured, currently there is an under-recording of imports and an under-recording of household final consumption expenditure. There is no impact on GDP with the increase in imports being offset by an equal increase in household final consumption expenditure.

The impact of all of these new treatments is that there will be no impact on the level of total GDP but there will be changes to its composition with offsetting changes between ‘trade in goods’, ‘trade in services’, ‘household final consumption expenditure’ and ‘valuables’.

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 for each year 1997 to 2009. The next update on the impact of the changes is scheduled for 30 June 2014 when it is planned to describe detailed methodologies that have an impact on headline real GDP.   The impact on the headline real GDP growth figures will be included in the article.

Future scheduled release dates are shown in Table 3.

Table 3: Release Dates for Future Articles

Release date Topic
30 June 2014 Impact of detailed methods changes that affect real GDP. This article will include the impact of all of the planned changes on headline real GDP growth in the years 1997 to 2009.
Early July  Impact of detailed methods changes that affect the sector accounts and balance of payments.
Early July Changes to the presentation of tables within Blue Book 2014, Pink Book 2014 and the UK Economic Accounts as a result of implementing ESA 2010 and BPM6 (3 articles)
10 July 2014 (prov) International comparisons of impacts
Mid July Impact of changes on components of GDP for years 1997 to 2009
August Impact of changes on real and nominal GDP 2010 to 2012
 Early September Reminder of the upcoming changes 1997 to 2012
30 September 2014 Publication of quarterly National Accounts data consistent with Blue Book and Pink Book 2014
31 October 2014 Publication of Blue Book and Pink Book 2014

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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

Get all the tables for this publication in the data section of this publication .
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