Proposals for the next SNA

In this chapter, three types of changes of the universal model have been proposed:

1. Changes in basic concepts;

2. Changes in presentation;

3. Supplementary standard tables and concepts.

All these changes should increase the utility of the universal model as defined in section 6.1.

Changes in basic concepts

The major changes in basic concepts proposed are:

1. Sector-classification: The central bank should become part of the sector general government, as it does not concern a market producer (see section 6.3). The value of its output should be recorded like that of all other non-market producers.

2. Valuation of other non-market output: This should include a net operating surplus by amount of an opportunity interest on the capital invested. This gives a much higher and better picture of the value and value added of government output (and other non-market output in general) (see section 6.3).

3. Capital formation: Expenditure on military weaponry should be recorded as capital formation and be written-down in accordance with the general national accounting rules for calculating consumption of fixed capital. This reflects that producing defence services is not fundamentally different from any other production process and that its capital inputs should therefore be treated in line with the general accounting principles (see section 6.3).

4. Capital formation: Expenditure on Research and Development should be recorded as capital formation and be written-down in accordance with the general national accounting rules for calculating consumption of fixed capital. The existence of international and well-established

statistics on R&D ensures that this is not unrealistic in terms of extra demands on data compilation.

Furthermore, by recording expenditure on R&D as capital formation the links between the national accounts and these statistics important for economic policy are clarified. This may reveal imperfections and inconsistencies and can induce improvements of the data (see section 6.2).

5. Capital formation and final consumption expenditure by households: The purchase of consumer durables by households should be recorded as capital formation instead of as final consumption expenditure. Imputed services of owner-used consumer durables should be recorded by amount of its consumption of fixed capital plus an opportunity interest on the capital invested. These imputed services are consumed as part of the final consumption expenditure of households (see section 6.4).

Several of these changes bring the national accounting concepts more in line with economic theoretic insights, e.g. net operating surplus on other non-market output should include at least an opportunity interest on the capital invested or consumer durables and R&D are non-financial assets (criterion: relevance from an economic theoretical point of view). Furthermore, many of these changes also amount to a more straightforward application of basic principles, e.g. recording the central bank also as a non-market producer and recording all purchases of durables like cars as capital formation. In this way, the logic of the central accounting framework becomes easier to grasp (criterion:

accessibility). Finally, negative consequences for other criterions, like relevance from an administrative point of view or measurability, are negligible. As a consequence, these changes increase the utility of the universal model.

Changes in presentation

The major changes in presentation proposed are:

1. Key-ratios should be presented as a major output of national accounts, e.g. productivity figures, Domestic Product per capita, government deficit (net lending) as a percentage of National Income.

2. The distinction between actual and imputed flows should play a much more important role in presenting national accounts statistics. This reveals underlying logic and can reduce misuse.

3. The terminology should be modified in various instances, e.g. less lengthy.

4. The links between the input-output tables and the sector accounts should be further clarified, e.g.

the supply table could be supplemented with a small matrix showing output by industry and by institutional sector.

5. The input-output tables should also be used as a format for presenting an overview of price changes or volume changes.

6. The number of accounts distinguished in the sector accounts should be more limited. Accounts should only be used to distinguish major economic processes and not to derive balancing items of secondary importance like entrepreneurial income. Excessive number of accounts limits the accessibility of national accounts statistics. Furthermore, meaningful alternative balancing items are generally better be derived by disregarding the general accounting structure.

7. The national accounts should be presented for each of its major perspectives. This includes overview tables with key-ratios, price- en volume changes and real values. This shows also that price – and volume-changes are not only meaningful for the input-output tables but also for the sector-accounts.

8. The national accounts presented should allow flexible use, e.g. by showing sufficient relevant detail like wage subsidies. Such concepts important for major specific data needs should be stressed.

In terms of the ten criterions for the universal model, most of these changes in presentation are focused on increasing the user-friendliness and accessibility of the universal model and national accounts statistics. The emphasis on a more systematic distinction between imputed and actual flows is relevant from an economic theoretic point of view. Negative consequences from the point of view of the other criterions seem absent. As a consequence, these changes in presentation should also be regarded as increases in the utility of the universal model.

Supplementary concepts

The major supplementary concepts proposed are:

1. For all domestic sectors: real change in net worth;

2. For financial and non-financial corporations: entrepreneurial income before and after tax;

3. For financial and non-financial corporations: net worth to the owners, i.e. the net worth corrected for shares and equity as a liability;

4. For households: disposable income in cash, final consumption expenditure in cash, revenue and expenditure.

5. For government in the SNA93: government expenditure and revenue. In Europe, after the drafting of ESA95, government expenditure and revenue have been defined officially. These definitions can be improved in various ways (see section 6.4.2):

a. Double-counting can be reduced by excluding the imputed employers’ social contributions.

b. Interest payments and receipts should be netted for the holding gains and losses on loans in nominal terms.

c. The net sale of non-produced assets should be recorded as revenue instead of as a negative expenditure.

6. For government: price and volume-change for all types of expenditure; this implies amongst others that price- and volume changes should also be defined and distinguished for social security and social assistance benefits in cash.

In terms of the ten criterions for the universal model, a common feature of the standard supplementary tables is that the consistency of the central framework is not affected, while the relevance and accessibility for specific purposes is substantially increased. By extending the scope of price- and volume changes with social benefits also the usefulness as an analytical tool is increased.

The negative effects for the other criterions, e.g. measurability or cost-efficiency, are negligible.

Further harmonization with statistics in specific areas

The next SNA should also have much clearer links to the major statistics in specific areas. Cases in point are the R&D statistics (OECD-Frascati-Manual), education statistics (OECD-Education at a glance) and social protection statistics (Eurostat-ESSPROSS; OECD-SOCX). Preferably the central tables of these major statistics are incorporated in the next SNA. Similarly, the major overview tables on the government in the next SNA should correspond with those in the next IMF-manual on government finance statistics.

In terms of the ten criterions for the universal model, further harmonization with other statistics will increase the relevance of the national accounts as a general overview and is likely to also improve measurability and cost-efficiency. Negative trade-offs with other criterions could occur when the harmonization is achieved by overburdening the central framework with specific detail or changes in concepts which are only useful from the perspective of these specific areas. However, harmonization can often be achieved by using the flexible set of basic national accounting concepts for redefining the specific purpose-concepts62 and by the introduction of tables showing the transition from the national accounts concepts towards the specific-purpose concepts.

Different views on the ideal accounting system

In chapter 3, some different views on the design of the ideal accounting system have been briefly discussed. Our description and discussion of the universal model reflects also a view on the ideal accounting system. This view can be clarified by a comparison with three alternative views (see scheme 6.7).

The first view is the one preferred by Ohlsson for empirical work. According to him, different accounting frameworks are needed for different purposes.

The second view is the one expressed in the new international guidelines: the core accounting framework should be multi-purpose, encompassing and flexible with respect to a whole series of detailed classifications; for specific purposes this framework can be supplemented with some modules.

The third view can be dubbed the Dutch view: the core accounting framework should be multi-purpose but rather general, “small”, without too much specific detail and with a very limited set of analytical elements. This core should be supplemented with a wide range of modules serving specific purposes; these modules will often contain much more analytical elements.

62 For example, in R&D statistics granting loans should not be regarded as a type of expenditure, but as a separate financial transaction.

Scheme 6.7 Four views on the ideal accounting framework

View 1: Different accounting frameworks for different purposes (Ohlsson)

View 2: A big multi-purpose core and some modules (general view of the SNA93)

View 3: A smaller multi-purpose core and many modules (Dutch view) Framework for

purpose 1

Framework for purpose 2

Framework for purpose 3

Big

multi-purpose core Module 1

Module 2

Module 3

Multi-purpose core

Module 3 Module 2

Module 4

Module 5 Module 1

Module 8

Module 7 Module 6

Our view on the ideal accounting system can be summarised as:

- A system with a multi-purpose core and specific purpose-modules;

- The core is a mix of eight different perspectives. These different perspectives are best served by specific modules. The core itself should be straightforward in its logic and major choices and should not contain a detailed accounting framework. However, the classifications should be sufficiently detailed to allow rearrangement for specific purposes.

- In contrast to the Dutch view, minimising the number of analytical elements is not an important aim as such for the core: these analytical elements should be judged on their merits and negative external effects for the various data needs and in view of the various data possibilities.

- In contrast to the view of Richard and Nancy Ruggles and general statements about the Dutch view (see section 3.4), the core should not be micro-oriented. A fully micro-oriented core can only address in a very indirect way the major data needs served by the national accounts and is in several respects problematic. Standard micro-economic concepts are hard to define in a satisfactory multi-purpose way (on household income see e.g. Smeeding and Weinberg, 2001) and will be affected by changes in the underlying administrative concepts. Furthermore, the micro-oriented core data base will have very complicated links with the major standard national accounting aggregates like Domestic Product and Saving, conceptually as well as numerically. The micro-economic promise of flexibility will therefore turn out to be an illusion.

- For each of the major perspectives separate modules should be drawn up. The modules can clarify and overcome the conceptual limitations of the core-system. Ohlsson was right that for many different purposes different concepts are needed. These different needs can not be reconciled in one consistent accounting framework.

Scheme 6.7 (continued)

View 4: A smaller multi-purpose core with eight perspectives, many modules directly linked to these perspectives and some of these modules derived by simply rearranging basic concepts (my view)

Multi-purpose core Modules

1. The national economy

2. Non-financial corporations 3. Financial corporations 4. Government

5. Households 6. Rest of the World 7. Industries

8. Other perspectives

Module(s) 2…

Module(s) 3…

Module(s) 4…

Module(s) 5…

Module(s) 6…

Module(s) 7…

Module 8.1 Module 8.2 Module 8….

Module(s) 1…

- The modules can offer two types of conceptual solutions. Firstly, by rearranging basic concepts alternative supplementary concepts can be constructed. This is the simplest and least data demanding solution. Secondly, more fundamentally different concepts are introduced, e.g. micro-oriented concepts. To this end, for all differences with the standard national accounting concepts separate estimates are to be made, e.g. for the difference between capital consumption in the national accounts and in the business accounts.

- The modules could also supplement the core-system in terms of detail and scope, e.g. with data in non-monetary terms.

- The modules should ensure that data users can select a national accounts data set that is focused on their data needs and are not bothered by detail and concepts meaningful for other purposes.

Annex 6A Financial corporations 6A.1 Description

Delimitation of financial corporations

Financial corporations are one of the major groups of economic actors in the national economy. Their principal role is that of producers of financial services, like banking services and insurance. Financial services pertain to financial assets and the income from financial assets, like interest. A characteristic feature of financial corporations is therefore also their principal role in supplying, demanding and rearranging financial assets and corresponding income flows.

The Polderland-statistics can be used to illustrate their importance. Financial corporations are only responsible for about 5% of Domestic Product and 3% of domestic employment. However, their financial assets and liabilities are substantial. For example, the liabilities to other sectors in terms of e.g. currency, deposits, loans and pension reserves are about four times Domestic Product. The property income payable on these liabilities amount to about 20% of Domestic Product.

The sector Financial corporations includes a wide range of units. Examples are banks, pension funds, insurance companies, supervisory authorities of financial intermediaries and financial markets, investment funds, financial leasing corporations, security dealers and pension consultants. These units can be private or public, e.g. a private bank or the Central Bank. Some units can be quasi-corporations.

These units are part of the administration of another unit, have no independent legal status but act economically and financially as if they were 'real' corporations. This can apply e.g. to a municipal credit bank.

All financial corporations are restricted to the domestic affiliates; foreign branches are regarded as the corporations of other countries. This implies also that the domestic branches of foreign financial corporations are regarded as domestic corporations.

The guidelines recommend employing two types of subsectoring for the sector financial corporations. The first type is based on the criterion control. It is consistent with the subsectoring used for the sector non-financial corporations:

- public financial corporations;

- national private financial corporations;

- foreign controlled financial corporations.

The second type of subsectoring looks like an industry-classification:

- the central bank;

- other monetary financial institutions;

- insurance corporations and pension funds;

- other financial intermediaries;

- and financial auxiliaries.

This subsectoring reflects five different types of financial services:

- central banking services;

- normal banking services;

- insurance and pension funding;

- other financial intermediation services;

- auxiliary financial services.

Each subsector is principally engaged in one of these activities. The principal activity of the central bank is to provide central banking services, i.e. to manage the supply of money by issuing currency, maintaining the internal and external value of the currency and holding the international reserves of the country.

The principal activity of other monetary financial institutions is to provide normal banking services, i.e. intermediation of money received as deposits (or close substitutes). Corporations in this subsector could be e.g. commercial banks, savings banks, post office giro institutions, rural credit banks, co-operative credit banks and merchant banks.

The principal activity of insurance corporations and pension funds is financial intermediation as the consequence of the pooling of risks, i.e. insurance and pension funding. The principal activity of

other financial intermediaries is any other type of financial intermediation, like financial leasing, hire purchase, factoring, personal finance, security dealing and providing venture capital.

Financial auxiliaries are principally engaged in activities closely related to financial intermediation. Examples are insurance brokers, pension consultants, loan brokers, investment advisers, corporations providing stock exchange and central supervisory authorities of financial intermediaries and financial markets.

The tables

The role of financial corporations is described by six tables:

1. a current account;

2. an accumulation account;

3. a balance sheet;

4. a table with entrepreneurial income;

5. a table with prices, volumes and key-ratios;

6. a table on the financial assets of the whole national economy. This table includes a breakdown of the sector financial corporations into monetary financial institutions, insurance and pension funds and other financial corporations.

The first five tables are in many respects similar to those for the non-financial corporations.

However, distinctive features of financial corporations are that their services are closely linked to transactions in financial assets and that a great part of these financial services are provided without explicit charge. These distinctive features are reflected in the tables on financial corporations.

In this section, we will focus on the roles played by two characteristic parts of the financial corporations:

- the role of the central bank and other monetary financial institutions;

- and the role of insurance companies and pension funds.

The central bank and other monetary financial institutions

The role of the central bank is to issue currency, to hold the international reserves of the country and to maintain the internal and external value of the currency. By issuing currency, the currency becomes a liability for the central bank and a financial asset for its owners. The balance sheet on financial corporations (table 6Ac) shows currency as a liability of 39 billion euros at the beginning of 1997.

This liability is the currency issued by the central bank. Currency is also an asset for financial corporations, e.g. currency held by other monetary financial institutions or foreign currency held by the central bank. However, the amounts involved are so small (about 4 billion euros) that they are not shown separately in the Polderland statistics.

Monetary gold and Special Drawing Rights (SDR's) are shown as financial assets of financial corporations. This reflects the central bank's role in holding the international reserves. They are also an instrument for maintaining the internal and external value of the currency. The Polderland statistics reveal that monetary gold and SDR's (40 billion euros less 4 billion euro currency) cover nearly the full value of the currency issued (42 billion euros). The allocation and cancellation of SDR's are recorded as other changes in the volume; they are thus not recorded as financial transactions.

The role of maintaining the internal and external value of the currency pertains in fact to all transactions by the central bank, including issuing currency and changing the size and composition of international reserves.

The role of other monetary financial institutions is to provide normal banking services, i.e. to intermediate money received as deposits (or close substitutes of deposits). The balance sheet of financial corporations shows that at the beginning of 1997 856 billion euros was received as deposits.

Interest should be paid on these deposits. Furthermore, many financial services are provided without explicitly charges. These expenditures are financed by investing the money deposited in loans (e.g.

mortgages), securities and equities; these investments have generally higher rates of return than the rate of interest to be paid on deposits. The value of the output of these services (Financial

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