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2000 Special Article - Business and communication services and the finance industry in Australia
The aggregate FBCS industry increased its share of industry value added by 16% over the 1990s, with the share to communications services rising 22% and the share to finance and insurance up 28%. No other individual industry or industry group recorded such a strong increase in its share of value added. While property and business services increased its share of value added a little more slowly (at about 8%) this was still faster than most other industries which were either increasing their relative significance more slowly, or indeed contracting in terms of their share of total industry. The exceptions were four service industries (accommodation, cafes and restaurants, health and community services, cultural and recreational services, and personal and other services). While individually each of these industries gained in relative significance more quickly than property and business services, they are each much smaller industries in terms of industry share, and collectively all four industries contribute about as much as property and business services.
Employment in FBCS industries
The significance to the Australian economy of the FBCS industries can also be considered in terms of the employment that the industries generate. The following table shows, for each of the main FBCS industries and their subdivision components, employment for the past 8 years together with growth in that employment and relative growth (share of total employment).
Employment in the FBCS industries has been very strong, growing by over 50% in the seven years to 2000 compared with economy wide growth of less than 20%. Employment in each of the broad industries within FBCS has also grown, although the finance component of the finance and insurance industry has shown a decline in employment due to the very strong productivity growth it has seen over the period, with output per hour worked increasing by nearly 50% compared with an economy wide increase of less than 20%.
The strong growth on FBCS employment has seen its share of total employment increase from less than 14% in 1993 to over 17% in 2000. Property and business services has shown the strongest increase in employment share.
Size of the finance and business services industries in the United Kingdom
The analysis of the city of London identified the broad FBS sector as contributing about 16.4% of UK gross domestic product at factor cost in 1992. The table below shows a similar calculation for the contribution of the broad UK sector from 1992 to 1998 at basic prices (including net taxes on production other than product taxes).
However, the FBS measure for the UK overstates somewhat the contribution of the sector because it does not deduct, from the estimates of the value added for finance and business industries, all of the inputs associated with financial intermediation services indirectly measured (or FISIM). These services cover the making of loans and the taking of deposits by financial intermediaries where the fee is implicit in the interest rate spread between loan and deposit rates. While the value of this service to industry is estimated, in total, for UK financial intermediation, and deducted as an adjustment from total industry value added, it is not distributed by industry. For broad comparison purposes, Australia's gross value added for FBS in financial year 1997-98, using the UK approach, would be about 17.6% of industry value added, a little lower than the UK average of 19.3% for 1997 and 1998.
The following table extends the UK analysis of this broad industry to include communications services. By 1998 this broad industry was contributing nearly a quarter of UK industry value added.
Australia's gross value added for FBCS, adjusted for FISIM to approximate the UK measure, was 21.0% in 1997-98, just behind the UK average of 22.4% for 1997 and 1998.
Inter-relatedness of the finance and supporting industries
A well functioning legal framework, and effective communications, legal and other business services are essential to a well functioning finance system and to growing employment opportunities across the wider FBCS industry grouping. These support mechanisms and industries are all "necessary" conditions for a growing and increasingly international finance industry.
The inter-relatedness of the industries can be seen a little more clearly through the analysis of the ABS's supply/use tables. The analysis that follows uses the commodity inputs into the finance and insurance industry and into each of its main support industries (communications and property and business services) from 1997-98 supply/use tables for Australia's national accounts. However, there are two caveats on the analysis. First, the estimates are not final and will be revised. Second, the analysis has assumed that certain commodities that are primary to the industries under analysis (FBCS) and input into the FBCS industries are produced by those same industries. In other words, secondary production of these services by industries other than FBCS industries is assumed to be zero. That assumption is certainly good for financial services, and is likely to be a sufficiently close approximation for the other services being considered.
Looking first at the finance and insurance industry, its total commodity inputs in 1997-98 were $19.2 billion. A substantial proportion of these commodities (over 40%) were finance and insurance services provided between businesses in the industry. Excluding these services and government charges (a further 5%) leaves about $10.0 billion of goods and services acquired by the finance and insurance industry from other industries. Over half (about 60%) were advertising services, communications services, and a wide range of other property and business services, indicating the very high degree of dependence of the finance and insurance industry on these other FBCS industries to support their operations. Looked at another way, the industries outside the FBCS grouping supplied only about one-fifth of the finance and insurance industry's requirements.
For the property and business services industry, after excluding both the services provided between businesses within the industry (nearly two-thirds of all commodity inputs to the industry) and government charges, about $24.1 billion of inputs remained in 1997-98. Just over 20% of these inputs were financial and insurance services, and about 15% were communications services. While the degree of inter-dependence on other FBCS industries is not as marked as for finance and insurance industry (many other commodity inputs such as catering, transportation, machinery, books, newspapers etc are involved as significant industry inputs for the property and business services industry), the finance and insurance and communications inputs are still very significant. Alternatively, industries outside the FBCS group supplied only about a quarter of property and business services requirements.
For the communications industry, after excluding its own industry's commodities (15% of total inputs) and government fees, about $11.1 billion of inputs remained. Finance and insurance services account for about 13% of these inputs, and property and business services accounted for over 30%, again indicating a very significant degree of interdependence. Alternatively, industries outside the FBCS group supplied about half the communications services requirements.
The following table summaries the input shares to the FBCS industries (excluding government charges) in 1997-98. It is probable that these input shares, and the high degree of interrelatedness between FBCS industries, would show similar relationships today - in fact the intensity of the relationship may have increased due to the increasing role of communications in the other FBS industries in the last couple of years.
Another way of looking at the inter-relatedness of the FBCS industries is to look at the share of total industry inputs from these industries that go into FBCS industries. In other words, how much of the finance and insurance industry products consumed by businesses are consumed by FBCS businesses? For both the finance and insurance industry and the property and business services industry about 45% of all sales to business went to FBCS industries. For communications services, about a third of all business sales are to FBCS industries. Clearly, the interdependence within the FBCS group of industries is not only in terms of the necessary inputs to run these FBCS businesses, but also in terms of a very significant element of demand for their products that comes from these industries.
Just as for the City of London, Australia's finance industry relies heavily on key business and communication services inputs for its success and growth. In turn, those support businesses are significant clients of the finance industry. Innovation in the finance industry will be supported by innovation in the communications and other support businesses, and the finance industry's demand for those services at a high level will spur that innovation and growth.
This wider view of the FBCS industries and their role in the Australian economy will be reviewed and updated in future articles in this publication.
1/ Bank of England Quarterly Bulletin (1993) "Competition and Financial Centres in Europe: London as a Case Study".
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