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FEATURE ARTICLE: IMPACT OF SECOND–HAND FIXED ASSETS ON GROSS DOMESTIC PRODUCT
This feature article explains the implications of transactions in second-hand fixed assets and the impact these transactions have on GDP.
IMPACT OF SECOND-HAND FIXED ASSET SALES ON GROSS DOMESTIC PRODUCT
Gross Domestic Product (GDP) measures the total market value of goods and services produced in Australia within a given period. GDP is derived by three conceptually equivalent approaches: the income approach (I), the expenditure approach (E) and the production approach (P).
GDP calculated using the expenditure approach is comprised of the following components:
Second-hand fixed asset sales are captured in the GDP (E) measure, within the Gross fixed capital formation (GFCF) component. GFCF is expenditure on new fixed assets plus net expenditure on second-hand fixed assets, whether for additions or replacements. Net expenditure on second-hand fixed assets is the expenditure on second-hand fixed assets, less the sale of existing fixed assets.
Total GFCF is comprised of public GFCF and private GFCF. A transaction in a second-hand fixed asset reallocates the asset from the private to the public sector, or vice versa. This can occur by the asset being sold, donated free of charge, or with economic ownership transferred under an instrument such as a financial lease arrangement.
While the sale of a second-hand fixed asset between the public and private sectors is not in itself production and does not contribute to GDP, the sale does represent a shift in the stock of fixed assets owned by each sector. Recording transactions in GFCF allows the stock of fixed capital owned by each sector to be correctly accounted for on the balance sheet.
While recent transactions in second-hand fixed assets have resulted in some large movements being recorded for the public and private sector components of GFCF, these movements in public GFCF and private GFCF offset one another. In other words, the value of the aggregate stock of fixed assets in the economy is unaffected by the reallocation of the fixed asset from one sector to the other. Therefore, the only impact on GDP is the Ownership transfer costs incurred by the acquirer of the second-hand fixed asset.
Ownership transfer costs include fees paid to lawyers, architects, surveyors, engineers and valuers, and commissions paid to estate agents, auctioneers, etc., and all ownership transfer taxes payable by the acquiring unit. Ownership transfer costs contribute only about 1 per cent to GDP, so even a large increase in this component due to a transaction in a second-hand fixed asset will have a negligible impact on GDP growth rates.
The following example demonstrates the impact of transactions in second-hand fixed assets has on GDP.
Example: Sale from the public sector to the private sector.
There has been a $3 billion sale of a fixed asset from the public to private sector. As a result of the sale, private GFCF has increased by the $3 billion purchase price, as well $200 million in ownership transfer costs incurred (e.g. stamp duty, real estate agent fees). Public GFCF has decreased by $3 billion as a result of the sale of the fixed asset. The $3 billion sale amount of the fixed asset cancels out in terms of GFCF for the economy as a whole, which means that GDP is only affected by the increase in ownership transfer costs of $200 million.
From a percentage change perspective, there has been a rise in private GFCF (+4.0%) and a strong fall in public GFCF (-18.8%), however, the contribution to GDP is an increase of only 0.1%.
RECENT TRANSACTIONS IN SECOND-HAND FIXED ASSETS
In recent quarters of the Australian National Accounts some large transactions in second-hand fixed assets between the private and public sectors have occurred. Two examples include:
2. The NSW Government financial lease of Port Botany and Port Kembla to private operators from 31 May 2013.
The financial lease of the Victorian desalination plant from the private sector to the public sector resulted in a strong rise in public GFCF in the December 2012 quarter, and an equivalent fall in private GFCF, leaving GDP unchanged.
The financial lease of Port Botany and Port Kembla from the public sector to the private sector caused a strong fall in public GFCF and a similar rise in private GFCF in the June quarter 2013. The only contribution to a change in GDP was the increase in ownership transfer costs incurred by the private sector.
Large transactions in second-hand fixed assets recorded in recent quarters of the Australian National Accounts has resulted in some large movements in the private and public sector components of gross fixed capital formation. However, because the value of fixed assets is simply reallocated from one sector to the other, the value of the stock of fixed assets in the economy as a whole remains unchanged. This leaves the increase in ownership transfer costs as the only contributor to total gross fixed capital formation.
For more information, refer to Chapter 10, Australian System of National Accounts: Concepts, Sources and Methods (cat no 5216.0).
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