FEATURE ARTICLE: IMPACT OF SECOND–HAND FIXED ASSETS ON GROSS DOMESTIC PRODUCT


INTRODUCTION

Recent releases of the quarterly Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0) have recorded some large transactions in second-hand fixed assets occurring between the public and private sectors of the economy. This has resulted in strong movements being recorded in the private and public sector disaggregation of gross fixed capital formation, a component of Gross Domestic Product (GDP).

Since the early 1990s there has been a shift in the contribution of private and public gross fixed capital formation (GFCF) to GDP. Reforms throughout the late 1980s and 1990s saw the Commonwealth and State governments privatise a number of public assets, whereby fixed assets and public corporations were sold by the public sector to the private sector. Following the fall of private GFCF during the recession of the early 1990s, the privatisation reforms were a major reason for the increase in private GFCF from around 17 per cent of GDP in the early 1990s to 21 per cent by the year 2000. Over a similar period the contribution of public GFCF to GDP fell steadily from around 8 per cent in the mid-1980s to below 5 per cent by the year 2000.

There has been a further increase in the contribution of private GFCF to GDP as a result of an increase in Mining construction over the past ten years. This has led to the contribution of private GFCF increasing to nearly 24 per cent of GDP.

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:

• Final expenditures, including Final consumption expenditure and Gross fixed capital formation;
• Changes in inventories; and
• Exports of goods and services less Imports of goods and services.

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%.

Example sale from the public to private sector
				Before sale	After sale	change	% change
				($m)	($m)	($m)	%
Gross domestic product				372 000	372 200	200	0.1
	Final consumption expenditure			270 000	270 000
	Total gross fixed capital formation			97 000	97 200	200	0.2
		Private gross fixed capital formation		81 000	84 200	3 200	4.0
			Dwellings	18 000	18 000
			Ownership transfer costs	5 000	5 200	200	4.0
			Non-dwelling construction	37 000	40 000	3 000	8.1
			Machinery and equipment	19 000	19 000
			Cultivate biological resources	1 000	1 000
			Intellectual property products	1 000	1 000
		Public gross fixed capital formation		16 000	13 000	-3 000	-18.8
			Public corporations	4 000	1 000	-3 000	-75.0
			General government	12 000	12 000
	Changes in inventories			2 000	2 000
	Net exports			3 000	3 000

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:

1. The Victorian desalination plant was constructed by a private company and completed towards the end of 2012. The asset was acquired under financial lease by the Victorian government in the December quarter 2012.
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.


CONCLUSION

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).