MACRO - ECONOMIC STANDARDS REVISIONS
In 2003, the United Nations Statistical Commission (UNSC) called for an update of the System of National Accounts and Balance of Payments manuals to bring the standards into line with the new economic environment, advances in methodological research, and needs of users. The Commission mandated that the update would not recommend fundamental or comprehensive changes to the standards that would impede its implementation, and it identified consistency between related manuals as a major objective.
The international framework for economic statistics is centred around two key documents, the System of National Accounts, 1993 (SNA93) and the fifth edition of the Balance of Payments Manual (BPM5), both of which were released in 1993. The ABS introduced these standards into its publications for the 1996-97 reference year (balance of payments) and 1997-98 reference year (national accounts). The International Monetary Fund Government Finance Statistics (GFS) framework is closely aligned with SNA93 and underpins Australian government finance statistics.
Since the release of these key standards, a number of new economic phenomena have arisen or assumed greater importance as economies continue to develop in their complexity. For example, mobile phone licenses did not exist when the SNA93 and BPM5 were written and clear guidance on the treatment of intangibles such as these is not available in the existing manuals. 'Knowledge' capital and productivity analysis have received increasing attention, as have aspects of the globalised economy. In response to this, relevant international organisations and a range of national statistical agencies, including the ABS, have reviewed a range of conceptual and measurement issues that were either not clarified completely at the time of the release of SNA93 and BPM5, or have emerged as important measurement issues since that time.
The current review is more limited than the changes introduced in SNA93 and BPM5. Those changes were far reaching, introduced additional detail (sectors and instruments), improved clarity of presentation (transactions, stocks, valuation and other changes) and changed terminology. In contrast, the recent round of updating focused on refining and improving practice rather than a full review of the underlying conceptual framework. Particular focus was given to:
- classification and treatment of intangible non-financial assets such as leases and licenses, computer software and databases, research and development expenditure, and marketing assets,
- financial asset and instrument classifications,
- capital services for non-market producers,
- banking and insurance industry output,
- unfunded pensions schemes, and
- articulation of the international investment position.
ABS ALIGNMENT WITH INTERNATIONAL STANDARDS
Good international standards are essential to ensure that Australian economic statistics are coherent, comprehensive, reliable, relevant and comparable with the macro-economic statistics of other nations. The ABS contributed considerable resources to the update process to ensure that Australian views were taken into account and that the outcomes of the revision process are conceptually coherent and practical.
In its implementation of the updated standards, the ABS will redress some areas of non-compliance with the changes introduced in SNA93 and BPM5. The ABS will also seek to comply as fully as possible with the new standards. Non-compliance affects international comparability and will only be considered in the relatively few cases where the ABS strongly disagrees with the theoretical position taken on a particular issue or where the costs of compliance (eg provider burden and problems of data availability) exceeds the materiality of the issue in the Australian context. In the cases where non-compliance is significant, the ABS will endeavour to provide sufficient supplementary information to enable a reconciliation back to the international standard, and therefore assist in international comparability.
The ABS maintains a coherent set of economic statistics. Therefore these changes to standards will be implemented across the suite of macro-economic statistics including: Australian System of National Accounts (ASNA - including both quarterly and annual releases as well as the State and Financial Accounts), Input-Output Tables, Balance of Payments, International Investment Position, and Merchandise Trade Statistics.
While the majority of the changes will also be implemented in the Government Finance Statistics there are a small number of exceptions. These exceptions, which are identified in the discussion on the issues, are predominantly where the change involves the imputation of transactions which may be appropriate in the National Accounts context but which are not appropriate in Government Finance Statistics. These exceptions are in addition to already existing minor differences in practice, such as the treatment of speculative construction and orchard growth. The International Monetary Fund will be reviewing GFS standards at a future date. Users will be consulted regarding any possible changes in Australian GFS statistics resulting from revised international standards.
THE CONSULTATION PROCESS
Internationally the revisions to SNA93 and BPM5 have been agreed and signed off by the UNSC and the IMF Committee on Balance of Payments Statistics, respectively. A first draft of the 'core' chapters of the System of National Accounts Rev 1 (SNA93 Rev.1) has been prepared and commented on by statistical agencies including the ABS and the final draft of the Balance of Payments and International Investment Position Manual Sixth Edition (BPM6) is being finalised. With these steps completed the ABS has been able to prepare a response to the issues arising from the revision process and is now undertaking user consultation on these. There are a small number of issues which will not be finalised until the remaining chapters of the SNA are drafted. It is not anticipated these will raise significant issues. However, if necessary, further user consultation will be undertaken.
We have considered each of the revisions to the standards and developed recommendations for their treatment within Australia's macro-economic statistics. It should be noted that the consultation process is focussed on how the international standards will be implemented in Australian statistics not on the international standards themselves. The process consists of: bilateral discussions with selected users; an information paper presented to the Economic Statistics User Group in June 2007; and this information paper inviting comment from all users.
During this process we are seeking user views on two key aspects of the implementation plan:
- user views on the recommendations for treatment of the key issues; and
- user views on the proposed implementation plan, particularly requirements for early advice on the impact on the estimates before release.
In the National Accounts the ABS intends to implement the new standards with the release of the 2008-09 Annual National Accounts (5204.0) published in November 2009. This timing has been selected to coincide with the introduction of the new industry classification, Australia and New Zealand Standard Industrial Classification 2006 (ANZSIC 06), in order to avoid having two significant changes to the accounts within a short period of time. The various quarterly releases (including national accounts, balance of payments, and financial accounts) will be released on the basis of the new standards beginning with the September quarter 2009 reference period. Timing of the implementation of the changed standards in other related publications will be notified through those publications.
We are committed to maintaining the integrity of time series and undertake to backcast the changes as far back in the series history as possible. For those changes which have major impacts on Gross Domestic Product (GDP) and it is appropriate to do so, the ABS will attempt to revise to the beginning of the series. Users will be fully informed of any occurrences where it is not possible to backcast changes to the beginning of the series.
The ABS will provide users with full and complete information on changes to the standards and to be transparent as to their impact on the data. To this end the ABS plans:
- to publish updated economic classifications in 2008.
- to publish an information paper on new presentational formats in approximately early 2009.
- to publish an information paper in approximately August 2009 which will provide an indication of the impact of the standards changes on the 2008-09 annual national accounts, and possibly a separate information paper for changes affecting the balance of payments.
- to publish in the relevant publications, the impact of the changes at the time the changes are introduced.
- to publish technical papers on various issues that will significantly affect national accounts and balance of payments estimates and methods (eg research and development, defence expenditure, reinvested earnings of investment funds).
- to produce updated concepts, sources and methods publications in the year following the implementation of the new standards.
ABS is keen to establish whether these information releases will satisfy user needs about the changes occurring and their impact. In particular, there is a question whether there are further requirements for the ABS to publish information on the expected impact of the changes on the sub-annual national account releases.
DISCUSSION OF SPECIFIC ISSUES
This section highlights specific issues for consideration by users. These issues have been selected because either they involve a change which impacts on key aggregates or they involve non-compliance with international standards. The issues are listed below with discussion on key major issues, while the minor issues are discussed in more detail in the appendices attached to this document. The separation into 'major' and 'minor' impacts on GDP and Current Account has been made on a subjective basis at this stage.
Research and Development
Research and Development (R&D) expenditures are currently treated as intermediate use within the accounts, i.e. as an expense for the enterprise in the current period. This treatment ignores the long term benefits which flow from R&D.
SNA93 Rev.1 recommends that the expenditure on R&D (excluding R&D made freely available) be recognised as investment expenditure thus creating an 'R&D asset' owned by the enterprise undertaking the expenditure. R&D that is made freely available is excluded as it does not meet the ownership requirements of an asset. Freely available R&D is that research which is made publicly available for use; it is largely seen to be the province of government and higher education institutions undertaking basic research.
The definition of R&D set out in the Frascati Manual (Proposed Standard Practice for Surveys on Research and Experimental Development, OECD 2002), the international guide to the methodology for R&D measurement, will be used to define R&D expenditures with the clarifying explanation that this does not imply that human capital is treated as an asset in the SNA. Patented entities will be no longer be separately identified, instead they will be subsumed into R&D assets.
The ABS intends to comply with this recommendation and introduce expenditure on R&D as investment expenditure. Where it is unclear as to whether R&D is freely available we lean towards including it as fixed capital formation. The ABS undertook an investigation on recognising R&D as investment expenditure in 2004. This study indicated that its inclusion would increase the level of GDP by approximately 1.5%, but have minimal impact on GDP growth rates.
Within the accounts, defence expenditure is currently treated as government final consumption expenditure, except where that military expenditure was an asset that also had a civilian use. This means that purchases of military equipment such as fighter planes and submarines were not seen as providing any ongoing services beyond the period in which they were purchased.
SNA93 Rev.1 alters this treatment to bring defence expenditure into line with capital formation in other industries. All expenditure on military weapon systems that have an anticipated ongoing use (longer than a year) is to be recorded as gross fixed capital formation. Expenditure on 'disposable' military equipment such as bullets will continue to be recorded as inventories until used. The recommendation further states that defence gross fixed capital formation should be presented separately from other types of gross fixed capital formation.
The ABS intends to fully comply with the revised treatment of these expenditures. This will increase the level of GDP, although at this stage the precise extent of the increase is not known.
Capital Services for Non-market Producers
In a production process, labour, capital, and intermediate inputs are combined to produce output. Capital goods can be seen as providers of capital services which input into the production process and it is these capital services which are an appropriate measure for capital inputs in productivity and production analysis. SNA93 allows for the identification of capital services for market producers. However the SNA93 recommended treatment for non-market producers differs from the treatment for market producers.
When summing costs to measure non-market output, the SNA93 recommends that the value of the services provided by a producer’s own non-financial assets should be measured as consumption of fixed capital. This means that neither a return on capital to these assets nor the equivalent opportunity cost of capital is recognised. An inconsistency arises with the rental that would have to be paid if the assets were leased. For example if a government agency moved accommodation from an office block it owned to one it rented, the rental payments would add to GDP despite the fact that the flow of accommodation services was the same and the only change has been one of economic structure rather than production. In addition to this undesirable impact the treatment is not consistent with the treatment adopted for market output.
The issue of measuring the output of non-market producers taking account of capital services, rather than consumption of fixed capital, was considered as part of the standards update process, but the UNSC decided not to make a change on the basis that further research on the issue was required.
However as it is the preferred conceptual treatment, and in order to avoid asymmetry in the accounts, the ABS intends to include an imputation of capital services for assets owned by the general government sector of the National Accounts, which would involve adding estimates for a return on capital to the estimates of consumption of fixed capital. This means that ABS will not be compliant with SNA93 Rev.1 on this issue. Further consideration needs to be given to the classes of assets for which capital services will be estimated. Capital service flows will not be imputed within the separately published Government Finance Statistics as their inclusion is not consistent with the use and purpose of those statistics.
The inclusion of capital services for Non-profit Institutions Serving Households (NPISH) will be undertaken with longer term work on the NPISH sector. A paper by the Organisation for Economic Co-operation and Development (OECD) suggested that the increase in the level of Australian GDP resulting from this change in respect of general government would be in the order of 2-3% but with little impact on GDP growth rates.
Reinvested Earnings of Investment Funds
The revised standards expand the imputation of reinvested earnings from undistributed foreign direct investment income to include undistributed earnings in both resident and non-resident investment funds. Under the reinvested earnings approach, the increase in the value (excluding capital gains) of the investment is imputed as an income flow to the investor with an equivalent capital investment back into the fund - rather than as a revaluation of the asset.
As Australian residents' holdings of non-resident investment funds are significantly higher than the holdings of non-residents in Australian funds, the recognition of imputed net income flows will have a noticeable impact on the Current Account Deficit. However the precise scope of this issue is still uncertain as it hinges on the definition of an investment fund within the Financial Corporation Sector (see Financial corporations classification (investment funds) in Appendix 1), and identification of undistributed earnings free of capital gains.
The expanded imputation of reinvested earnings will affect the estimates of sectoral saving in the national accounts. Saving for the financial corporation sector will fall, as income flows are imputed to households and other holders of the investment funds. The counterpart to this flow will see increased saving and net lending for the holding sectors, from the imputed reinvestment into the financial corporation sector. As with the impact on the Current Account Deficit, the size of these changes is dependent on the scope adopted for investment funds.
Valuation of Loans
Under the prevailing international standards non-performing loans are to be recorded at nominal value. SNA93 Rev.1 recommends continuing this treatment but also suggests that the 'fair value' of non-performing loans be recorded as a memorandum item and the related accrued interest be recorded as an 'Of which' item. If fair value reporting is not possible, it recommends estimating the fair value for the memorandum item as the nominal value of non-performing loans less expected losses.
The current ABS treatment varies with GFS and Financial Accounts statistics largely recording non-performing loans on a nominal value basis, while International Accounts record these loans at fair value. The ABS is considering the adoption of a consistent approach of recording non-performing and other loans at fair value in the core accounts and recording their nominal values as a memorandum items. This proposal requires further investigation to work through the implications of such a change and to engage in consultation with users.
The remainder of the issues are those that will have a relatively minor impact on GDP and are discussed in the appendices. They are separated into two groups, based on whether they will bring the accounts into compliance or non-compliance with international standards.
Compliance with international standards with minor impact
(See Appendix 1 for discussion of these issues)
Non-compliance with international standards with minor impact
- Cost of Ownership Transfers
- Mineral Exploration Expenditure
- Financial Auxiliaries
- Orchard Growth
- Software Originals and Copies
- Employee Pension Schemes
- Employee Stock Options
- Goodwill and Other Non-produced Intangibles
- Economic Territory
- Balance of Payments Goods and Services Account
- Migrant Transfers
- Activation of Guarantees
- Financial corporations classification (investment funds)
- International Reserves
- Unallocated Gold Accounts
(See Appendix 2 for discussion of these issues)
- Definition of Basic Prices
- Repurchase Agreements
- Recording of Interest on Debt Securities
- Ancillary Units (Holding Companies)
- Financial Instrument Classification
- Reclassifications for Transactions Between Non-residents
User comments and views on the proposed changes are welcome, particularly on:
- research and development expenditure;
- treatment of defence weapons platforms and government owned assets;
- subsectoring of the financial sector and investment fund definition; and
- issues where the ABS proposes to not comply with the international standards.
User feedback is requested by the 31 October 2007.
For more information, or to comment on changes occurring, contact Michael Smedes (02) 6252 6718 or email@example.com.
Complete discussion, including country and expert comments, on the changes to SNA93 can be viewed at the UNSC website http://unstats.un.org/unsd/nationalaccount/snarev1.asp. Issues, discussion and recommendations surrounding the update of the BPM5 can be viewed at the IMF website http://www.imf.org/external/bopage/bopindex.htm.