Download The SNA : Some Outstanding Issues

The SNA : Some Outstanding Issues
Peter Hill
The paper focuses on three broad issues.
• The structure and scope of the SNA accounts. The
different roles played by monetary and non-monetary
transactions and the inter-relationships between the real
and the financial accounts of the system.
• The potential conflict of interest between the needs of
short and long term analysts.
• The need to reconstruct the production account and to
record the interest payable on the current value of the
fixed and other assets used in production.
A recurring theme is the extent to which it is desirable, necessary
or feasible to record internal transactions in the SNA.
• Internal transactions occur when the same economic unit,
such as an enterprise or household, acts in two different
capacities and engages in two different types of economic
activity.
• For example, an economic unit may choose to consume or
add to its stock of assets something that it has produced itself,
instead of selling it on the market.
• In order to record this production an internal transaction is
deemed to take place in which the producer ‘sells’ the output
to itself in its capacity as a consumer or asset owner.
Internal transactions involve real flows of goods and
services.
• Although prices have to be estimated, or imputed, for the
quantities transacted, the quantities are real and
observable.
• If internal transactions are ignored, real economic
activities and their associated costs and benefits go
unrecorded. Not only production but consumption ad
capital formation are missed.
• These activities interact with market activities and may
have a considerable impact on welfare and growth
potential.
Transactions accounts, real accounts and the financial account
• Transactions accounts are defined here simply as accounts
that record transactions. In the SNA, therefore, they consist of
the sequence of accounts from the production account to the
financial account.
• Transactions accounts other than the financial account are
described here as real accounts, although this term is not
used in the SNA.
• The real accounts record transactions related to the real
economic activities of production, consumption and capital
formation. In the SNA they consist of the sequence of
accounts from the production account to the capital account.
Monetary transactions
• The great majority of the entries in the SNA accounts
refer to monetary transactions although, a few refer to
certain types of internal transactions and other nonmonetary transactions.
• In a monetary transaction a good, service or asset is
exchanged for cash or the creation of a short term
financial asset or liability.
• For each of the parties concerned, a monetary
transaction leads to a pair of matching entries in the
accounts: one in a real account and one in the financial
account.
Net lending or borrowing
• The net change in an economic unit’s real resources
resulting from its monetary transactions as recorded in
the real accounts must be matched by an equal change
in financial asset/liabilities in the financial account.
• This identity emerges in the SNA in the form of the
identity between net borrowing/lending as recorded in
the capital and the financial accounts respectively.
• The identity holds because the transactions accounts as
a whole constitute a closed inter-dependent system of
accounts.
The transactions accounts form an inter-dependent
system of accounts.
• The capital account includes net saving carried over
from the preceding sequence of real transactions
accounts and not just transactions in capital assets.
• Net saving therefore links the capital account to the other
real accounts. The net lending/borrowing requirement
shown in the capital account is generated by all the real
economic activities in which a unit engages.
• The identity between net lending/borrowing in the capital
and financial account reflects the inter-dependence
between the real and financial sectors of the economy.
The SNA’s accounting structure
• In the SNA the accounts are grouped into current
accounts and capital accumulation accounts. The
capital and financial accounts are hived off from the
other transactions accounts.
• Thus, the SNA effectively ignores the fact that the
transactions accounts form an integrated interdependent system.
• The structure of the SNA accounts plays down the interdependence between the real and the financial accounts
and is therefore not ideal at a time of financial crisis.
Demands on the accounts for short and lone term analysis
• Until very recently, it seemed that the main objective of
monetary and fiscal policy in most countries was no
longer short term economic stabilization but promoting
long term growth.
• This has led to demands to expand the accounts to
include more non-market activities and non-monetary
transactions.
• However, restoring stability in real and financial markets
has suddenly become the over-riding priority of
economic policy throughout the world.
The SNA is meant to be a multi-purpose system.
• However, there has long been pressure to change or expand
the system to include various non-market activities, such as
household production for own consumption or capital
formation.
• The inclusion of non-monetary transactions does not disturb
the identity between net lending/borrowing in the capital and
financial accounts. However, the inclusion of slow moving
non-market activities may tend to dampen down short term
fluctuations in the aggregates.
• Their inclusion may be important for certain types of analysis
but it could actually detract from the usefulness of the
accounts for purposes of monitoring and analysing short-term
fluctuations and market disequilibria.
Recent events suggest that the present SNA should
continue to be based mainly on monetary transactions.
• However, a convincing case has been made that there
maybe a need over the longer term to construct more
comprehensive measures of economic growth and also
additional series to explain growth.
• The best way to meet the needs of short and long term
analysis may be to have two sets of accounts: the
existing accounts plus some extended accounts
• In the past it has been argued that users would be
confused by having two set of accounts, but it is doubtful
whether this is the case today.
Interest and capital services
• There is one way in which the usefulness of the
accounts for analysis and policy could be improved with
minimal disturbance to the system, namely by recording
in the production account the interest payable on the
current value of fixed asset used in production.
• In the early days of the SNA interest used to be recorded
as a cost in the production account but it was dropped
from the account in the 1968 revision.
Leasing and rentals
• When fixed assets are rented under a lease, the rentals
payable are recorded as costs in the SNA production
account.
• For the leasing to be viable, the rentals must cover not
only the lessor’s maintenance and administrative costs
but also the depreciation on the asset and the interest
payable or foregone on the current value of the asset.
• The interest represents the opportunity cost of using the
funds to acquire fixed assets instead of investing them in
financial assets.
Imputed rentals on assets owner by the user
• When an enterprise using a fixed asset owns it an
internal transaction should be recorded in which the
enterprise pays a rental to itself its capacity as an asset
owner.
• The rentals may be estimated using corresponding
market rentals, but if there is no suitable rental market,
the rentals can be estimated from their costs, including
depreciation and the interest payable.
• However, the SNA only records the depreciation and not
the interest.
The SNA net operating surplus is not all primary income
• The SNA net operating surplus is not the surplus from
production if there are outstanding liabilities that have
been incurred purely as a result of engaging in
production that have not been charged against the
production.
• The interest payable is an inescapable cost of production
that needs to be accounted for in the SNA production
account. It is not some kind of discretionary payment
made out of an operating ‘surplus’.
Estimating capital services
• The total interest payable plus depreciation should
provide a close approximation to the cost of the capital
services used in production.
• There is substantial literature in favour of using an
exogenous or endogenous rate of return on the fixed
assets instead of the interest payable on their value.
• However, that it should be possible to value the costs of
the inputs into a process of production independently of
the value of the output. The interest paid or foregone
represents an integral part of the opportunity cost to an
enterprise of using its own assets in production.
Depreciation and interest
• Enormous advances have been made in developing a
theoretically satisfactory and practical methodology for
estimating stocks of fixed asset by means of the
perpetual inventory method, or PIM.
• Depreciation can be estimated within the general
framework of the PIM, but nevertheless it remains much
more difficult to estimate than the interest payable on the
current value of the asset.
• A case can be made on practical grounds for not
calculating depreciation, and the 1993 SNA explicitly
allows for this possibility, but if depreciation can be
calculated and recorded there is no case for not
recording the interest payable as well.