Download Impact on Public Sector Finances

Transition to ESA10: Impact on Public Sector Finances
Transition to ESA10: Impact on Public
Sector Finances
Peter Gittins Office for National Statistics
1. Summary
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On 26 November 2013 ONS published an article on content of Bluebook 2014. This article highlighted,
amongst other things, the likely impact on National Accounts of moving from the European system of
Accounts 1995 (ESA95) to the European System of Accounts 2010 (ESA10). This change, which will also
affect the Public Sector Finances, will come into force in September 2014.
ONS have identified major drivers of change between the two sets of guidance, and are currently assessing
specific impacts to help support users through this key change. The changes that directly affect the key
public sector finance aggregates (public sector net debt and net borrowing) are presented here, together with
an initial assessment of impact. However, as ONS progresses through implementation work between now
and September 2014 further changes may be identified and impact assessments may need to be refined.
The key changes for public sector finances caused by adoption of ESA10 are likely to be:
• A reclassification of Network Rail (from private sector to central government) will increase public
sector net debt by around £30bn in 2012/13.
• The reclassification of Network Rail and changes to the treatment of liabilities in underfunded
pension schemes will increase public sector net borrowing by around £5bn in 2012/13.
• Other changes in the National Accounts will revise public sector expenditure and receipts without
affecting overall net borrowing in 2012/13.
o Changes to the ESA rules on whether spending should be capitalised will change the current
to capital ratio within public sector net borrowing.
o Changes to the rules on how certain aspects of tax revenue should be treated will change
public sector expenditure and public sector receipts by equal amounts, also potentially
affecting the current to capital ratio.
• The one-off transfer of the Royal Mail Pension Plan (RMPP) is expected to add £9bn to public sector
net borrowing in April 2012. This reflects the shortfall between the £28bn of assets transferred from
the RMPP and the £37bn of future pension liabilities that were consequently assumed by
Government. Furthermore, the transfer of the assets is no longer likely to reduce borrowing in that
period as it did under ESA95. However, ONS will only be able to confirm the correct treatment of
RMPP in February after concluding bilateral discussions with Eurostat.
• Revised guidance on permits to use natural resources is expected to alter the profile of receipts from
sales of 3G mobile phone licences. However, as with RMPP, ONS will only be able to confirm the
correct treatment of 3G licences in February after concluding bilateral discussions with Eurostat.
These key changes and their impacts are described below. It is important to restate that, at this stage, the
impacts are early estimates produced to help users understand the change. These estimates may need to
be refined over the course of producing the 2014 National Accounts datasets.
2. Introduction
Every year ONS updates the UK National Accounts through a process known as annual supply and use
balancing. This brings together detailed data on the three approaches to measuring Gross Domestic Product
(GDP) and balances them by product and industry. At the same time, any major methodological or
classification changes may be implemented within the accounts.
The UK National Accounts must adhere to international standards, specifically the European System of
Accounts, to ensure international comparability. These standards are updated periodically to reflect
economic and technological developments and changes in user needs. In September 2014 the UK will be
required to publish the UK National Accounts consistent with the European System of Accounts 2010
(ESA10). This manual replaces the European System of Accounts 1995 (ESA95). The updated standards
are in line with the System of National Accounts 2008 (SNA08). The ONS is undertaking a major programme
of work to meet these updated standards and in 2014 will focus on implementing changes that directly
Office for National Statistics
Transition to ESA10: Impact on Public Sector Finances
impact Gross National Income (GNI). The ESA10 consistent data will be published in September 2014 in the
annual data release known as the National Accounts “Blue Book”.
The Blue Book and Public Sector Finances both follow the European System of National Accounts guidance.
However, the production of Public Sector Finances allows a more flexible revisions policy, meaning that
some data changes are incorporated before Blue Book publication.
In Blue Book 2013 the first phase of an exercise was conducted to bring the National Accounts government
data and Public Sector Finances (including government finance statistics transmitted to Eurostat for
purposes of the Excessive Deficit Procedure) into alignment. Following Blue Book 2013 further changes
relating to the classification of public sector bodies and their transactions have been incorporated into the
Public Sector Finances. These changes will be implemented in the National Accounts in Blue Book 2014.
ONS will continue to report the Public Sector Finances on an ESA95 basis up to the end of August 2014. In
September 2014, the presentation of Public Sector Finance Statistics will move to an ESA10 basis.
ONS is committed to help guide users through these significant changes to the public sector finances. This
document provides a broad impact assessment on the headline borrowing and debt estimates for the UK. In
June 2014, a “shadow table” will be produced and published in the Public Sector Finances statistical bulletin.
This will provide the key public sector finance measures (public sector net borrowing, public sector net debt
and public sector current budget surplus/deficit) on an ESA10 basis.
3. Impact of introducing ESA10 on Public Sector Net Debt
Public sector net debt is calculated as financial liabilities less liquid assets with both scored at face value.
The public sector financial liabilities largely consist of government bonds (known as gilts), Treasury bills and
National Savings liabilities. Liquid assets mainly comprise foreign exchange reserves and bank deposits.
The only significant change so far identified under ESA10 that impacts headline public sector net debt (i.e.
excluding temporary affects of financial interventions) arises from a reclassification of Network Rail.
Network Rail
The classification of Network Rail was extensively considered by ONS in 2002-2004, and culminated in an
ONS decision (under ESA95), that Network Rail was a private sector company. Consequently, its debt did
not form part of the public sector debt. Eurostat confirmed their agreement with this decision and there is
more information on the classification of Network Rail on the ONS website.
ESA2010 provides considerably more guidance on the classification of bodies and how to recognise public
sector control. It also includes some new guidance on how to recognise control in not-for-profit bodies such
as Network Rail. This guidance has some important differences compared to ESA95. ONS has therefore
reviewed the classification of Network Rail using the revised guidance in ESA2010 and the accompanying
ESA2010 Manual on Government Debt and Deficit. This has resulted in the classification of Network Rail in
central government under ESA10 rules.
A separate document on treatment of network rail under ESA10 guidance has been released today. This
includes more detail on the classification decision and the impact of reclassifying network rail. Overall, this
will add around £30bn to public sector net debt in 2012/13.
4. Impact of introducing ESA10 on Public Sector Net Borrowing
Public sector net borrowing is the difference between total accrued revenue/income and total accrued
expenditure (both current and capital). There are a number of changes in ESA10 that impact on public
sector net borrowing and these are described below.
4.1 Network Rail
The network rail reclassification (outlined above) moves revenue and expenditure into central government
where expenditure in 2012/2013 exceeds income by around £2.5bn. Thus, the impact of reclassifying
network rail from private sector to central government is to increase public sector net borrowing by around
£2.5bn in 2012/13.
4.2 Local Authority funded pension schemes
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Transition to ESA10: Impact on Public Sector Finances
ESA10 requires a change in treatment of funded pension schemes where there is a shortfall between the
annual change in entitlements and contributions. This specifically affects the calculation of local government
contributions to the Local Government Pension Scheme (a funded scheme administered by the private
sector in the interest of Local Authorities' employees and ex-employees). Imputed social contributions by
Local Authorities must now be added to the existing actual contributions to cover the shortfall between
entitlements and contributions. In addition to this methodological change, ONS now has better source data
from which to estimate the actual social contributions paid by the Local Authorities into this scheme.
These changes to the valuation of pension contributions increase compensation of employees (a subcategory of current expenditure) for local government. The impact of the change is therefore to raise public
sector net borrowing by around £2.5bn in 2012/13.
4.3 Changes to treatment of tax revenue
Changes to the rules on how certain aspects of tax revenue should be treated will change public sector
expenditure and public sector income by equal amounts. These changes have no impact on the level of
public sector net borrowing.
European Union (EU) Value Added Tax (VAT) based payments
ESA10 introduces a new current transfer specifically for VAT and Gross National Income (GNI) based EU
contributions. This means that EU VAT (3rd resource) payments currently presented in National Accounts
as tax paid direct to the EU, must now be shown as paid to the UK Government and then distributed as a
transfer to the EU. This reflects that UK VAT is being used to define the level of a budget payment to the
EU, rather than EU VAT being a specific tax on products imposed by the EU.
The impact of this change is to raise current tax receipts and current transfers (expenditure) by an equal
amount (around £2.5bn in 2012/13). The impact on public sector net borrowing is therefore zero in all years.
Accrual recording of taxes
ESA10 changes to guidance on accrual recording of taxes require tax write-offs, recorded for Council Tax
and National Non-Domestic Rates, to be deducted from the assessment of tax obligations. This is different
to ESA95 where, for these specific taxes, tax is recorded based on the expected amount of tax which would
be collected with a corresponding capital transfer back to households and private sector to reflect that
proportion of tax which was written-off. This has a relatively small impact (around £0.2bn in 2012/2013),
reducing the level of current receipts and capital expenditure of government by equal amounts. The impact
on the level of public sector net borrowing is therefore zero in all years.
4.4 Changes to rules on capitalisation of non financial assets
ESA10 requires significant change in the capitalisation of non-financial assets. This mainly affects the
current to capital ratio for public sector net borrowing rather than the level of borrowing.
Capitalisation of Single Use Military Equipment (weapons systems and ammunition)
Government spending on Single Use Military Equipment (SUME) is treated under ESA95 as intermediate
consumption (current expenditure for public sector finances). This is now required to be treated as capital
formation (capital expenditure) under ESA10. Broadly, Weapons Systems (Planes, Tanks etc.) become fixed
capital expenditure and ammunition/bombs are treated as military inventories. The value of discharged
ammunition remains as current spending. The difference between value of discharged ammunition and the
value of purchased ammunition becomes change in military inventories (capital expenditure).
For national accounts, the impact of this change is to increase capital consumption which increases Gross
Domestic Product (GDP) and Gross National Income (GNI). However, the consumption of fixed capital is not
part of the calculation of Public Sector Net Borrowing. The impact is therefore simply to cause a switch
between current and capital expenditure.
In 2012/13 the likely impact of this change in public sector net borrowing is to move around £4.5bn of current
expenditure to become capital expenditure.
Capitalisation of Research and Development (R&D)
Under ESA10 R&D activity (defined as creative work undertaken on a systematic basis in order to increase
the stock of knowledge) is also required to be capitalised for the first time.
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Transition to ESA10: Impact on Public Sector Finances
For R&D purchased by government, the change will cause a switch of government spending out of
intermediate consumption (current expenditure) into fixed capital formation (capital expenditure) in exactly
the same way as capitalisation of weapons systems. The impact on GDP is therefore limited to increased
capital consumption. The impact for public sector finances is simply to switch between current and capital
expenditure (impact is likely to be around £1.5bn in 2012/13) with no impact on public sector net borrowing.
.
Own account R&D activity by government units is considered output for own final use under ESA10 and will
therefore be valued by sum of costs incurred (intermediate consumption + compensation of employees +
capital consumption).
For government own account R&D, the expenditure leading to production of R&D is not removed from
compensation of employees and intermediate consumption (current expenditure). Rather, an increase in
capital expenditure equal to sum of costs is recorded with a corresponding increase in output for own final
use (output for own final use is recorded as negative current expenditure within the public sector finances).
This means that GDP is changed only by the impact of the increased capital consumption, as with R&D
purchased by government. For public sector finances the impact is again to reduce current expenditure and
increase capital expenditure by the same amount (likely to be around £2.0bn in 2012/13). Therefore the
overall impact on public sector net borrowing is again zero.
Capitalisation of decommissioning costs
ESA10 explicitly requires decommissioning (terminal) costs to be included in calculation of the costs of
ownership transfer. As with ESA95, costs of ownership transfer are currently treated as fixed capital
formation and written-off as consumption of fixed capital in the year of disposal or acquisition.
As decommissioning costs were not separately mentioned in ESA95 there is currently no special treatment
or source for them in the National Accounts. Decommissioning is carried out in a number of industries
covering many assets. In Blue Book 2014, it will be assumed that the decommissioning costs of oil and gas
and nuclear infrastructure represent the majority of decommissioning costs. Adding decommissioning costs
to transfer costs will result in higher levels of gross fixed capital formation (capital expenditure in public
sector finances) and consumption of fixed capital.
In the public sector finances this change will add around £0.5bn to public sector capital expenditure in 2003
for decommissioning costs associated with the Sellafield nuclear site. This raises the level of public sector
net borrowing. There are a number of other years with somewhat smaller impacts but no expected impact in
2012/2013.
4.5 The treatment of the Royal Mail Pension Plan (RMPP).
In April 2012, the historic pension liabilities (estimated at around £38bn) and some of the assets of the
RMPP (valued at £28.6bn) were transferred to government. This transfer saw the pension plan move from
being a funded scheme to an unfunded scheme. Under ESA95 and ESA10 rules, the pension liabilities of
unfunded pension plans are contingent liabilities and are therefore not recorded in the National Accounts.
Specific guidance in the ESA95 version of the Manual on Government Deficit and Debt, regarding pension
scheme transfers to government required that financial assets transferred as part of pension schemes
should be recorded as capital transfers (receipts) reducing government borrowing. This guidance led to the
recording of a one-off capital transfer in April 2012 which reduces the public sector net borrowing in that
period by £28.0bn. This is slightly less than the total value of the assets as some of them were in the form of
non-financial assets (e.g. buildings). These are recorded as capital expenditure by government on transfer
and only as capital receipts once they are sold.
ESA10 provides much greater detail on the treatment of pensions and in the case of pension scheme
transfers requires that the financial assets transferred are considered as a financial advance for the
prepayment of social contributions. This means that under ESA10 there is no one-off reduction to public
sector net borrowing in April 2012, but future borrowing will be less than it otherwise would be as pension
benefits paid under the RMPP would be off-set by imputed revenue. The imputed revenue reduces the initial
£28.0bn financial advance until it is extinguished. The treatment of the small amount of transferred nonfinancial assets does not change under ESA10.
The current guidance based on ESA10 refers to the transfer of pension schemes where the pension
obligations/liabilities are matched by the transferred assets. In the case of the RMPP the obligations have
been estimated to be around £9bn greater than the assets transferred. ONS is currently in discussion with
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Transition to ESA10: Impact on Public Sector Finances
Eurostat over how to treat this, but it may be that this shortfall in the pension scheme will be best reflected by
a capital expenditure by government at the point of transfer in April 2012. This would increase public sector
net borrowing in that period by £9bn.
The overall impact from implementing ESA10 could therefore be a £37bn increase in public sector net
borrowing in 2012/13 (although one of the headline measures of net borrowing would exclude that one-off
impact in order to facilitate comparison between years). However, ONS will only be able to confirm the
correct treatment of RMPP in February after concluding bilateral discussions with Eurostat
4.6 The treatment of mobile phone licences.
Under ESA95 ONS currently treats Government sale of mobile phone licenses, as sale of an intangible nonproduced asset (i.e. a one-off receipt). The revised ESA10 guidance on permits to use natural resources
(recently confirmed in the Manual on Government Deficit and Debt), suggests that the 3G mobile phone
licences should be viewed as permits to use radio spectra. Under ESA10 income from these permits should
be treated as rent. This was, in fact, how ONS was originally treating this income before implementing new
ESA95 based guidance from Eurostat in 2011.
Eurostat have confirmed that treatment of receipts for 4G licences in 20012/13, as sale of an intangible nonproduced asset, has not been affected by the move to ESA10. ONS is waiting for further guidance from
Eurostat which applies to the 3G licence sale.
Payments of rent are accrued over the length of the lease even if paid up front in a lump sum. The
consequences of implementing the likely ESA10 change for 3G licences would be to record the £22.5bn
receipts for the licences (which last 20 years) as annual income of around £1bn per annum, rather than
recording a one off receipt of £22.5bn in 2000.
As with Royal Mail Pension Plan, ONS will only be able to confirm the correct treatment of 3G mobile phone
licences in February after concluding bilateral discussions with Eurostat.
6. Communication
The implementation of ESA10 methodological changes mean that there will be more change in Blue Book
2014 and ESA10 consistent Public Sector Finances than is usual. To keep users informed ONS will publish
a series of articles, hold a number of seminars and interact with user groups in the lead up to publication.
The planned communication includes:
1. Detailed methods and impacts: between January and June 2014 further articles will be published
and seminars will be held. These will provide detailed methodological information and include
expected impacts. Information will also be provided outlining expected changes to publications,
including table layouts, series information and series identifiers.
2. For Public Sector Finances a shadow table will be published from June 2014 within the Public
Sector Finances publication.
3. Reminder: August 2014 will focus on highlighting the key changes that users can expect in Blue
Book 2014.
4. Publication: in September 2014 the Quarterly National Accounts Q2 2014, United Kingdom
Economic Accounts Q2 2014 and the Balance of Payments Q2 2014 will be published on an ESA10
basis. The Public Sector Finances will also be published on this basis. An article providing
economic commentary and impact analysis of the revisions, more detailed articles relating to specific
changes and a seminar will accompany the publications.
ONS has a webpage dedicated to the ESA2010 and BPM6 Programme. Further information relating to
ESA2010 can be found on the Eurostat website.
7. ESA10 developments in 2015 and beyond
The UK will be implementing the new ESA10 concepts and methodology as far as practically possible by
September 2014. However, the UK, like most Member States, is seeking derogations covering specific parts
of the new regulation for a period beyond September 2014. These derogations allow Member States time to
put into place resources, methodology, systems and appropriate data collection to meet the requirements in
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Transition to ESA10: Impact on Public Sector Finances
full. Derogations are not allowed on areas where any of the key EU or Euro Area aggregates are
significantly affected. Negotiations on the UK derogations being sought began informally in mid-2010, and
formally in mid-2012. They will be legally accepted as part of a European Commission Decision in 2014.
ESA10 work that affects Public Sector Finances and is scheduled for completion in future years includes:
•
•
•
Implementation of the ESA10 change that requires recording payable tax credits on a gross (rather than
net) basis has been deferred until 2015, since the change has no impact on Gross National Income or
Public Sector Net Borrowing.
Under ESA10 allocation of non-market output into “non market output provided free of charge” and
“payments for non market output” becomes mandatory for the first time. ONS has applied for a
derogation to allow implementation of this change to be delayed until 2016.
Under ESA10 data covering government sub-sectors for “state government” and “social security funds”
are required to be delivered to Eurostat. ONS has applied for a derogation to allow implementation of
this change to be delayed until 2018.
As further information relating to the scope of future work becomes available it will be published on the ONS
website.
8. Conclusion
Adoption of ESA10 will cause significant changes to the National Accounts and Public Sector Finances. This
article outlines how the key public sector finance aggregates are impacted by the change. However, the
programme of work over the next year is extremely challenging and plans may change prior to
implementation.
ONS will continue to communicate with users regarding progress and any changes to planned
implementation. Where possible the detail of the changes will be explained and expected impacts provided.
The release of data on an ESA10 basis will be accompanied by additional analysis and seminars.
9. Acknowledgements
The author would like to thank colleagues across ONS for their contributions to this article, in particular: Kate
Marks, Iain Bell, and David Bailey.
10. Contact
Peter Gittins
Public Sector and Households Division
[email protected]
Telephone: + 44 (0)1633 455610
Office for National Statistics