Download Background to Sector Classification

BACKGROUND TO SECTOR CLASSIFICATION
New harmonised European System of Accounting
This Sector Classification Guide describes a method of sector classification that is consistent with a new
harmonised system of economic accounts that will apply to all the members of the European Union (EU)
The rules of the system are published in the European System of Accounts 1995 (ESA95). It updates the 1979
edition of ESA and is consistent with the System of National Account 1993 (SNA93), which was developed by a
number of international organisations.
The enforcement of ESA95 is backed by European law and will be introduced in several stages over the next few
years throughout the EU.
The first ESA95 accounts in the UK are in the United Kingdom National Accounts: The Blue Book 1998 which
was published in the autumn of 1998.
Economic accounts provide information on domestic and national product, income and expenditure, taxation,
capital formation, public finances, international transactions, and other economic statistics, broken down in a
variety of different ways. These breakdowns rely on rigorous classification systems.
Classification Systems
Economic units (individuals and organisations) are classified into groups with similar characteristics so that their
economic and financial behaviour can be aggregated for analysis. Sector Classification divides the economy into
a relatively small number of institutional sectors with reference to their control, ownership and functions: for
example persons, households, corporations, public bodies, and the rest of the world. This is different from, for
example, the standard industrial classification (SIC), which groups together economic units in accordance with
their main activity without regard to ownership or who operates them. For example: Regional Health Authorities,
National Health Service Trust hospitals and private hospitals are all in different sectors but are classified to the
same activity in the SIC - health care.
Sector classification brings together groups of economic units which have common characteristics that are likely
to affect economic behaviour. Units within the same sector may be expected to react in a sufficiently similar
fashion to market, fiscal and monetary forces, to make aggregation meaningful for the purpose of economic
analysis.
Purpose of sector classification
One important feature of a national accounting system is the set of accounts summarising the
transactions of individual sectors. These sector accounts stand between the accounts which record the
economic activity of the nation as a single unit, and the accounts that are, or could, be drawn up by enterprises or
individuals. The main benefit of this framework is that it displays the relationships between different parts of the
economy and between different types of economic activity in a way that analysis of statistics of aggregate
national wealth cannot.
The sector accounts provide information on the contribution to the national aggregates by each sector and the
resources employed by each sector. The accounts also show transfers between sectors such as taxes, grants
and interest, as well as transactions in financial assets. These transactions illustrate the transfer of resources
between sectors and how each sector holds its wealth.
A significant aspect of sector classification in the United Kingdom is the separation of public and private sector
bodies. This is because the size and role of the public sector in the economy is of interest not only for
economic analysis but has also played a crucial role in the policies of many governments. Public sector net
saving, net borrowing, and net debt have targets in domestic economic policy and two of the economic
convergence criteria under the Maastricht Treaty cover general government sector deficit and debt.
PRINCIPLES OF SECTOR CLASSIFICATION
Sector classification begins by dividing the economy into institutional units. The whole activity of each institutional
unit is allocated to one, and only one, sector.
Institutional units
An institutional unit is
“An economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in
1
economic activities and in transactions with other entities”
The characteristics of most institutional unit are:
(a)
it is entitled to own goods or assets in its own right and so is able to exchange the ownership of goods
or assets in transactions with other institutional units;
(b)
it is able to take economic decisions and engage in economic activities for which it is itself held to be
directly responsible and accountable in law;
(c)
it is able to incur liabilities on its own behalf, to take on other obligations or future commitments and to
enter into contracts;
(d)
it should have either a complete set of accounts, including a balance sheet of assets and liabilities; or it
should be possible to compile a complete set of accounts if required that are economically meaningful
and legally sound.
Not all the characteristics apply to quasi-corporations and notional resident units (see below).
Types of institutional unit
There are four main types of institutional units for the purposes of sector classification
(a)
persons, or groups of persons in the form of households;
The individual members of multi-person households are not treated as separate institutional units. This is
because it is very difficult to draw up meaningful balance sheets or other accounts for members of the household
on an individual basis. For instance many assets are owned, or liabilities incurred, jointly by two or more
members of the household; income may be received by individuals and then pooled for the benefit of all
members; and expenditure decisions may be made collectively.
(b)
legal or social entities whose existence is recognised by law or society independently of the persons, or
other entities, that may own or control them.
These institutional units include companies, non-profit institutions, and government bodies. They are responsible
and accountable for economic decisions or actions they take, although their autonomy may be constrained to
some extent by other institutional units; for example corporations that are ultimately controlled by their
shareholders.
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SNA 1993 p87
c)
quasi corporations
Some unincorporated enterprises belonging to households or government may behave in much the same way as
corporations in that their main source of funds is the sale of goods and services. Such units are treated as
separate institutional units when they have a complete set of accounts and autonomy in their day- to day
management even though they do not have independent legal status. The de facto relationship of a quasi
corporation to its owner is that of a corporation to its shareholders.
The existence of a complete set of accounts is not a sufficient condition for producers of market output to be
treated as quasi-corporations. They must also enjoy the autonomy of decision that characterises institutional
units. Public producers that are not independent legal entities are not regarded as quasi-corporations because
they are unlikely to be sufficiently independent of government to satisfy the autonomy condition.
(d)
Notional resident units
Typically these are UK branches of foreign organisations. They are defined as:
i)
those parts of non-resident units which have a centre of economic interest on the economic territory of
the country . To have a centre of economic interest, a unit must engage in economic transactions for a
year or more which carry out a construction activity for a period of less than a year if the output
constitutes gross fixed capital formation;
ii)
non-resident units in their capacity as owners of land or buildings on the economic territory of the
country, but only in respect of transactions affecting such land or buildings.
Unlike other institutional units, notional resident units might not keep full accounts nor enjoy autonomy of
decision.
Allocating units to each sector
ESA95 gives precise definitions and guidance on how to classify institutional units to each sector.
In some instances bodies might be established with ownership, control, finance and strategic objectives
organised in such a way that they have attributes typical of more than one sector. The ONS is responsible for
deciding these borderline cases. In particular ONS frequently has to make decisions on the borderline between
private and public sectors. This has implications for some key economic statistics such as public sector net
borrowing.
Main attributes of each sector
A summary of the types and characteristics of units within each sector can be found on the Institutional Sectors
page (http://www.statistics.gov.uk/themes/economy/Articles/NationalAccounts/SectorAccounts/InstitutionalSectors.asp)