Download 19 Military expenditures

Capitalisation of Military
Expenditures (Issue 19)
Gulab Singh
UN STATISTICS DIVISION
Economic Statistics Branch
National Accounts Section
UNSD/NA/GS
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Military Equipment
Current treatment in 1993 SNA
 Provision of defence services is an important
function of the government.

Total military expenditure is very significant worldwide in both high and low income countries and
accounts for about 2.5 per cent of world GDP.

Provision of defence are construed as a form of
production from which people benefit and for
which they are prepared to pay individually or
collectively. (1993SNA 6.169)

Provision of defence, like any other productive
activity, does require the repeated or continuous
usage of certain durable goods over a number of
accounting periods.
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Current treatment in 1993 SNA

The 1993 SNA (6.168-170) draws a distinction
between two types of durable goods used by the
military:
 those “that are used in much the same
way as in any other type of production”
 durable goods, including “airfields, docks, or other
facilities used as bases,” can potentially be used
for civilian purposes and are treated as fixed
assets.

“destructive military weapons designed for
combat.”
 durable goods—“rockets, missiles and their
warheads” and, by extension, “missile silos,
warships, submarines, fighter aircraft and
bombers, and tanks” are considered destructive
and are not treated as fixed assets.
 treated as intermediate consumption by general government
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Problems and inconsistencies in the
present treatment

An armoured vehicle used by police for internal
security is treated as a fixed asset, even though an
identical vehicle purchased by the military would be
treated as intermediate consumption.

The distinction between military equipment that can
be used for civilian purposes and the equipment that
cannot is difficult to make in practice and may lead to
inconsistencies between countries.

It fails to recognise that existing military equipment
has value and can be sold.

Improper accounting: As weapons are recorded as
consumption or “spent” after production they may be
sold or exported in another accounting periods, the
accounting balance would require recording them as
negative component in govt. final consumption – a
counter intuitive entry in govt. accounts.
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Problems and inconsistencies in
the present treatment

The treatment is inconsistent with public sector
financial accounting.


International public sector accounting boards has
adopted new standards that classify specialist
military equipment as property, plant, and equipment
and thereby require these items to be depreciated
over their useful lives (IFAc’s IPSAS 17 paragraph 3)
Distinction between destructive and productive
assets appears normative and outside the usual
purpose and scope of the national accounting
system. Similar distinctions are not drawn in
other areas of the accounts—for example, both
equipment that generates pollution and equipment
used for pollution abatement and control are
treated as fixed assets in 1993 SNA.
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Problems and inconsistencies in
the present treatment

It fails to recognise that weapon systems provide
a nation with economic benefits by protecting the
liberty and property of its citizens

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military fixed assets in general meet the criteria
of fixed assets because they continuously
provide defence services to the nation’s
residents, protecting their liberty and property,
even if the equipment is merely serving as a
deterrent to aggressors.
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AEG recommendations

Military expenditure that meets general SNA
criteria for capital formation—that is, being
used in production over a period in excess of
one year—will be treated as capital
formation.

Weapon systems and military inventories
would be distinguished within fixed capital
formation and inventories, respectively.

Military items that are essentially designed
for use on a single occasion such as bullets,
bombs, grenades, and torpedoes are
designed for a single use, should be treated
as inventories.
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AEG recommendations

However, some single-use items, such as
ballistic missiles, may provide an on-going
service of deterrence against aggressors
and therefore, meet the general criteria for
classification as fixed assets.

In addition, gross capital formation and assets
should be divided into two groups: military and
non-military ones. It is important to do so since
for economic analysis one would want to link
non-military gross capital formation to long-term
economic growth.
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Implications of AEG recommendations

The recommendation would require moving
government final expenditure on weapons
to government gross capital formation.

General government value added and GDP
would be higher by an amount equal to the
CFC on weapon systems.

General government net saving would be
higher (lower) by the difference between
gross fixed capital formation and CFC.
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Thank You
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