Update of the 1993 SNA - Key Issues and Recommendations

1. 11th OECD-NBS Workshop on National Accounts25-28 September 2007Beijing Update of the 1993 SNA – Progress Report and Main Issues Paul Schreyer, OECD

2. Contents • Background • Three issues with potential implication for China • Next steps

3. Background • 2003: United Nations Statistical Commission (UNSC) calls for update of the 1993 System of National Accounts • Reason: bring SNA into line with the new economic environment, advances in methodological research and the needs of users. • In principle, no fundamental changes to the 1993 SNA that would impede its implementation

4. Background • Intersecretariat Working Group on National Accounts (ISWGNA) (Eurostat, IMF, OECD, UNSD, World Bank) to organize and coordinate the update project, assisted by a project manager and editor. • SNA, Rev.1to have two deliverables: • core chapters, in 2008 • remainder, in 2009.

5. Background • 2007: consolidated list of recommendations presented to UNSC to which it gave its assent • 44 issues in total • UNSC emphasized need for the broadest possible involvement of the global statistical community • Advisory Expert Group (AEG) on National Accounts

6. Background • Project website, http://unstats.un.org/unsd/nationalaccount/snarev1.asp, which promotes transparency and wide involvement of national accounts experts • Well-defined process • Several sub-groups to deal with specific areas such as Canberra II Group on Non-financial assets

7. Issue 1: Pension schemes • 1993 SNA distinction: • Employer pension schemes: a means of redistributing income over time for a single individual. • Social security schemes: redistribution of income among a set of individuals at a single point in time.

8. Private pension schemes • 1993 SNA: social contributions by an employer and employee in a period should be the amount actually paid into a pension fund. • For a defined contribution scheme, this is correct and complete since the eventual payment depends only on the amounts set aside in a pension fund. • For a defined benefit plan, there is no guarantee that the amounts set aside will exactly match the liability of the employer to the employee.

9. Private pension schemes • New calculation for defined benefits: • employer’s contribution in period t = increase in the net present value of the pension entitlement the employee has earned in the period in question, + costs by pension fund for operating the scheme - contribution by employee • Calculation should take not take into account impact of any future pay increases on the ultimate pension benefit.

10. Private pension schemes • NPV of future pension payments rises as retirement gets closer, even if there are no contributions in a given period • This is treated as imputed flow of property income payable to the employee and returned to the pension fund as a social insurance contribution supplement. • Liability of the pension fund to the employee is to be shown in the financial account and balance sheet.

11. Private pension schemes • The assets of the fund are then to be regarded as belonging to the fund and not (as stated in the 1993 SNA) as belonging to the employee. • Any excess of the liabilities over the available assets may represent a claim of the pension fund on the employer and vice versa.

12. Government employer schemes • How should pension entitlements of schemes for government employees be recorded, given the diversity of funding arrangements across countries? • A standard table should be prepared: • pension entitlements accruing to households for all pension schemes, regardless of the means of funding or the category of the unit bearing the responsibility to meet the obligations of the pension scheme.

13. Government employer schemes • Flexibility about whether the full increase in the entitlements will be shown as income and saving of households • In cases where particular schemes are not carried forward, a reasoned explanation for why this is not done will be required. Internationally agreed criteria for when a scheme might not be carried forward should be developed

14. Quantitative impact of change to treatment of pension schemes • Likely to vary considerably between countries • Compensation of employees, GOS and household saving could change • If government liabilities are recognised for unfunded employer defined benefits scheme for government employees then the ratio of the SNA public debt to GDP could rise substantially, maybe by between 20% and 80%.

15. Issue 2: R&D capitalisation • In the 1993 SNA, research and experimental development are current expenditure • Proposal to “capitalise” R&D already in the 1993 SNA, but no agreement on how to do it. • Problems of implementation also recognised in current Revision • Rev. 1: In principle, R&D should be recognized as part of capital formation. However, before the objective can be reached, satellite accounts will provide a useful way of working towards solutions.

16. R&D capitalisation • R&D definition as in OECD Frascati Manual “creative work undertaken on a systematic basis in order to increase the stock of knowledge, including the knowledge of man, culture and society and use of this stock of knowledge to devise new applications.” • This excludes, however, human capital formation • By convention, since much R&D is carried out on own account, it should be valued at cost.

17. R&D capitalisation • In practice, the information collected in accordance with the Frascati Manual will provide estimates of R&D expenditure; discussion is ongoing to make adjustments to the Frascati framework to meet the needs of the SNA more closely. • A detailed guide to implementation is being worked out by the OECD.

18. R&D capitalisation • All R&D expenditure that is sold or is expected to bring a benefit in the future to its owner (including for the provision of public services in the case of R&D undertaken by government) is included within the asset boundary. • Only R&D that brings no economic benefit discernable at the time of its completion is excluded. • With the inclusion of R&D in the asset boundary, patented entities will no longer be separately identified as such in the system, but they will be subsumed into R&D assets.

19. R&D capitalisation: some difficulties • The technical difficulties fall into three groups: • scope of R&D capital formation, • methods for compiling R&D price indices and capital measures, • collecting the raw data to derive estimates of R&D capital formation.

20. R&D capitalisation: some difficulties • Scope of R&D capital formation, • Treatment of freely available R&D: • Does not belong to anyone, so can it be an asset • But then again, very hard to determine • Price indices and capital measures • Most R&D is own account  no market prices • Input price indices  ignore productivity change in the production of ‘knowledge’

21. R&D capitalisation: some difficulties • Pseudo price indices (eg price change of R&D intensive industries etc.) • Rate of depreciation • Raw data: • From Frascati Manual but adjustmentsneeded to R&D surveys • Capturing international flowsisdifficult

22. Issue 3: Goods for processing The situation • The 1993 SNA and the Balance of Payments Manual (BPM)treat goods that are sent abroad for processing and then returned to the country from where they were dispatched as undergoing an effective change of ownership. • Exports: when goods leave the first country • Imports when goods return to the first country.

23. Issue 3: Goods for processing The situation (2) • Full value of goods is shown in country that processes, even though the processor never has to pay for the value of the goods on entry. • Increasing importance of offshore processing, such treatment is increasingly questionable. • Also, different recommendation for goods being processed in one country for a second, which instead of being returned to the second country, are sold (on behalf of the owner in the second country) to a third country.

24. Issue 3: Goods for processing The recommended change • Imports and exports should be recorded on a change of ownership basis •  goods being processed in one country on behalf of another would no longer be part of imports and exports in the balance of payments and SNA. That would be a change from the 1993 SNA. • ownership principle : no transactions will be recorded for intra-enterprise (inter-establishment) deliveries when goods are passed from one establishment to another for processing and then returned.

25. Issue 3: Goods for processing • Input-output tables : they would reflect what each unit contributes to the production process rather than the physical technology, as previously was the case. • Implications for reconciliation of data on physical movement of goods (merchandise trade statistics) and the national accounts. • Import and export flows measured on an ownership basis are difficult to capture with customs-based trade statistics. It may be necessary to increasingly rely on business survey information as a statistical source.

26. Issue 3: Goods for processing • Quantitative impact • Lower estimates of output and intermediate consumption, but the reduction will be the same and so there will be no change to industry gross value added. • Exports and imports will also be reduced by the same amount, and for some countries the reductions could be relatively large.

27. Other important issues • Cost of capital services (see new Manual on Capital Measurement) • Treatment of military expenditure

28. Implementation • European countries • Revision of ESA by 2011 • Implementation by 2014 • Australia: 2009 • Canada: 2010 • United States: progressive introduction of changes with likely completion by 2012/13 • Korea: 2014 • Japan: no concrete plans yet