Capitalization of Military Weapons Systems in the U.S. National Accounts

1. Capitalization of Military Weapons Systems in the U.S. National Accounts Brent R. Moulton Working Party on National Accounts, OECD Paris October 25–28, 2011

2. Why SNA 2008 capitalizes weapons • SNA 2008 recognizes that military personnel are engaged in production and use weapon systems continuously in the production of defense services • Weapon systems have value and can be resold • Consistent with international public sector accounting standards • Service lives and depreciation account for decline in value over time and the need for eventual replacement

3. Effects of new treatment • SNA 1993 treated purchases of weapons systems as intermediate consumption • SNA 2008 reclassifies weapons purchases as gross fixed capital formation (GFCF) • Lowers final consumption expenditures and raises GFCF by equal and offsetting amounts • SNA 2008 includes weapons systems in consumption of fixed capital (CFC) • Raises final consumption expenditures and GDP

4. Effects on U.S. national accounts • GDP level - for 2010: • Purchases of weapons systems were about $105 billion (or 0.7 percent of GDP) • Reclassified from consumption expenditures to GFCF • CFC for weapons systems was about $74 billion (or 0.5 percent of GDP) • Raised general government final consumption expenditures and GDP • Modest effects on GDP growth rate, trends

5. Perpetual inventory method • CFC and net stocks are calculated using the perpetual inventory method (PIM) • Method is described by: • OECD, Measuring Capital: OECD Manual 2009, second edition • Bureau of Economic Analysis, Fixed Assets and Consumer Durable Goods in the United States, 1925–97, (2003), available at www.bea.gov

6. Outline of PIM • Determine age-price/depreciation profile for each type of asset • May be geometric or straight-line • Determine retirement profile (straight-line) • Apply profiles to net stock (geometric) or to time-series of investment (straight-line) at constant prices • Calculate end-of-period net stock as beginning stock plus investment less other changes in assets less depreciation (at constant prices) • Reflate to current prices

7. Setting depreciation/service lives • For service lives, BEA staff consulted with staff from the Department of Defense • Declining balance rates were used to convert service-life information to depreciation rates • Geometric depreciation profiles are used for all asset types except missiles, which use straight-line • For more information, see Fixed Assets and Consumer Durable Goods, available at www.bea.gov

8. BEA depreciation rates/service livesExamples – selected weapons system assets

9. Other changes in assets • For weapons systems, other changes in assets may represent war losses or the scrapping of equipment after a war. • War losses affect the PIM calculation in the following ways: • The loss itself is subtracted to derive end-of-period net stock. • Depreciation on the loss is computed using a half-year convention. This “depreciation” is subtracted from both beginning-of-period net stocks and CFC.

10. Implementation in U.S. accounts • Based on advisory expert recommendations, BEA began capitalizing military weapons systems in its national accounts in 1996 • For international comparability, data submitted to OECD apply the SNA 1993 treatment • This is the only NIPA/SNA adjustment that affects GDP • When BEA implements the other major SNA 2008 changes in 2013, it will no longer need to make this adjustment