General Government Delimitation, Definition and the EDP compilation

Presentation Outline Definition of General Government Sector Delimitation The compilation and submission of EDP tables

Background Sectors and sub-sectors Notion of control Market/Non Market Non Market Public Enterprises Public Holding Corporations Special Bodies (SPVs)

Guidelines The Manual on Government Deficit and Debt is the definitive reference manual for determining the sector classification The latest edition (2013) is based on ESA95 After September 2014, ESA2010 will bring about further updates

Sector definitions: ESA2010 The general government sector (S.13) consists of institutional units which are non-market producers whose output is intended for individual and collective consumption, and are financed by compulsory payments made by units belonging to other sectors, and institutional units principally engaged in the redistribution of national income and wealth.

Sector Definitions (ESA 2010) The institutional units included in sector S.13 are for example the following:

Sector Definitions General Government Central Government State Government Local Government Social Security Funds

Sector Definitions PUBLIC SECTOR (public companies that are indirectly owned and controlled by government). ESA2010 – chapter 20 – defines the public sector.

Sector Definitions A resident unit is regarded as constituting an institutional unit if it has decision-making autonomy in respect of its principal function, and either keeps a complete set of accounts or it would be possible and meaningful, from both an economic and legal viewpoint, to compile a complete set of accounts if they were required.

Delimitation In both SNA93 (paragraphs 6.45 and 6.50) and ESA95 (paragraph 3.19), the distinction between market and non-market producers depends on whether or not prices charged for sales are economically significant. •A price is said to be economically significant when it has a significant influence on the amounts the producers are willing to supply and on the amounts purchasers wish to buy.

Delimitation The 50% criterion In ESA95, economically significant prices are defined as prices that generate sales covering more than 50% of production costs.

Delimitation The biggest issue concerning general government delineation is the market/non-market borderline.

Production costs “production costs” are the sum of intermediate consumption, compensation of employees, consumption of fixed capital and other taxes on production. For this criterion other subsidies on production are not deducted.

Delimitation ESA2010 introduces a new update to the definition of costs: Costs: “production costs are equal to .... plus costs of capital. .... For the sake of simplicity, the costs of capital may in general be approximated by the net actual interest payments.”

Special Purpose Entities - Special Bodies ESA 2010 provides more specific guidance on treatment of SPEs. (chapter 2.17-28)

CMFB as a consultative body CMFB is the competent body which will provide the necessary direction in case of borderline cases. CMFB / Eurostat make such decisions public (for the sake of transparency).

ESA 2010: Specific Updates Capitalisation of Research and Development Expenditure Eurostat set up a dedicated Task Force to prepare templates for supplementary tables of R&D with the long-term aim of capitalisation of R&D

ESA 2010: Specific Updates Task Force on R&D – Summary R&D expenditure will be capitalised under ESA2010 Estimates for the sector general government include freely available R&D The capitalisation of R&D expenditure impacts on GDP and affects via this channel the deficit ratio for general government.

ESA 2010: Specific Updates Change in the treatment of lump sum payments received from pension schemes. In ESA95, these had a direct impact on the deficit as they were treated as revenue (capital transfer received). In ESA2010, these will now be treated as financial advances, without any direct impact on the deficit.

THE EDP SUBMISSION These are a set of tables which show the debt and deficit position for S.13 for years y, y-1, y-2, y-3, y-4. Proposed updates to Regulation 479/2009 to improve the quality of statistical data in the context of the excessive deficit procedure.

Bi-Annual publication of EDP reporting Eurostat reports to the European Parliament and to the Council on the quality of the EDP data reported by Member States. The report includes an overall assessment of the actual data reported by Member States as regards to compliance with accounting rules, completeness, reliability, timeliness and consistency of the data

Central coordinating role of the NSI for EDP Following the crisis of statistics of some years ago, the European Statistical System is strengthening its independence. This change will be reflected in the updates to Regulation 479. The objective is to confirm that it is the national statistical authority which is fully in charge of the notification of EDP statistics.

Separation between statistics and forecasts The Commission is strongly recommending a clear separation between the function of forecasting versus the function of compiling statistics: NSIs do not make forecasts of the deficit and debt. Forecasts are made by Ministries of Finance, and Eurostat is itself not in a position to verify the quality of forecasts.

Powers of Investigation and financial sanctions for Eurozone Countries (1) Commission Delegated Decision of 29 June 2012 on investigation and fines related to the manipulation of statistics as referred in Reg. 1173/2011 on the effective enforcement of budgetary surveillance in the euro area (one of the 6-pack legislation on the 16 November 2011) increased Eurostat powers of investigation and imposed sanctions on the Member States concerning the manipulation of statistics.

Powers of Investigation and financial sanctions for Eurozone Countries (2) During an investigation Eurostat may request information, interview persons, conduct on-site inspection and accede to the accounts of all government entities. Total amount of the fine shall not exceed 0.2% of the latest official GDP.

Powers of Investigation and financial sanctions for Eurozone Countries (3) The fine maximum amount is established on following criteria: - seriousness and wider effects of misrepresentations - serious negligence or intentionality - work of one entity alone or two or more - repetition, frequency or duration of misrepresentation - MS cooperation vs obstruction

Extension of assessment of quality of data to upstream data sources (1) In April 2011, following the Greek crisis and Financial crisis, a Commission Communication ‘Towards robust quality management for European Statistics’ was issued. The Communication set out a strategy to give the EU a quality management framework for and the mechanisms to ensure the high quality of statistical indicators related to Reinforced Economic Governance.

Extension of assessment of quality of data to upstream data sources (2) Actions taken by Eurostat: - Strengthening the Governance of the ESS (Code of Practice, Independence of NSIs and Code of Confidence) - Preventive approach through internal country risk assessments and more focus on quarterly data - Upstream dialogue visits - Implementation of quality management framework in the EDP processes - Promote accrual based accounting in public finance