System of National Accounts Clementina Ivan-Ungureanu Training: Essential SNA: Building the basics Addis Ababa, February 2012

Content of the training 1.SNA -What is SNA -Towards the 2008 SNA 2.Basic concepts -Fundamentals -Main aggregates 3. Building the SNA -NSDS -SNA implementation strategy

Content of the training 4. Infrastructure for NA -Business register -Classifications -Statistical data sources -Administrative sources 5. Transition from administrative data to national accounts concepts 6. NOE: concept, content, estimation practices 7. Informal sector: concept, content, estimation practices

WHAT IS SNA

Content of the presentation What is SNA Need for SNA The 2008 SNA

Definition SNA is the internationally agreed standard set of recommendations on how to compile measures of economic activity in accordance with established accounting conventions based on economic principles.

Definition The recommendations are expressed in terms of a set of concepts, definitions, classifications and accounting rules that comprise the internationally agreed standard for measuring such items as gross domestic product (GDP), the most frequently quoted indicator of economic performance. The accounting framework of the SNA allows economic data to be compiled and presented in a format that is designed for purposes of economic analysis, decision taking and policymaking

Characteristics They are: -Internationally compatible -Harmonized with those in other social and economic statistics -Well-established and fixed for a long period -Focused on describing the economic process in monetary and readily observable terms -Flexible and multi-purpose

The economic circuit

SNA –Main uses Measure the structure and the evolution of the economy Establish a country’s economic and social policy: they are used by policy makers to analyse the current situation, identify the major problems and find a common solution for development Is the framework used for economic forecasting. International comparisons

SNA –Main uses ( cont) The SNA is the central statistical framework that must be used as the coordinating framework for all other statistics so as to obtain consistent definitions, and hence data.

NA for decision-making 1. Target of public policy: -Supply of money should grow in line with the nominal growth of GDP corrected for changes in the velocity of circulation (monetary policy target in order to avoid excessive inflation) -Government expenditure on education as %of GDP -Expenditure on R&D as %of GDP -Government expenditure < 60% of domestic product -Contribution to military expenditure, -The burden of taxes and social security contributions as a % of national income

NA for decision-making (cont) 2. Tax or aid measure for nations and regions. -The contributions to the international organisations like UN, OECD and IMF and to supra-national economic and political unions, like the EU. -Regions with a relatively low gross domestic product per region per capita receive funds

NA for decision-making ( cont) 3. Automatic adjustment for price changes. -Government expenditures adjusted with the price- change in GDP -Multi-annual contracts by local authorities and non- profit institutions are adjusted with the price change in net material consumption -The budget by local authorities and non-profit institutions can be determined by using for the various types of expenditure and for some sales and tariffs indices from the national accounts.

Main users Administrative users Economic policymakers Economic modelers Masse media, public Other users (financial markets etc) International organizations

Promoting NA NA and statistics are commonly not well marketed ( monopolistic product) NA is like a good and should be promoted Marketing efforts: -stress the main purposes of NA -make the NA an attractive statistics Point to the value added of NA to efficient and democratic-decision-making.

Education The general knowledge of data users and compilers should be raised Providing guidance to users: presentation of the concepts, methods, clear tables with data Courses for various groups of data users and at various levels. More prominent place in the research Investments in education will reduce misinterpretation, will increase interaction between data compilers and data users. In the long run, this will also improve the national accounts as a description and tool for analysis and policy

TOWARD THE 2008 SNA

Evolution The roles and uses of the national accounts have developed over time and have been stimulated by major events, like the economic crisis in the thirties, the Second World War and European unification.

Historical questions Production and/or distribution matters? Does government produce? Are services relevant? What production and income arises from financial activities? How to show changes over time? How to compare over nations? Can national accounts say something about wellbeing (environment, natural resources, sustainability…)?

Early estimates

Revolutionary decades ( ) In the period , national accounting was drastically transformed. It was a revolution in terms of the use of the national accounts

Period Uses: PPP: international comparison of real income Systematic analysis of long term growth Input-output analysis Econometric modelling of national economies Macro-economics development Public finance in a macro-economic framework Monetary policy linked to national income instead of gold Balance of payments in a macro-economic framework

The era of the international guidelines ( )

Update - The process : Statistical Commission called for update 44 issues for review ISWGNA to coordinate and manage with the assistance of an AEG (5 meetings) TFs and WGs, broad consultation March 2007:SC adopted recommendations 2008 UNSC Bureau approved Vol UNSC Bureau approved Vol. 2

Theme based recommendations 1.Globalisation 2. Financial instruments and institutions 3. Government and the public sector 4. New economy and non-financial assets 5. Informal sector 6. Environment

Changes 1. Statistical units and issues of classification and sectoring 2. Production boundaries for output and intermediate consumption 3. Assets 4.Other changes

The issues reviewed Non-financial assets (22 issues) Financial services (8) Financial instruments (6) Government and public sector (7) The rest of the world (10) Units (2) Informal and illegal activities (2) Other issues (1)

Main recommendations with impact on GDP -Research and development is not an ancillary activity -Compilation of own account production by including return in capital -FISIM estimation refined -Extension of the assets boundary and government GFCF to include expenditure on weapons systems -The asset category “computer software” modified to include databases

Example – military expenditures

Treatment of GFCF The SNA/ESA 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,” are treated as GFCF; - “destructive military weapons designed for combat” as rockets, missiles and their warheads and, by extension, warships, submarines, fighter aircraft and bombers, and tanks are considered destructive and are not treated as fixed assets, but IC of government

Problematic issues This treatment is problematic for several reasons : -It fails to recognize that weapon systems provide a nation with economic benefits by protecting the liberty and property of its citizens -It fails to recognize the role of capital in the production of defence services. -It fails to recognize that existing military equipment have value and can be sold.

Problematic issues -The distinction between destructive equipment and non-destructive equipment that can be used for peaceful purposes is difficult to make in practice. -The treatment of military equipment used by the military is inconsistent with the treatment of the same equipment (for example, armoured vehicles) used by internal police. -The treatment is inconsistent with the latest international public sector financial accounting standards.

Main reasons to change a. 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

Main reasons to change - cont b. The weapons have value in global resale markets; consequently, their exclusion from the asset boundary implies that the balance sheets understate the market value of the assets held by governments. c. Destructive military equipment provides a nation with real economic benefits by protecting its citizens and their property – provide a defensive service.

Main reasons to change - cont d. Adoption of new standards of accounting The specialist military equipment is classified as property, plant, and equipment and require to be depreciated over their useful lives. International Federation of Accountants recommends that NA recognise that military equipment can provide economic benefits to the economy in the form of defence services, in more than one period

Recommended changes of the 2008 SNA Classification of the military weapon system as fixed assets based on the same criteria than the other assets GFCF includes the military weapon system, including vehicles, other equipment (warships, submarines, military aircraft, tanks, missile carriers and launchers, etc ) used continuously in the production of defence services. Single-use items, such as ammunition, missiles, rockets, bombs, etc., delivered by weapons or weapons systems are treated as military inventories

Recommended changes of the 2008 SNA The destruction of the weapon systems classified as fixed assets should be recorded in the “other changes in volume of assets account,” the same treatment as for other fixed assets that are destroyed in war. If the single-use items, which are classified as inventories, are expended, whether in combat or in training exercises, their use should be classified as intermediate consumption by general government, with an reduction in inventories.

Treatment in national accounts - weapon system Weapon system- in the 93SNA/ESA95 Weapon systems are treated as intermediate consumption by general government.

Example RoWTotal econo my Gen Gover nment NFCTransactionsNFCGen Govern ment Total econo my RoW 1P6 export of goods and services P7 Imports of Goods and ser 3 11 P1 Output P2 Intermediate consumption 11 P3.Final consumption expenditures

Treatment in national accounts - weapon system Weapon system- in the 2008SNA weapon systems are treated as GFCF

Ro W Total econ Gen gov NFCTransactionsNFCGen gov Total econ RoW 1P6 export of goods and services P7 Imports of Goods and services 3 Production accounts P1 Output 9817 P2 Intermediate consumption 88 K1 CFC 88 Use of disposable income account P3Final consumption expenditure 11 Capital account P51 GFCF -8 K1 CFC

Major implications General government value added and GDP would be higher by an amount equal to the consumption of fixed capital on weapon systems (8 in this example) General government net saving would be higher (lower) by the difference between gross fixed capital formation and consumption of fixed capital (11 – 8 = 3 in the example)

Issues of implementation Affect other international tranzactions Transfers of military equipment from one country to another would need to be reclassified as capital transfers rather than current transfers, a change presented in the Balance of Payments Manual. The Government Finance Statistics manual would also clearly need to be changed to reflect this set of recommendations.

Issues of implementation Some obstacle for implementation -Secret of the data -Luck of data concerning munitions to include in the inventory

The 2008 SNA implementation strategy

Background of the 2008 SNA implementation  The 39 th session of UNSC in 2008 requested the ISWGNA to come up with an implementation strategy  Long term development of SNA and the its implementation strategy  International Conference on International Outreach and Coordination in National Accounts for Sustainable Growth and Development, 6-8 May 2008, Luxembourg  High Level Forum for the Long-Term Development of the SNA, Nov 2008, Washington DC  Inputs from these events considered by ISWGNA for formulating the 2008 SNA implementation strategy

Luxembourg recommendations  Luxembourg conference was attended by developing countries, development partners  It is recognized that availability of the good quality basic economic statistics in a sustainable manner is key for implementation of international standards on NAs and economic statistics  Direction guiding the LRs can be characterized as  global coordination  regional implementation  to strengthen the national statistical capacity for the compilation and reporting of national accounts and related basic statistics.

Luxembourg recommendations 1. Strategic Planning Frameworks (SPF) 2. Coordination, monitoring and reporting 3. Global Governance 4. National Statistical Capacity Building 5. SNA Knowledge Platform: statistics, information technology and management

SNA implementation- problem  Insufficient staff and training.  Coverage of economic activities – data collection mechanism and supporting infrastructure need to be improved  Quality and policy relevance of basic economic and macroeconomic statistics are not well promoted  Lack of modern management, ICT infrastructure  Lack of coordination between TAs providing country, regional and international agencies  Reference manuals and compilation guidance not easily accessible

Implementation strategy Objectives  Promoting international coordination among development partners;  Implementing regional programmes, guidelines and procedures for coordination, monitoring and reporting on performance;  Strengthening national statistical capacity for national accounts and related basic statistics;  Advocating the use of NA and statistics in general for policy purposes

Implementation programme  The Implementation Programme for the 2008 SNA and supporting statistics represents a global statistical initiative  Objectives: -Make the conceptual change over from the 1993 SNA to the 2008 SNA -Improve the scope, detail and quality of the national accounts and supporting economic statistics

Principles of the global statistical initiative  strategic planning  coordination, monitoring and reporting  improving statistical systems

Actions to put in practice the global statistical initiative 1. Use of National Strategies for the Development of Statistics (NSDS) as the strategic planning framework 2. The programme information structure built around the statistical production process, scope and compliance for the national accounts and supporting economic statistics 3. The modalities of statistical capacity building through training and technical cooperation, publication of manuals and handbooks, research and advocacy 4. The stages of implementation leading to the change over to the 2008 SNA

Implementation stages 1.Review: Review of strategic framework and detailing of national and regional implementation programmes 2. Adaptation Adaptation of classification frameworks, business registers and frames, surveys, administrative data sources and information technology infrastructure 3.Application Application of adapted frameworks and source data, backcasting and change over to 2008 SNA.