Measurement of capital stocks for government in the UK Nollaig Griffin Working Party for National Statistics OECD October 2005

Overview Current UK methodology (PIM) Alternatives to the PIM Whole of Government Accounts Application to the National Accounts Indicative data Conclusions and future plans Discussion points

Current UK Methodology Perpetual Inventory Method (PIM) Inputs –Gross fixed capital formation –Assumptions about asset lives –Other assumptions –Straight-line depreciation For central government, investment inputs are based on figures from HM Treasury (Dept. of Finance)

PIM: advantages and disadvantages Recommended “wherever direct information is missing” [ESA 95] Cheap and convenient Used internationally Generally predictable BUT Many assumptions “probably less reliable than most other official statistics” [OECD manual]

Alternatives to PIM Outlined in OECD (2001) Measuring Capital manual Statistical surveys –Expensive; quality dependent on respondents’ records Published company accounts –Valuation different for tax or other reasons Balance of fixed assets –Can be a “valid alternative to PIM”, but severe practical difficulties Administrative records –Can be used for certain asset types; “usually preferred to estimates based on the PIM”

Whole of Government Accounts (WGA): overview HM Treasury programme Consolidated departmental resource accounts –Assets and liabilities –Capital and reserves –Income and expenditure Based on UK Generally Accepted Accounting Practice (GAAP) with some modifications UK is the forerunner –USA, NZ, Australia, Canada, Sweden, Iceland produce some form of WGA –Other countries taking steps in the same direction

WGA: Application to the national accounts May present a valid alternative the PIM for the central government sector, Will cover local government and public corporations in the future Issues to consider: –Valuation and depreciation –Coverage –Impairments

WGA and NA: Valuation and depreciation SNA 1993 requires replacement cost WGA uses modified historic cost accounting –Asset values are reviewed regularly –Indices used in the intervening periods Under SNA 1993, capital consumption must be calculated from values based on the remaining benefits to be derived from the use of the asset WGA depreciates stock by “allocating the cost…of the assets as fairly as possible to the periods expecting to benefit from their use”

WGA and NA: coverage Asset types are broadly consistent between the two frameworks WGA provides estimates of goodwill and single use military equipment which SNA 2008 will require Provides assets under construction separately Treatment of development expenditure and computer software will have to be agreed

WGA: Impairments WGA values assets according to the economic benefits they are expected to provide in the future Audits can prove previous estimates to have been incorrect, leading to an impairment Impairments resulting from “normal wear and tear and foreseeable obsolescence” apply to capital consumption Impairments resulting from market fluctuations do not apply Challenge is to identify appropriate figures; focus on getting this right at the macro level

Indicative data

Conclusions and future plans Reasons for using WGA data: –Government bodies can make better estimates of stock and depreciation than the PIM does –Fully audited data –Asset valuation approximated replacement cost and is over the operating life of the asset Future plans –Agree these concepts (comments welcome) –Work with HMT to quality assure data

Discussion points The relationship between national accounts and resource accounting/GAAP The use of impairments to measure capital consumption Any other issues