Copyright 2010, The World Bank Group. All Rights Reserved. Introduction to the SNA, advanced Lesson 5 Government 1

Copyright 2010, The World Bank Group. All Rights Reserved. Background Government units are different from those in other sectors – they are financed directly by government rather than operating with a motive of making a profit on their operations Functions undertaken by government include redistributing income by paying social benefits such as aged pensions, subsidising activities such as child care, and providing health and education services – the extent to which such activities are financed by government very from one country to another The government sector is a major component of the public sector 2

Copyright 2010, The World Bank Group. All Rights Reserved. Government units The 2008 SNA defines government units as unique kinds of legal entities established by political processes that have legislative, judicial or executive authority over other institutional units within a given area Government units typically oversee three different kinds of outlays: – providing goods and services either to individuals or to the general community, either free or at prices that are not economically significant – providing civic infrastructure such as roads and bridges – redistributing income and wealth by means of transfers paid to other institutional units, mostly households 3

Copyright 2010, The World Bank Group. All Rights Reserved. Consumption goods and services The SNA distinguishes between individual consumption and collective consumption All consumption expenditure by households is incurred on their own behalf and so must be individual consumption On the other hand, consumption expenditure by general government may be either for the benefit of individual households or for the benefit of the community at large (collective consumption) – examples of individual consumption services provided by government are health and education – examples of collective consumption services provided by government are defence, police and fire fighting services 4

Copyright 2010, The World Bank Group. All Rights Reserved. Individual consumption Individual goods and services are essentially “private” as distinct from “public” goods and services An important characteristic of an individual good or service is that its acquisition by one household does not result in any significant benefit to the rest of the community When a government provides individual goods or services, it must decide how to allocate the goods or services to individuals – the criteria adopted to distribute the services may be very important if there is a limited amount available to be spent on these services 5

Copyright 2010, The World Bank Group. All Rights Reserved. Collective services Collective services are provided by government and can be delivered simultaneously to every person in a country, or to particular groups within the country, such as those in a region One of the main characteristics of collective services is that their use does not require the explicit agreement or active participation of any individual – in addition, providing a collective service to one individual does not reduce the amount available to others in the same country It is impossible to identify any individual’s use of collective services so individuals cannot be charged according to their use or the benefits they obtain 6

Copyright 2010, The World Bank Group. All Rights Reserved. 7

Actual final consumption 8

Copyright 2010, The World Bank Group. All Rights Reserved. The notion of government control The concept of “control” has been mentioned several times One aspect of control that is often difficult to determine objectively is whether government is exercising control over a particular unit – could be either a corporation or a non-profit institution The SNA defines control as the ability to determine the general corporate policy of the unit – the arrangements for the control of corporations can vary considerably so it is not possible to define factors that conclusively identify control The SNA sets out eight indicators to be used in determining whether or not government is controlling a corporation and five indicators for the case of an NPI 9

Copyright 2010, The World Bank Group. All Rights Reserved. Government non-profit institutions (NPIs) NPIs produce goods and services but their status does not permit them to be a source of profit to their “owning” units It can be difficult to determine an NPI’s sector – the main criterion is the sector which “controls” the NPI The SNA identifies 5 indicators that can be used in deciding if the government exercises control over an NPI: ( a) the right of the government to appoint the NPI’s officers (b) other provisions of the enabling instrument that allow the government to determine significant aspects of the NPI’s policy (c) contractual agreements that allow the government to determine the NPI’s policy (d) degree of financing by government (e) the government’s exposure to the unit’s financial risk 10

Copyright 2010, The World Bank Group. All Rights Reserved. Public corporations A corporation controlled by government is usually referred to as a “public corporation” to identify it as being outside the “general government” sector but still part of the (broader) public sector A public corporation is a market producer Control is an important consideration and is based on: (a) Ownership of the majority of the voting interest (b) Control of the board or other governing body (c) Control of the appointment and removal of key personnel (d) Control of key committees of the entity (e) Golden shares and options (f) Regulation and control (g) Control by a dominant government customer (h) Control attached to borrowing from the government 11

Copyright 2010, The World Bank Group. All Rights Reserved. Central banks The SNA defines a central bank as the national financial institution that exercises control over key aspects of the financial system The SNA also says that, as long as the central bank is a separate institutional unit, it is always allocated to the financial corporations sector even if it is primarily a non- market producer However, it is not always straightforward to allocate the central bank to the financial institutions sector – in some countries, the central government may include units that engage in financial transactions that in other countries would be performed by central banks 12

Copyright 2010, The World Bank Group. All Rights Reserved. Taxes The 2008 SNA defines taxes as compulsory, unrequited payments, in cash or in kind, made by institutional units to general government units The categories of tax distinguished in the SNA depend on the interaction of the following three factors: (a) the nature of the tax (b) the type of institutional unit paying the tax (c)the circumstances in which the tax is payable The SNA emphasises that taxes unlikely ever to be collected should not be included in the national accounts In accordance with the accrual principle, a tax should be recorded in the period in which the tax liability arises 13

Copyright 2010, The World Bank Group. All Rights Reserved. Government transactions Government transactions that contribute to GDP relate to output – government final consumption expenditure on the expenditure side of the accounts – government gross product on the production side In lesson 3 we saw how government output is measured by summing the costs of producing the output On the expenditure side of the accounts, government final consumption expenditure is an important aggregate in most countries On the production side of the accounts, one of the industries that is included is Public administration and defence and compulsory social security – government also contributes to industries such as education and health 14

Copyright 2010, The World Bank Group. All Rights Reserved. Classifying government transactions Government final consumption expenditure is classified using the Classification of the functions of government (COFOG) which, as its name implies, is a classification by function rather than an industry classification (such as ISIC) The major categories in COFOG are: 01 General public services 02 Defence 03 Public order and safety 04 Economic affairs 05 Environmental protection 06 Housing and community amenities 07 Health 08 Recreation, culture and religion 09 Education 10 Social protection 15

Copyright 2010, The World Bank Group. All Rights Reserved. Consumption of fixed capital Consumption of fixed capital is a cost of production for all producers, including government – it is calculated for all fixed assets which, by definition, are outputs from processes of production – it does not cover the depletion or degradation of natural assets such as land, coal and oil or intangible assets such as contracts, leases or licences The government sector can have significant amounts of capital stock (e.g. roads, bridges, dams, harbours) and so a country’s national accounts would be distorted if no allowance is made for that capital stock The perpetual inventory method (PIM) is the most common method of estimating capital and consumption of fixed capital 16

Copyright 2010, The World Bank Group. All Rights Reserved. Government data in the national accounts The SNA sets out a series of accounts – current accounts – capital accounts – balance sheets Each of the accounts is presented for each of the major sectors, including government An indication of the importance of government is that, according to the 2005 ICP, government final consumption expenditure contributes about 17% of GDP on average 17

Copyright 2010, The World Bank Group. All Rights Reserved. References Government Finance Statistics Manual System of National Accounts,