The SNA : Some Outstanding Issues Peter Hill

The paper focuses on three broad issues. The structure and scope of the SNA accounts. The different roles played by monetary and non-monetary transactions and the inter-relationships between the real and the financial accounts of the system. The potential conflict of interest between the needs of short and long term analysts. The need to reconstruct the production account and to record the interest payable on the current value of the fixed and other assets used in production.

A recurring theme is the extent to which it is desirable, necessary or feasible to record internal transactions in the SNA. Internal transactions occur when the same economic unit, such as an enterprise or household, acts in two different capacities and engages in two different types of economic activity. For example, an economic unit may choose to consume or add to its stock of assets something that it has produced itself, instead of selling it on the market. In order to record this production an internal transaction is deemed to take place in which the producer ‘sells’ the output to itself in its capacity as a consumer or asset owner.

Internal transactions involve real flows of goods and services. Although prices have to be estimated, or imputed, for the quantities transacted, the quantities are real and observable. If internal transactions are ignored, real economic activities and their associated costs and benefits go unrecorded. Not only production but consumption ad capital formation are missed. These activities interact with market activities and may have a considerable impact on welfare and growth potential.

Transactions accounts, real accounts and the financial account Transactions accounts are defined here simply as accounts that record transactions. In the SNA, therefore, they consist of the sequence of accounts from the production account to the financial account. Transactions accounts other than the financial account are described here as real accounts, although this term is not used in the SNA. The real accounts record transactions related to the real economic activities of production, consumption and capital formation. In the SNA they consist of the sequence of accounts from the production account to the capital account.

Monetary transactions The great majority of the entries in the SNA accounts refer to monetary transactions although, a few refer to certain types of internal transactions and other non- monetary transactions. In a monetary transaction a good, service or asset is exchanged for cash or the creation of a short term financial asset or liability. For each of the parties concerned, a monetary transaction leads to a pair of matching entries in the accounts: one in a real account and one in the financial account.

Net lending or borrowing The net change in an economic unit’s real resources resulting from its monetary transactions as recorded in the real accounts must be matched by an equal change in financial asset/liabilities in the financial account. This identity emerges in the SNA in the form of the identity between net borrowing/lending as recorded in the capital and the financial accounts respectively. The identity holds because the transactions accounts as a whole constitute a closed inter-dependent system of accounts.

The transactions accounts form an inter-dependent system of accounts. The capital account includes net saving carried over from the preceding sequence of real transactions accounts and not just transactions in capital assets. Net saving therefore links the capital account to the other real accounts. The net lending/borrowing requirement shown in the capital account is generated by all the real economic activities in which a unit engages. The identity between net lending/borrowing in the capital and financial account reflects the inter-dependence between the real and financial sectors of the economy.

The SNA’s accounting structure In the SNA the accounts are grouped into current accounts and capital accumulation accounts. The capital and financial accounts are hived off from the other transactions accounts. Thus, the SNA effectively ignores the fact that the transactions accounts form an integrated inter- dependent system. The structure of the SNA accounts plays down the inter- dependence between the real and the financial accounts and is therefore not ideal at a time of financial crisis.

Demands on the accounts for short and lone term analysis Until very recently, it seemed that the main objective of monetary and fiscal policy in most countries was no longer short term economic stabilization but promoting long term growth. This has led to demands to expand the accounts to include more non-market activities and non-monetary transactions. However, restoring stability in real and financial markets has suddenly become the over-riding priority of economic policy throughout the world.

The SNA is meant to be a multi-purpose system. However, there has long been pressure to change or expand the system to include various non-market activities, such as household production for own consumption or capital formation. The inclusion of non-monetary transactions does not disturb the identity between net lending/borrowing in the capital and financial accounts. However, the inclusion of slow moving non-market activities may tend to dampen down short term fluctuations in the aggregates. Their inclusion may be important for certain types of analysis but it could actually detract from the usefulness of the accounts for purposes of monitoring and analysing short-term fluctuations and market disequilibria.

Recent events suggest that the present SNA should continue to be based mainly on monetary transactions. However, a convincing case has been made that there maybe a need over the longer term to construct more comprehensive measures of economic growth and also additional series to explain growth. The best way to meet the needs of short and long term analysis may be to have two sets of accounts: the existing accounts plus some extended accounts In the past it has been argued that users would be confused by having two set of accounts, but it is doubtful whether this is the case today.

Interest and capital services There is one way in which the usefulness of the accounts for analysis and policy could be improved with minimal disturbance to the system, namely by recording in the production account the interest payable on the current value of fixed asset used in production. In the early days of the SNA interest used to be recorded as a cost in the production account but it was dropped from the account in the 1968 revision.

Leasing and rentals When fixed assets are rented under a lease, the rentals payable are recorded as costs in the SNA production account. For the leasing to be viable, the rentals must cover not only the lessor’s maintenance and administrative costs but also the depreciation on the asset and the interest payable or foregone on the current value of the asset. The interest represents the opportunity cost of using the funds to acquire fixed assets instead of investing them in financial assets.

Imputed rentals on assets owner by the user When an enterprise using a fixed asset owns it an internal transaction should be recorded in which the enterprise pays a rental to itself its capacity as an asset owner. The rentals may be estimated using corresponding market rentals, but if there is no suitable rental market, the rentals can be estimated from their costs, including depreciation and the interest payable. However, the SNA only records the depreciation and not the interest.

The SNA net operating surplus is not all primary income The SNA net operating surplus is not the surplus from production if there are outstanding liabilities that have been incurred purely as a result of engaging in production that have not been charged against the production. The interest payable is an inescapable cost of production that needs to be accounted for in the SNA production account. It is not some kind of discretionary payment made out of an operating ‘surplus’.

Estimating capital services The total interest payable plus depreciation should provide a close approximation to the cost of the capital services used in production. There is substantial literature in favour of using an exogenous or endogenous rate of return on the fixed assets instead of the interest payable on their value. However, that it should be possible to value the costs of the inputs into a process of production independently of the value of the output. The interest paid or foregone represents an integral part of the opportunity cost to an enterprise of using its own assets in production.

Depreciation and interest Enormous advances have been made in developing a theoretically satisfactory and practical methodology for estimating stocks of fixed asset by means of the perpetual inventory method, or PIM. Depreciation can be estimated within the general framework of the PIM, but nevertheless it remains much more difficult to estimate than the interest payable on the current value of the asset. A case can be made on practical grounds for not calculating depreciation, and the 1993 SNA explicitly allows for this possibility, but if depreciation can be calculated and recorded there is no case for not recording the interest payable as well.