Gross National Income reservations

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1 Gross National Income reservations Eurostat has completed the verification process of the sources and methods used to calculate Gross National Income (GNI) by the United Kingdom (UK). The process revealed the following problems, referred to as reservations concerning the reliability, the comparability and the exhaustiveness of ONS's GNI output (applicable to years from 2002 to 2010). This note sets out the latest position on the GNI reservations currently being held against the UK national accounts, nine specific to the UK and six to all EU member states (transversal), plus those that have been addressed since Blue Book In future all new GNI reservations and all work to close existing GNI reservations will be communicated annually using the Blue Book publication. UK Specific reservations Two UK specific reservations have been lifted by Eurostat since Blue Book 2012: 1. Revised estimates of insurance A new method of estimating insurance output, intermediate consumption and value added, that is in line with the ESA95 provisions and with the recommendations of the GNI Committee on insurance measurement, has to be implemented. New methods of estimating insurance output, intermediate consumption and value added were introduced for Blue Book ONS published two articles explaining the new methodology on the ONS website; 'New insurance data and methods ' and 'Improvements to Blue Book 2012: Measurement of insurance services'. These methods ensured that deficiencies such as cash-based estimates, inclusion of holding gains and financial auxiliaries in the output of insurance, were resolved. The revised insurance data have now been integrated with the national accounts framework and are included in the nationally published GNI estimates. Reservation lifted July GNI Reconciliation The GNI data for the period from 2002 onwards (transmitted with the 2011 GNI Questionnaire) need to be reconciled with the nationally published national accounts data. In 2011 the UK GNI Questionnaire was submitted to Eurostat before the publication of ONS's annual data release, the Blue Book. ONS announced that the Blue Book 2011 would contain revised data that may not be consistent with the GNI Questionnaire As part of the GNI Questionnaire 2012, ONS included the GNI Questionnaire for 2011 consistent with Blue Book 2011 data. Reservation lifted July Blue Book 2013 included methods and data changes aimed at lifting the following three UK specific reservations: 1. Minor Repairs and Maintenance Minor repairs and maintenance of dwellings by owner-occupiers of a kind typically carried out by owners need to be separately identified and classified as intermediate consumption in the production of dwelling services. In the UK's national accounts all minor repairs and maintenance of dwellings are recorded as household final consumption expenditure.

2 Expenditure on minor repairs by owner-occupiers of a kind typically carried out by owners should be separately identified and classified as intermediate consumption in the production of dwelling services. Gross value added and gross operating surplus in dwelling services (for households' imputed rents) should be adjusted accordingly. The link to and consistency with the estimates of households own-account major repairs and improvements (to be recorded as gross fixed capital formation) should be further investigated. ONS response: The issues covered in this reservation are inextricably linked to those in transversal reservation Imputed Rentals (see Transversal Reservations). As such, the issues covered by both were addressed and revised estimates incorporated into the national accounts and published GNI estimates. Further information is available on the ONS website in the article Blue Book 2013: Improvements to Household Expenditure Estimates. 2. Cinematographic Film Originals ONS needs to include the creation of cinematographic film originals in the estimates of output and gross fixed capital formation. In the United Kingdom's national accounts the creation of cinematographic film originals is not accounted for in the estimates of output and gross fixed capital formation. The United Kingdom should develop sources and methods for the inclusion of the creation of cinematographic film originals in the estimates of output and gross fixed capital. ONS response: The UK was already partially compliant but ONS took this opportunity to improve its sources and methods and the revised estimates have been integrated within the national accounts are included in the nationally published GNI estimates. Further information is available on the ONS website in the article GDP Continuous Improvement: The Measurement of Artistic Originals in the UK - 21 June Own-Account Software A mark-up for net operating surplus must be included in the estimates of own account software. The treatment of consumption of fixed capital in the calculation of own-account software should be clarified. In the UK's national accounts, the mark-up for net operating surplus is not taken into account in the valuation of own-account software. Furthermore, it remains not clear if the estimates of the consumption of fixed capital are included in the output algorithm. ONS has been asked to clarify the treatment of consumption of fixed capital and to include the mark-up for net operating surplus in the calculation of the own-account software, in accordance with the related GNI Committee recommendations (GNIC/013). Further information is available on the ONS website in the article GDP Continuous Improvement: summary of improvements to the estimation of gross fixed capital formation in the UK National Accounts - 27 March ONS response: These issues have been addressed. ONS plans to address the following UK specific reservations for Blue Book Consumption of fixed capital on roads, bridges, etc.

3 Improvements need to be made in the estimation of consumption of fixed capital on roads, bridges, etc. In the UK's national accounts the major repairs of roads are not included in the gross fixed capital formation. ONS should treat the expenditure on major maintenance and repair of roads as gross fixed capital formation rather than as intermediate consumption. This change should be made for the whole input time series for the Perpetual Inventory Model (PIM). ONS should use (in the PIM calculations) an average lifetime for roads that is in accordance with the GNI Committee recommendations or to provide justification for the longer lifetime (75 years) used in the calculations. 2. Non-Profit Institutions Serving Households (NPISH) A review of the new compilation process of NPISH has to be carried out with a view to improving the estimation methods and the coverage of the NPISH units. ONS announced plans to review the compilation process of Non-Profit Institutions Serving Households with the aim to take stock of all the relevant information currently available, which may lead to the use of new sources and to an improved coverage of the NPISH units or to a change of existing methods. ONS has been asked to carry out this review and to consider the usefulness of the information collected in this context for the NPISH final consumption expenditure estimates. 3. Exhaustiveness A review of the methods to ensure exhaustiveness has to be carried out with a view to updating the benchmarks and/or modifying the methods where needed. A number of exhaustiveness adjustments in the UK's national accounts are based on fixed percentages, which themselves are based on a study on exhaustiveness from mid-1990s. ONS has been asked to carry out a review of the methods to ensure exhaustiveness with a view to update the benchmarks and/or to modify the methods where needed. 4. Own-Account Construction The valuation of the own-account construction output needs to be improved with the inclusion of a mark-up for net operating surplus. In the UK's national accounts the mark-up for net operating surplus is not taken into account in the valuation of own-account construction by households. Furthermore, it remains not clear if the mark-up for net operating surplus is applied in the valuation of own-account construction by enterprises. ONS has been asked to further investigate this issue and to include the mark-up for net operating surplus to own-account construction where necessary. 5. Car List Prices The impact of the use of list prices in the calculation of the household final consumption expenditure on the purchase of new cars has to be investigated. In view of the results from this work, the national accounts data need to be corrected, if appropriate.

4 In the UK's national accounts the estimates of household final consumption expenditure on the purchase of new cars are derived by multiplying the numbers of cars sold to private individuals by trade information on list prices. The discounts on new vehicles, including those that are linked to the trade-in value for a previous vehicle, are not taken into account in this method. Similarly, the value of accessories may be missing from the estimates, as they are not covered by the list prices. ONS has been asked to investigate the impact of these deficiencies on the estimates of household final consumption expenditure on the purchase of new cars and modify if necessary. The remaining UK specific reservation was applied in October 2013 and ONS plans to address it for Blue Book Transition from producer's prices to basic prices The compilation process to make the transition from producer's prices to basic prices in order to value output in accordance with ESA95 should be reviewed. The compilation process to make the transition from producer's prices to basic prices in order to value output in accordance with ESA95 should be reviewed. Furthermore, the consistency between the scope of taxes and subsidies in the aforementioned transition and the scope of taxes and subsidies from the government accounts used in the estimation of GDP should be ensured. In view of the results from this work, the national accounts data need to be revised, if appropriate. Transversal Reservations Two transversal reservations have been lifted by Eurostat since Blue Book 2012: 1. Entities with little or no physical presence The treatment of entities with little or no physical presence (sometimes referred to as Special Purpose Entities - SPEs) needs to be clarified as concerns the inclusion in GDP and GNI components. The discussion at the meeting of the GNI Committee in April 2010 showed that the treatment in national accounts of transactions involving SPEs may differ in the various countries in some cases. Further clarifications and discussions are needed in order to agree on an ESA 95 compliant and comparable treatment. ONS response: Further information was provided to Eurostat who concluded that the UK generally corresponds to the agreed GNI Committee recommendations. Should there be instances of less than full compliance - some SPEs not separately identifiable and for which output is measured according to the activity they are engaged in - the potential impact on GNI is considered negligible. Reservation lifted August Cooperative dwellings The treatment of cheap rentals in the context of cooperative dwellings needs to be reviewed in order to ensure compliance with ESA 95. The discussion at the meeting of the GNI Committee in October 2011 showed that the treatment in national accounts of aspects of cooperative dwellings, in particular the treatment of cheap rentals, may differ in the various countries in some cases. Further clarifications and discussions are needed in order to agree on an ESA 95 compliant and comparable treatment.

5 ONS response: Further information was provided to Eurostat who concluded that no cooperative dwellings exist in the UK. Reservation lifted August Eurostat have recommended that the following reservation can be lifted: 1. Car scrap schemes Following the financial crisis many countries set up programs, including car scrap schemes, to promote economic growth. The existing schemes and the methods to record them in national accounts need to be reviewed in order to ensure the compliance of the treatment of car scrap schemes with ESA 95. The discussions of this issue during the meetings of the National Accounts Working Group in March and November 2011 showed that scheme design and treatment in national accounts are quite different in the various countries. Further clarifications and discussions are needed in order to agree on an ESA 95 compliant and comparable treatment. In particular, a distinction needs to be made between an unconditional and a conditional bonus. ONS response: Further information was provided to Eurostat who concluded that the UK is compliant with ESA95 and is awaiting confirmation from the European Commission that this reservation has been lifted. The following transversal reservation was addressed with Blue Book 2013: 1. Imputed Rentals The calculation of IC for actual and imputed rentals in the estimation of the production of housing services. In the compilation of Gross Value Added (GVA) of housing services (including actual rentals and imputed rentals), an estimate of the expenditure on ordinary maintenance and repairs that are not typically carried out by tenants should be made and recorded as intermediate consumption in accordance with Regulation No 1722/2005. ONS response: This reservation was addressed with UK specific reservation Minor Repairs and Maintenance (see UK Specific reservations). The ONS considers the UK is already ESA95 compliant for the following transversal reservations: 1. The calculation and allocation of financial intermediation services indirectly measured (FISIM) Following the Commission Regulation (EC) No 1889/2002 of 23 October 2002 and the Council Decision 2010/196/EU, Euratom of 16 March 2010, FISIM produced domestically or imported should be allocated between intermediate consumption, final consumption and exports. The sources and methods used need to be reviewed in order to ensure that FISIM is properly estimated and allocated to the user sectors. In the ESA 79 FISIM were entirely allocated to intermediate consumption. The ESA 95 provides that FISIM that are produced domestically or imported are allocated between intermediate consumption, final consumption and exports. These

6 different treatments result in a higher GDP calculated according to ESA 95. A correction to property incomes with the rest of the world should be applied when calculating GNI. ONS response: The UK has been compliant with the recommended ESA95 method for calculating and allocating FISIM since 2008, has provided further information to Eurostat and awaits notification from the European Commission that this reservation can be lifted. 2. The recording of the vehicle registration tax ESA95 requires the vehicle registration tax to be recorded under D214 (taxes on products, except VAT and import taxes) regardless of the tax payers. ONS response: Further information has been provided to Eurostat and ONS is awaiting confirmation that recommendation can be made that this reservation be lifted from the UK. ONS plan to address the remaining two transversal reservations in Blue Book 2014: 1. Cross border income Property income flows with the rest of the world should be added to/subtracted from GDP in national accounts in order to calculate GNI. The sources and methods used need to be reviewed in order to ensure that all relevant property income flows are included in the national accounts. From the work of the GNI Committee some difficulties common to several countries are observed in estimating property income flows with the rest of the world. Although the overall consistency of the recording of cross-border property income flows should be demonstrated, the most important points concern in particular: Reinvested earnings on foreign direct investment (ESA 95 paragraphs 4.64 to 4.67). It should be demonstrated in particular that the recommendations of the GNI Committee Task Force are properly applied. Interest and dividends received by mutual funds from the investments (ESA 95 paragraphs 4.49(b) and 4.54(b)). Withdrawals of income from quasi-corporations. Recording of taxes on property income. 2. The inclusion of illegal activities in national accounts The ESA 95 provides that illegal activities (e.g. prostitution and production of drugs) fall within the production boundary of national accounts (see paragraphs 1.13(g) and 3.08, last paragraph). The sources and methods used need to be reviewed in order to ensure that illegal activities are properly included in the national accounts. A GNP Committee Task Force concluded its work and presented its results to the GNP Committee in December The Task Force encouraged Member States to develop studies and research, particularly concerning the three activities which should have the most significant impact on GDP/GNI: drugs, prostitution, and smuggling of alcohol and tobacco. The GNI Committee discussed the issue of the inclusion of prostitution, drugs and smuggling between 2008 and Following the conclusions of the Task Force and the subsequent discussions mentioned above, the coverage of the relevant illegal activities and the appropriateness of sources and methods used need to be reviewed.

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