Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 on the European system of national and regional accounts in the European Union Text with EEA relevance

Changes in assets	Changes in assets	Changes in assets	Changes in liabilities and net worth	Changes in liabilities and net worth	Changes in liabilities and net worth
F	Net acquisition of financial assets	37	F	Net incurrence of liabilities	66
F.1	Monetary gold and SDRs	1	F.1	Monetary gold and SDRs	0
F.2	Currency and deposits	11	F.2	Currency and deposits	– 2
F.3	Debt securities	9	F.3	Debt securities	20
F.4	Loans	4	F.4	Loans	45
F.5	Equity and investment fund shares	2	F.5	Equity and investment fund shares	14
F.6	Insurance, pension and standardised guarantee schemes	0	F.6	Insurance, pension and standardised guarantee schemes	0
F.7	Financial derivatives and employee stock options	0	F.7	Financial derivatives and employee stock options	3
F.8	Other accounts receivable/payable	10	F.8	Other accounts receivable/payable	– 14
			B.9	Net lending (+)/net borrowing (–)	– 29

Table 18.13 —  Financial account of the BPM6

Net lending (+)/borrowing (–) (current and capital accounts)			29
Financial account (by functional category)	Change in assets	Change in liabilities	Balance
Direct investment	– 4	8
Portfolio investment	17	7
Financial derivatives etc.	3	0
Other investment	42	22
Reserve assets	8	—
Total change in assets/liabilities	66	37
Net lending (+)/net borrowing (–) (financial account)			29
Net errors and omissions			0

• 18.58The functional categories of the BPM6 convey information about the motivation and relationship between the parties, which are of particular interest to international economic analysis. Data by functional category are further subdivided by instrument and institutional sector, which makes it possible to link them to the corresponding ESA and monetary and financial statistics items. The institutional sector classification in the BPM6 is the same as in the ESA, although it is usually abbreviated (to five sectors in the standard components). In addition, a supplementary subsector is used for monetary authorities, which is a functional subsector linked to reserve assets. It covers the central bank and any parts of general government or financial corporations other than the central bank that hold reserve assets, so it is relevant for countries where some or all reserves are held outside the central bank.

• 18.59The main links between the financial instrument categories of the national accounts and the functional categories of the international accounts are shown in Table 18.14. The functional categories are used both on the asset side and the liabilities side of the financial account of the BPM6. Relatively uncommon links are not shown.

Table 18.14 —  Links between the functional categories of the BPM6 and the financial instrument categories of the ESA

	International account functional categories	International account functional categories	International account functional categories	International account functional categories	International account functional categories
ESA instruments	Direct investment	Portfolio investment	Financial derivatives	Other investment	Reserve assets
Monetary gold					X
Special Drawing Rights (SDRs)				X	X
Currency and deposits	Currency and deposits	Currency and deposits	Currency and deposits	Currency and deposits	Currency and deposits
Currency				X	X
Interbank positions				X	X
Other transferable deposits	X			X	X
Other deposits	X			X	X
Debt securities	X	X			X
Loans	X			X	X
Equity and investment fund shares	Equity and investment fund shares	Equity and investment fund shares	Equity and investment fund shares	Equity and investment fund shares	Equity and investment fund shares
Equity:	Equity:	Equity:	Equity:	Equity:	Equity:
Listed shares	X	X			X
Unlisted shares	X	X			X
Other equity	X			X
Investment fund shares/units:	Investment fund shares/units:	Investment fund shares/units:	Investment fund shares/units:	Investment fund shares/units:	Investment fund shares/units:
Money market fund shares/units	X	X			X
Non-MMF investment fund shares/units	X	X		X	X
Insurance, pensions, and standardised guarantee schemes	Insurance, pensions, and standardised guarantee schemes	Insurance, pensions, and standardised guarantee schemes	Insurance, pensions, and standardised guarantee schemes	Insurance, pensions, and standardised guarantee schemes	Insurance, pensions, and standardised guarantee schemes
Non-life insurance technical reserves	X			X
Life insurance and annuity entitlements	X			X
Pension entitlements				X
Claims of pension funds on pension managers	X			X
Entitlements to non-pension benefits				X
Provisions for calls under standardised guarantees	X			X
Financial derivatives and employee stock options	Financial derivatives and employee stock options	Financial derivatives and employee stock options	Financial derivatives and employee stock options	Financial derivatives and employee stock options	Financial derivatives and employee stock options
Financial derivatives			X		X
Employee stock options			X
Other accounts receivable/payable	Other accounts receivable/payable	Other accounts receivable/payable	Other accounts receivable/payable	Other accounts receivable/payable	Other accounts receivable/payable
Trade credits and advances	X			X
Other accounts receivable/payable, excluding trade credits and advances	X			X

BALANCE SHEETS FOR THE REST OF THE WORLD SECTOR

• 18.60The IIP is that part of the balance sheets covered in the international accounts. The terminology highlights the specific components of the national balance sheet which are included. The IIP covers only financial assets and liabilities. In the case of directly owned real estate in a country by a non-resident unit, a notional resident unit is regarded as the owner of the real estate, and in turn subject to ownership by the non-resident unit in terms of a financial asset (see also paragraph 18.16). In the case of financial claims, the cross-border element arises when one party is a resident and the other party is a non-resident. In addition, while gold bullion is an asset that has no counterpart liability, it is included in the IIP when held as a reserve asset, because of its role in international payments. However, non-financial assets are excluded, as they do not have a counterpart liability or other international aspect.

• 18.61The balancing item on the IIP is the net IIP. The net IIP plus non-financial assets in the national balance sheet equal national net worth, because resident-to-resident financial claims net to zero in the national balance sheet. Table 18.15 shows an example of the balance sheet for the rest of the world sector, and Table 18.16 provides an example of IIP.

• 18.62The same broad categories are used for investment income and the IIP. As a result, average rates of return can be calculated. Rates of return can be compared over time and for different instruments and maturities. For example, the trends in return on direct investment can be analysed, or the return can be compared with other instruments.

Table 18.15 —  Balance sheets for the rest of the world sector (ESA)

		Opening balance	Changes due to transactions	Other changes in volume	Revaluation	Closing balance
Assets	Assets	Assets	Assets	Assets	Assets	Assets
Non-financial assets	Non-financial assets
Financial assets	Financial assets	805	37	0	7	849
AF.1	Monetary gold and SDRs	0	1	0	0	1
AF.2	Currency and deposits	105	11	0	0	116
AF.3	Debt securities	125	9	0	4	138
AF.4	Loans	70	4	0	0	74
AF.5	Equity and investment fund shares	345	2	0	3	350
AF.6	Insurance, pension and standardised guarantee schemes	26	0	0	0	26
AF.7	Financial derivatives and employee stock options	0	0	0	0	0
AF.8	Other accounts receivable/payable	134	10	0	0	144
Liabilities	Liabilities	1 074	66	0	3	1 143
AF.1	Monetary gold and SDRs	770	0	0	0	770
AF.2	Currency and deposits	116	– 2	0	0	114
AF.3	Debt securities	77	20	0	2	99
AF.4	Loans	17	45	0	0	62
AF.5	Equity and investment fund shares	3	14	0	1	18
AF.6	Insurance, pension and standardised guarantee schemes	25	0	0	0	25
AF.7	Financial derivatives and employee stock options	7	3	0	0	10
AF.8	Other accounts receivable/payable	59	– 14	0	0	45
	Net worth	269				265

Table 18.16 —  The integrated IIP statement of the BPM6

International investment position (IIP)	Opening position	Transactions	Other changes in volume	Revaluation	Closing position
Assets	Assets	Assets	Assets	Assets	Assets
Direct investment	42	– 4	0	1	39
Portfolio investment	40	17	0	2	59
Financial derivatives	0	3	0	0	3
Other investment	152	42	0	0	194
Reserve assets	63	8	0	0	71
Total assets	297	66	0	3	366
Liabilities	Liabilities	Liabilities	Liabilities	Liabilities	Liabilities
Direct investment	132	8	0	2	142
Portfolio investment	180	7	0	5	192
Financial derivatives	0	0	0	0	0
Other investment	261	22	0	0	283
Total liabilities	573	37	0	7	617
Net international investment position (net IIP)	– 276	29	0	– 4	– 251

CHAPTER 19

EUROPEAN ACCOUNTS

INTRODUCTION

• 19.01The process of European integration made it necessary to compile a full set of accounts that reflect the European economy as a whole and enable better analysis and policy making at the European level. European accounts cover the same set of accounts, and are based on the same concepts, as the national accounts of the Member States.

• 19.02This chapter describes the distinguishing features of European accounts, that is, the accounts of the European Union and of the euro area. European accounts require particular attention to be given to the definition of resident units, rest of the world accounts and the netting of intra-European economic transactions (flows) and financial balance sheets (stocks).

• 19.03The economic territory of the European Union consists of:

• (a) the economic territories of the Member States of the European Union; and

• (b) the economic territories of European institutions.

• 19.04The economic territory of the euro area consists of:

• (a) the economic territories of the Member States of the euro area; and

• (b) the economic territory of the European Central Bank.

FROM NATIONAL TO EUROPEAN ACCOUNTS

• 19.05European accounts are conceptually not equal to the sum of the national accounts of the Member States after conversion to a common currency. The accounts of resident European institutions need to be added. The scope of the concept of residence changes when one steps from the national accounts of Member States to European accounts. The ways in which the reinvested earnings of foreign direct investment enterprises or special purpose entities are treated are good examples in this context. In the national accounts of the Member States, a foreign direct investment enterprise may have investors which are residents of another Member State of the European Union/the euro area. The corresponding reinvested earnings are not recorded as such in European accounts. Besides, special purpose entities may need to be reclassified in the same institutional sector as their parent company when the latter is resident of another Member State. Finally, cross-border economic flows and financial stocks between European countries need to be reclassified. These differences are presented in diagrams 19.1 and 19.2 assuming, for the sake of simplicity, a European area composed of only two Member States: A and B. Flows and stocks involving residents and non-residents are schematically displayed with arrows.

Diagram 19.1 —   Aggregation of the national accounts of the Member States

When the national accounts of countries A and B are aggregated, the aggregated rest of the world accounts record intra-flows between countries A and B, and with other countries and European institutions.

Image omitted; see official source

Text of image

European institutions

Country A

Country B

Diagram 19.2 —   European accounts

The European Union/euro area is considered as a single entity: the accounts of European institutions/the European Central Bank are included and only transactions of resident units with third countries are recorded in the rest of the world accounts.

Image omitted; see official source

Text of image

European institutions

Country A

Country B

Conversion of data in different currencies

• 19.06In European accounts, the economic flows and the stocks of assets and liabilities must be expressed in one single monetary standard. For this purpose, data recorded in the different national currencies are converted into euro by either:

• (a) using market exchange rates (or an average thereof) prevailing during the time period for which the accounts are compiled; or

• (b) using fixed exchange rates, over the whole time period. The fixed rate can be the one prevailing at the end of the period, in the beginning, or as an average of exchange rates over the whole time period. The exchange rate used affects the (fixed) weight of a given Member State in European aggregates; or

• (c) calculating an index between consecutive periods as the weighted average of the growth indices of the data of each Member State expressed in national currency. Weights are constructed as the exchange-rate converted share of each Member State in the first period of comparison. After a reference period is chosen as a benchmark, the chain-linked index can be applied to this benchmark to generate levels for other periods of observation.

• With method (a), the weights of Member States in European aggregates are updated according to the parities of their respective currencies. European aggregates' levels are therefore up-to-date, at any moment in time, but their movements may be affected by exchange rate fluctuations. In the case of ratios, the impact of exchange rate fluctuations on the numerator and denominator may cancel out to a large extent.

• With method (b), the weights of Member States are not updated, which preserves the movements of European aggregates from exchange rate fluctuations. However, European aggregates' levels may be influenced by the choice of the (fixed) exchange rates that reflect the parities of Member States' currencies at a given moment in time.

• Method (c) preserves the movements of European aggregates from exchange rate fluctuations whereas European aggregates' levels broadly reflect the parities in force for each time period. This is at the expense of additivity and other accounting constraints. If these are required, they must be restored as a last step.

• 19.07European accounts can also be calculated by converting data recorded in the different national currencies into purchasing power standards (PPS). Method (a), (b) or (c) set out in paragraph 19.06 can be used for this purpose replacing exchange rates by corresponding purchasing power parities (PPPs).

European institutions

• 19.08In the ESA, European institutions comprise the following entities:

• (a) European non-financial institutions: the European Parliament, the European Council, the Council, the European Commission, the Court of Justice of the European Union and the European Court of Auditors;

• (b) European non-financial bodies, including the entities covered by the general budget of the European Union (e.g. the Social and Economic Committee, the Committee of the Regions, European agencies etc.) and the European Development Fund; and

• (c) European financial institutions and bodies including notably: the European Central Bank, the European Investment Bank and the European Investment Fund.

• Note that in category (b) European agencies do not include agricultural market regulatory agencies whose main activity consists in buying and selling agricultural products to stabilize prices. The latter agencies are considered resident in the Member State in which they carry out their activities.

• 19.09European non-financial institutions and bodies covered by the general budget of the European Union form one institutional unit which principally provides non-market government services for the benefit of the European Union. It is thus classified in the 'European institutions and bodies' subsector (S.1315) ([^E0033]) of the 'general government' sector (S.13).

• 19.10As long as its budget is not adopted as a part of the general budget of the European Union, the European Development Fund forms a separate institutional unit classified in the 'European institutions and bodies' subsector (S.1315) of the 'general government' sector (S.13).

• 19.11The European Central Bank is an institutional unit classified in the 'central bank' subsector (S.121) of the 'financial corporations' sector (S.12).

• 19.12The European Investment Bank and the European Investment Fund are separate institutional units classified in the 'other financial intermediaries, except insurance corporations and pension funds' subsector (S.125) of the 'financial corporations' sector (S.12).

• 19.13The economic territory of the European institutions includes the territorial enclaves that are located in the Member States of the European Union or in non-EU countries, such as representations, delegations, offices, etc.

• 19.14The main transactions of European institutions are recorded in resources and uses as described in the Annex.

The rest of the world account

• 19.15In European accounts, the rest of the world accounts record the economic flows and the financial stocks of assets and liabilities between the resident units of the European Union/the euro area and non-resident units. Hence, European rest of the world accounts exclude transactions taking place within the European Union/the euro area. The flows taking place within the EU/euro area are called 'intra-flows' and the financial positions between residents of the EU/euro area are called 'intra-stocks'.

• 19.16Imports and exports of goods include quasi-transit trade, that is:

• (a) goods imported from third countries into a Member State of the European Union/euro area by an entity which is not considered to be an institutional unit and then dispatched to another Member State of the European Union/euro area; and

• (b) goods arriving from a Member State of the European Union/euro area which are then exported to third countries by an entity which is not considered to be an institutional unit.

• Exports of goods shall be valued FOB at the border of the European Union/the euro area.

• For goods in quasi-transit to be exported, transportation and distribution costs within the European Union/the euro area shall be considered as output of transportation services if the carrier is resident in the European Union/the euro area and as imports of transportation services if it is not.

• 19.17In European accounts, merchanting includes only the purchase of goods by a resident of the European Union/the euro area from a non-resident with the subsequent resale of the same goods to a non-resident without the goods being present in the European Union/the euro area. It is recorded first as a negative export of goods and then as a positive export of goods, with any timing differences between the purchase and sale being recorded as changes in inventories (see paragraphs 18.41 and 18.60).

• Where a merchant who is a resident of the European Union/euro area buys goods from a non-resident and then sells them to a resident of another Member State, the purchase is recorded as negative exports in the national accounts of the Member State of the merchant but as imports in European accounts.

• 19.18A foreign direct investment enterprise is a resident of the European Union/the euro area where an investor which is not a resident owns 10 per cent or more of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise).

• In the national accounts of the Member States, a foreign direct investment enterprise may have investors who are resident in another Member State of the European Union/the euro area. The corresponding reinvested earnings are not recorded as such in European accounts.

Balancing of transactions

• 19.19One method to compile the European rest of the world accounts consists of withdrawing intra-European flows, on both the resources and uses sides, from the rest of the world accounts of the Member States. Although these mirror flows should balance in theory, they generally do not do so in practice because of the asymmetrical recording of the same transaction in the national accounts of the counterparties.

• 19.20Asymmetries create a mismatch, in European accounts, between the total economy and rest of the world accounts. The compilation of European accounts therefore requires reconciliation of the accounts. This is achieved by reconciliation methods such as minimum least squares or proportional allocation. In the case of goods, intra-Union trade statistics may be used to allocate asymmetries by expenditure category.

• 19.21The removal of asymmetries and subsequent balancing of the accounts causes further differences between European aggregates and the sum of the national accounts of the Member States.

Price and volume measures

• 19.22European non-financial accounts at the prices of the previous year can be compiled, for transactions in goods and services, using a similar methodology as for European accounts at current prices. First, the accounts of the Member States and European institutions/the European Central Bank, compiled at the prices of the previous year, are aggregated. Second, cross-border transactions among Member States, valued at the prices of the previous year, are eliminated from the rest of the world accounts. Third, the resulting discrepancies between resources and uses are eliminated using the method chosen to balance European transactions at current prices.

• 19.23European accounts at the prices of the previous year allow the calculation of volume indices between the current time period and the previous year. After a reference period is chosen as a benchmark, volume indices can be chain linked and then applied to the European accounts at current prices of the benchmark year. This generates European accounts in volume for any period of observation. The series obtained in this way are not additive. If additivity and other accounting constraints are required for measures in volume terms for specific purposes, these must be restored as a last step in order to obtain additive adjusted series.

Balance sheets

• 19.24In European accounts, financial balance sheets can be compiled using a similar treatment as for transactions:

• (a) the financial balance sheets of the Member States are complemented by stocks of assets held and liabilities assumed by European institutions which are resident of the European Union/euro area;

• (b) stocks of financial assets of a resident of the European Union/euro area held by another resident (intra-stocks) are withdrawn from the national rest of the world accounts; and

• (c) imbalances created by the mismatch between intra-stocks of financial assets and the corresponding liabilities are allocated to the different sectors through balancing.

• 19.25In European accounts, non-financial balance sheets can be compiled as the sum of the non-financial balance sheets of the Member States of the European Union/euro area.

'From whom-to-whom' matrices

• 19.26'From whom-to-whom' matrices detail the economic transactions (respectively holdings of financial assets) between institutional sectors. In the national accounts of the Member States, these matrices map in detail the transactions/financial assets between sectors of origin/creditor and destination/debtor, as well as between domestic sectors and the rest of the world.

• 19.27In European accounts, 'from whom-to-whom' matrices can be compiled by aggregation of the national matrices and reclassification of intra-European flows and stocks as resident flows and stocks. For this purpose, a distinction is then to be made in these national matrices between transactions, and the holding of financial assets, vis-à-vis the resident units of the European Union/the euro area and the non-residents in the rest of the world account. Moreover, flows and stocks vis-à-vis the residents units of the European Union/the euro area need to be further distinguished by counterpart sectors.

ANNEX 19.1

THE ACCOUNTS OF EUROPEAN INSTITUTIONS

Resources

• 19.28The main resources of European non-financial institutions and bodies include the following:

• (a) customs and agricultural duties;

• (b) production charges on producers of sugar, isoglucose and inulin syrup;

• (c) the value added tax resource; and

• (d) The gross national income (GNI) resource.

• 19.29In the accounts of European institutions, these flows are recorded as resources of the 'European institutions and bodies' subsector (S.1315) and as uses of the rest of the world (S.211).

• 19.30Customs and agricultural duties are levied at the external frontiers of the European Union under the common customs tariff. They are classified as 'taxes and duties on imports excluding VAT' (D.212) and include collection costs.

• 19.31Production charges are levied on the sugar, isoglucose and inulin syrup quotas held by the producers. They are classified as 'taxes on products, except VAT and import taxes' (D.214) and include collection costs.

• 19.32A fixed share of the amounts collected under points (a) and (b) of paragraph 19.28 is retained by Member States as collection costs. This share was 25 % in 2009. In the accounts of European institutions, these collection costs are recorded, on the uses side, as 'intermediate consumption' (P.2) of the 'European institutions and bodies' subsector (S.1315). On the resources side, they are recorded as 'imports of services' (P.72) in the rest of the world accounts (S.211).

• 19.33The value added tax resource is calculated by applying a fixed percentage rate, known as the VAT rate of call, to the harmonised VAT assessment base of each Member State. The VAT base is capped in relation to gross national income. The capping of the VAT base means that, if the VAT base of a Member State exceeds a given percentage of this Member State's GNI assessment base, then the VAT rate of call is not applied to the VAT base but to the latter percentage of the GNI assessment base. The value added tax resource includes payments for the current year as well as balances from previous years, corresponding to revisions of past VAT bases, when they are due to be paid. The value added tax resource is classified as 'VAT- and GNI-based EU own resources' (D.76).

• 19.34The gross national income resource is a residual contribution to the budget of the European institutions which is assessed on the levels of gross national income of each Member State. It is classified as 'VAT- and GNI-based EU own resources' (D.76) and includes reimbursements as well as the balancing payments for previous years. The correction of budgetary imbalances paid by the other Member States to the countries concerned is also recorded under D.76, as resources and uses of the rest of the world (S.211).

• 19.35The contributions of Member States to the European Development Fund are classified as 'current international cooperation' (D.74).

• 19.36The Member States subscriptions to the paid-in capital of the European Investment Bank, the European Investment Fund and the European Central Bank are recorded in the financial accounts as 'other equity' (F.519). They are recorded as changes in assets of the rest of the world (S.211) and changes in liabilities of the 'other financial intermediaries, except insurance corporations and pension funds' (S.125)/'central bank' (S.121) subsectors.

• 19.37Interests payable on loans granted by the European Investment Bank, after deduction of financial intermediation services indirectly measured (FISIM), are classified as 'interest' (D.41). In the accounts of European institutions, they are recorded as uses of the rest of the world (S.2) and resources of the 'other financial intermediaries, except insurance corporations and pension funds' (S.125).

• 19.38Interests payable on loans granted by the European Central Bank are classified as 'interest' (D.41). In the accounts of European institutions, they are recorded as uses of the rest of the world (S.2111) and resources of the 'central bank' (S.121) subsector.

Uses

• 19.39Payments made by European non-financial institutions and bodies consist of the following:

• (a) transactions related to their activities as non-market producers, mainly: 'intermediate consumption' (P.2), 'gross fixed capital formation' (P.51) and 'compensation of employees' (D.1);

• (b) distributive transactions related to the transfers from European institutions to Member States. They take mainly the form of 'subsidies on products' (D.31), 'other subsidies on production' (D.39), 'current international cooperation' (D.74), 'other miscellaneous current transfers' (D.759), 'investment grants' (D.92) and 'other capital transfers' (D.99); and

• (c) payments of the European Development Fund to third countries which are classified as 'current international cooperation' (D.74).

• 19.40The accounts of European institutions record the payments made by European non-financial institutions and bodies as uses of the 'European institutions and bodies' subsector (S.1315) and resources of the rest of the world (S.211 or S.22).

• 19.41Payments made by European non-financial institutions and bodies are generally recorded on the basis of the expenditure statements provided by the Member States. Advance and ex-post payments are recorded in the financial accounts of the European institutions as 'other accounts receivable/payable, excluding trade credits and advances' (F.89).

• 19.42Payments made by European financial institutions and bodies consist of the following:

• (a) transactions related to their activities as market producers of financial services, mainly: 'intermediate consumption' (P.2), 'gross fixed capital formation' (P.51) and 'compensation of employees' (D.1);

• (b) interest payments (D.41).

• As the subscriptions of Member States to the capital of the European Investment Bank are not considered as foreign direct investment, there is no imputed flow of reinvested earnings (D.43) to be recorded in its accounts.

• 19.43The accounts of European institutions record the payments made by European financial institutions and bodies as uses of the 'other financial intermediaries, except insurance corporations and pension funds' (S.125) subsector and resources of the rest of the world (S.211 or S.22).

Consolidation

• 19.44In European accounts, flows between Member States and European institutions are normally not consolidated, among resources and uses, within the 'general government' sector (S.13). However, in the case of 'current international cooperation' (D.74), the payments of Member States to the European institutions to finance, e.g. the European Development Fund, are consolidated and recorded, in European accounts, as uses of national 'central government (excluding social security)' (S.1311) and resources of the rest of the world (S.22).

CHAPTER 20

THE GOVERNMENT ACCOUNTS

INTRODUCTION

• 20.01The activities of government are presented separately from those of the rest of the economy because the powers, motivation, and functions of government are different from those of other sectors. This Chapter presents general government sector accounts and a government finance statistics (GFS) presentation that gives an integrated picture of government economic activities: revenue, expenditure, deficit/surplus, financing, other economic flows and balance sheet.

• 20.02Governments have powers to raise taxes and other compulsory levies and to pass laws affecting the behaviour of economic units. The principal economic functions of government are as follows:

• (a) to provide goods and services to the community, either for collective consumption such as public administration, defence, and law enforcement, or individual consumption such as education, health, recreation and cultural services, and to finance their provision out of taxation or other incomes;

• (b) to redistribute income and wealth by means of transfer payments such as taxes and social benefits;

• (c) to engage in other types of non-market production.

• 20.03The GFS presentation of general government economic activities presents the usual sequence of accounts in a manner that is more suitable for government finance analysts and policymakers. The GFS presentation uses aggregates and balancing items defined in terms of the ESA concepts, definitions, classifications, and accounting rules so that they are measured consistently with other macroeconomic variables, and with the same measures in other countries. Items such as saving and net lending/net borrowing are already available in the sequence of accounts. Other items, such as total revenue, total expenditure, the tax burden and total debt, are not shown explicitly.

• 20.04Additional rules on some more difficult issues of classification and measurement for the general government sector are given in the section 'Accounting issues relating to general government'.

DEFINING THE GENERAL GOVERNMENT SECTOR

• 20.05The general government sector (S.13) consists of all government units and all non-market non-profit institutions (NPIs) that are controlled by government units. It also comprises other non-market producers as identified in paragraphs 20.18 to 20.39.

• 20.06Government units are legal entities established by political process which have legislative, judicial or executive authority over other institutional units within a given area. Their principal function is to provide goods and services to the community and to households on a non-market basis and to redistribute income and wealth.

• 20.07A government unit usually has the authority to raise funds through compulsory transfers from other institutional units. In order to satisfy the basic requirements of an institutional unit, a government unit must have funds of its own either raised by income from other units or received as transfers from other government units, and must have the authority to disburse such funds in the pursuit of its policy objectives. It must also be able to borrow funds on its own account.

Identification of units in the government

Government units

• 20.08In all countries, there is a core entity, notably inside the central government that exercises national executive, legislative and judiciary powers. Its revenues and expenditures are directly regulated and controlled by a Ministry of Finance, or its equivalent, by means of a general budget approved by the legislature. Despite its size and diversity, this entity is usually a single institutional unit. Ministerial departments, agencies, boards, commissions, judicial authorities, and legislative bodies are part of this core central government unit. The separate ministries within it are not recognised as separate institutional units as they do not have the authority to own assets, incur liabilities, or engage in transactions in their own right.

• 20.09General government subsectors such as state and local governments can include such primary core government units as described in paragraph 20.08, each related to a given level of government and geographic area.

• 20.10In addition to this primary unit, there are government entities with separate legal identities and substantial autonomy, including discretion over the volume and composition of their expenditures and a direct source of revenue, such as earmarked taxes. Such entities are often established to carry out specific functions, such as road construction or the non-market production of health, education or research services. These entities are considered to be separate government units where they maintain full sets of accounts, own goods or assets in their own right, engage in non-market activities for which they are held accountable at law, and are able to incur liabilities and enter into contracts. Such entities (together with non-profit institutions controlled by government) are known as 'extra-budgetary units' because they have separate budgets, receive substantial transfers from the main budget, and their primary sources of finance are supplemented with own sources of revenue that fall outside the main budget. These extra-budgetary units are classified to the general government sector unless they are predominantly market producers controlled by another government unit.

• 20.11The general budget of any government level can include unincorporated enterprises that are market producers and quasi-corporations. If they qualify as institutional units, such enterprises are not considered to be part of general government, but classified to the non-financial or financial corporations sector.

• 20.12Social security funds are government units devoted to the operation of social security schemes. Social security schemes are social insurance schemes covering all or a large part of the community as a whole, which are imposed and controlled by government. A social security fund is an institutional unit if it is organised separately from the other activities of government units, holds its assets and liabilities separately, and engages in financial transactions on its own account.

NPIs classified to the general government sector

• 20.13Non-profit institutions (NPIs) that are non-market producers and are controlled by government units are units of the general government sector.

• 20.14Governments may choose to use some NPIs rather than government agencies to carry out government policies because they are seen as more detached, objective, and less subject to political pressures. For example, research and development and the setting and maintenance of standards in fields such as health, safety, the environment, and education are areas in which NPIs may be more effective than government agencies.

• 20.15Control of a NPI is defined as the ability to determine the general policy or programme of the NPI. Public intervention in the form of general regulations applicable to all units working in the same activity is irrelevant when deciding whether the government holds control over an individual unit. To determine whether a NPI is controlled by the government, the following five indicators of control should be considered:

• (a) the appointment of officers;

• (b) other provisions of the enabling instrument, such as the obligations in the statute of the NPI;

• (c) contractual agreements;

• (d) degree of financing;

• (e) risk exposure.

• A single indicator can be sufficient to establish control. However, if a NPI that is mainly financed by government remains able to determine its policy or programme to a significant extent along the lines mentioned in the other indicators, then it would not be considered as being controlled by government. In most cases, a number of indicators will collectively indicate control. A decision based on these indicators will be judgmental in nature.

• 20.16The non-market characteristic of an NPI is determined in the same way as for other units of general government.

Other units of general government

• 20.17It can be difficult to decide on the classification of producers of goods and services that operate under the influence of government units. The alternatives are to classify them as general government or, if they qualify as institutional units, as public corporations. For such cases, the following decision tree is used.

Diagram 20.1 —   Decision tree

Image omitted; see official source

Text of image

Is the entity an institutional unit?

no

Part of the controlling unit

yes

Is the unit controlled by government?

no

Unit is classified to the private sectors

yes

Is the unit a non-market producer?

no

Unit is classified as a public corporation

yes

Unit is part of general government

Public control

• 20.18Control over an entity is the ability to determine the general policy or programme of that entity. In order to determine the existence of control by government, the criteria used are those used for corporations liable to be public corporations, as set out in paragraph 2.32.

Market/non-market delineation

Notion of economically significant prices

• 20.19Non-market producers provide all or most of their output to others free of charge or at prices that are not economically significant. Economically significant prices are prices which have a substantial influence on the amounts of products producers are willing to supply and on the amounts of products that purchasers wish to acquire. It is the criterion that is used to classify output and producers as market or non-market, thus deciding whether an institutional unit in which government has a controlling interest is to be designated as a non-market producer and so classified in the general government sector, or as a market producer and so classified as a public corporation.

• 20.20Whereas the assessment of whether a price is economically significant is carried out at the level of each individual output, the criterion determining the market/non-market character of a unit is applied at the level of the unit.

• 20.21When the producers are private corporations, it can be presumed that prices are economically significant. By contrast, when there is public control, a unit's prices may be established or modified for public policy purposes, which may cause difficulties in determining whether the prices are economically significant. Public corporations are often established by government to provide goods and services that the market would not produce in the quantities or at the prices to meet government policy. For such public units enjoying government support, the sales may cover a large part of their costs, but they will respond to market forces differently from private corporations.

• 20.22To analyse the difference between a market and a non-market producer, in relation to changes in market conditions, it is useful to specify which units are the consumers of the goods and services in question and whether the producer actually competes on the market or is the only supplier.

Criteria of the purchaser of the output of a public producer

The output is sold primarily to corporations and households.

• 20.23Economically significant prices normally result when two major conditions are fulfilled:

• (1) the producer has an incentive to adjust supply either with the goal of making a profit in the long run or, at a minimum, covering capital and other production costs, including consumption of fixed capital, by sales; and

• (2) consumers are free to choose on the basis of the prices charged.

The output is sold only to government.

• 20.24Some services are typically required as ancillary services. They include activities such as transportation, financing and investment, purchasing, sales, marketing, computer services, communications, cleaning, and maintenance. A unit that provides this type of services exclusively to its parent unit or to other units in the same group of units is an ancillary unit. It is not a separate institutional unit and is classified with its parent unit. Ancillary units provide all of their output to their owners for use as intermediate consumption or gross fixed capital formation.

• 20.25If a public producer sells only to government and is the only supplier of its services, it is presumed to be a non-market producer unless it competes with a private producer. A typical case is tendering for a contract with government on commercial terms and therefore government payments are only for services delivered.

• 20.26If a public producer is one of several suppliers to government, it is considered a market producer if it competes with other producers on the market and its prices satisfy the general criteria to be economically significant, as defined in paragraphs 20.19 to 20.22.

The output is sold to government and others.

• 20.27If a public producer is the only supplier of its services, it is presumed to be a market producer if its sales to non-government units are more than half of its total output or its sales to government fulfils the tendering condition of paragraph 20.25.

• 20.28If there are several suppliers, a public producer is a market producer if it competes with the other producers through tendering for a contract with government.

The market/non-market test

• 20.29The sector classification of core government units, engaged in the provision of goods and services on a non-market basis and/or in the redistribution of income and wealth, is straightforward.

• For other producers that operate under the control of government, an assessment of their activity and resources is necessary. In order to decide if they are market units, and charge economically significant prices, the criteria as set out in paragraphs 20.19 to 20.28 are to be checked. In summary the conditions are as follows:

• (a) the producer is an institutional unit (a necessary condition; see also the decision tree in paragraph 20.17);

• (b) the producer is not a dedicated provider of ancillary services;

• (c) the producer is not the only supplier of goods and services to government, or, where that producer is, it has competitors; and

• (d) the producer has an incentive to adjust supply to undertake a viable profit-making activity, to be able to operate in market conditions and to meet its financial obligations.

• The ability to undertake a market activity will be checked notably through the usual quantitative criterion (the 50 % criterion), using the ratio of sales to production costs (as defined in paragraphs 20.30 and 20.31). To be a market producer, the public unit shall cover at least 50 % of its costs by its sales over a sustained multi-year period.

• 20.30For the market/non-market test, sales of goods and services correspond to sales receipts, in other words to the market output (P.11) increased by payments for non-market output (P.131), if any. Own-account production is not considered as part of sales in this context. Sales exclude also all payments received from government unless they are granted to other producers undertaking the same activity.

• 20.31Production costs are the sum of intermediate consumption, compensation of employees, consumption of fixed capital and other taxes on production. For the purpose of the market/non-market test, production costs are increased by the net interest charge and decreased by the value of any imputed production, notably own-account production. Subsidies on production are not deducted.

Financial intermediation and the government boundary

• 20.32The case of units engaged in financial activities needs special consideration. Financial intermediation is the activity in which units acquire financial assets and at the same time incur liabilities on their own account by engaging in financial transactions.

• 20.33A financial intermediary places itself at risk by incurring liabilities on its own account. For instance, if a public financial unit manages assets but does not place itself at risk by incurring liabilities on its own account, it is not a financial intermediary and the unit is classified in the general government sector rather than in the financial corporations sector.

• 20.34Applying the quantitative criterion of the market/non-market test to public corporations involved in financial intermediation or in managing assets is generally not relevant, because their earnings arise from both property income and holding gains.

Borderline cases

Public head offices

• 20.35Public head offices are entities whose main function is to control and direct a group of subsidiaries under the control of a government unit. Two cases are distinguished.

• (a) To the extent that the public head office is an institutional unit and is engaged in the management of market producers, it is classified according to the main activity of the group, in sector S.11 if the main activity is to produce goods and non-financial services, or in sector S.12 if it produces mainly financial services (see also paragraphs 2.23 and 2.59).

• (b) If the public head office is not an institutional unit, and so sometimes known as a 'shell', or acts as a government agent for public policy purposes, such as channelling funds amongst subsidiaries, and organising privatisation or defeasance, it is classified to the general government sector.

• 20.36The term 'public head office' used here covers units which are also known under the label of 'public holding companies'.

• 20.37Subsidiaries forming part of the group, engaged in production and keeping a full set of accounts, are deemed to be institutional units even if they have partially surrendered some of their autonomy of decision to the central body (see paragraph 2.13). The market/non-market test is applied to individual units. It may thus happen that one subsidiary, but not others, is recognised as non-market and classified to the general government sector.

Pension funds

• 20.38Employers' pension schemes are arrangements set up to provide retirement benefits to participants, based on a contractual employer-employee relationship. They include funded, unfunded, and partly funded schemes.

• 20.39A defined-contribution funded scheme, established by a government unit, is not treated as a social security scheme, where there is no government guarantee on the level of pensions due, and the level of pensions is uncertain because it depends on asset performance. As a consequence, the unit identified as managing the scheme — as well as the fund itself, if it is a separate institutional unit — is considered a financial corporation, classified in the insurance corporations and pension funds subsector.

Quasi-corporations

• 20.40Quasi-corporations are unincorporated enterprises that function as if they were corporations. Quasi-corporations are treated as corporations: that is, as separate institutional units from the units to which they belong in recognition of their distinct economic and financial behaviour. Thus, market establishments controlled by government units and recognised as public quasi-corporations are grouped with corporations in the non-financial or financial corporations sectors.

• 20.41A government establishment or a group of establishments engaged in the same kind of production under common management is treated as a public quasi-corporation if:

• (a) it charges prices for its outputs that are economically significant;

• (b) it is deemed to have autonomy of decision; and

• (c) a complete set of accounts exists that enables its operating balances, savings, assets and liabilities to be separately identified and measured, or it is possible to construct such a complete set of accounts.

• 20.42The amount of income withdrawn from a quasi-corporation during a given accounting period is decided by the owner. Such a withdrawal is equivalent to the payment of a dividend by a corporation to its shareholders. Given the amount of the income withdrawn, the amount of earnings retained within the quasi-corporation is determined. The owner may invest more capital in the enterprise or withdraw capital from it by disposing of some of its assets, and such flows of capital shall also be identifiable in the accounts whenever they occur. Investment and property income flows in the quasi-corporation are recorded in the same way as similar flows in corporations. In particular, investment grants are recorded as capital transfers.

• 20.43The producer entities that are not treated as quasi-corporations remain integrated with the government units that own them. While units of government consist largely of non-market producers, market establishments can exist within a government unit. The sales of these market establishments are in addition to incidental sales, which are secondary output sold by non-market establishments at economically significant prices. As a result, a non-zero net operating surplus is possible for a government unit: the net operating surplus generated by market establishments.

Restructuring agencies

• 20.44Some public units are involved in the restructuring of corporations. Such corporations may or may not be controlled by government. The restructuring agencies may be long-standing public units or agencies created for this special purpose. Government funds the restructuring in various ways, either directly through capital injections such as capital transfers, loans or acquisition of equity, or indirectly, through granting guarantees. The major criteria determining sector classification of restructuring agencies are whether such entities are financial intermediaries, the market character of the main activity and the degree of risk assumed by the public agency. In many cases, the degree of risk taken by the restructuring agency is low due to the fact that it acts with public financial support and on behalf of the government. Restructuring agencies can handle privatisation or defeasance.

Privatisation agencies

• 20.45The first type of restructuring agency manages privatisation of public sector units. There are two cases.

• (a) The restructuring unit, whatever its legal status, acts as a direct agent of the government or has a limited lifespan. Its main function is to redistribute national income and wealth, channelling funds from one unit to the other. The restructuring unit is classified in the general government sector.

• (b) The restructuring unit is a holding company controlling and managing a group of subsidiaries, and only a minor part of its activity is dedicated to conducting privatisation and channelling funds from one subsidiary to the other on behalf of the government and for public policy purposes. The unit is classified as a corporation, and any transactions made on behalf of the government should be rerouted through the general government.

Defeasances structures

• 20.46The second type of restructuring agency deals with impaired assets, and may be set up in a banking or other financial crisis. Such agencies are referred to as defeasance structures or 'bad banks'. A restructuring agency shall be classified according to the degree of risk it assumes, considering the degree of financial support of the government.

• In the most common case, the restructuring agency purchases assets above market prices with the direct or indirect financial support of government. Its activities result in redistribution of national income and wealth. If the defeasance structure does not place itself at risk, it is classified to the general government sector.

Special purpose entities

• 20.47Special purpose entities (SPEs), also called special purpose vehicles (SPVs), may be set up for financial convenience by governments or by private entities. The SPE may be involved in fiscal operations, including securitisation of assets, borrowing on behalf of government, etc. Such SPEs are not separate institutional units when resident. These entities are classified according to the principal activity of the owner, and SPEs performing fiscal operations are classified to the general government sector.

• 20.48Non-resident SPEs are recognised as separate institutional units. All flows and stock positions between the general government and the non-resident SPE are recorded in the general government and SPE accounts. In addition, when such non-resident SPEs undertake government borrowing or incur government outlays abroad, even when there are no flows recorded between the government and the SPE related to those fiscal activities, transactions are imputed in the accounts of both the government and the non-resident entity to reflect the fiscal activities of the government. If a non-resident SPE engages in a securitisation operation without a sale of asset, the operation is considered to be a borrowing transaction of the government. The economic substance of this transaction is accounted for by imputing general government borrowing from the non-resident SPE for the same value and at the same time the SPE incurs a liability to the foreign creditor.

Joint ventures

• 20.49Many public units enter into arrangements with private entities or other public units to undertake a variety of activities jointly. The activities can result in market or non-market output. Joint operations can be structured broadly as one of three types: jointly controlled units, referred to here as joint ventures; jointly controlled operations; and jointly controlled assets.

• 20.50A joint venture requires the establishment of a corporation, partnership or other institutional unit in which each party has joint control over the activities of the unit. As an institutional unit, the joint venture may enter into contracts in its own name and raise finance for its own purposes. A joint venture maintains its own accounting records.

• 20.51Normally, the percentage of ownership will be sufficient to determine control. If each owner owns an equal percentage of the joint venture, the other indicators of control must be considered.

• 20.52Public units can also enter into joint operating arrangements that are not run by separate institutional units. In this case, there are no units requiring classification, but care must be taken to ensure that the ownership of assets is recorded correctly and sharing arrangements of revenues and expense are made in accordance with the provisions of the governing contract. For example, two units may agree to be responsible for different stages of a joint production process or one unit may own an asset or a complex of related assets but both units agree to share revenues and expenses.

Market regulatory agencies

• 20.53Public agencies acting in the field of agriculture engage in two types of activity:

• (a) either to buy, hold and sell agricultural and other food products on the market; or

• (b) to be exclusively or principally a distributor of subsidies or other transfers to producers.

• In the first case, given that it acts as a market producer, the institutional unit is classified in the non-financial corporations sector (S.11). In the second case, the institutional unit is classified in the general government sector (S.13).

• 20.54Where the market regulatory agency performs both activities described in paragraph 20.53, it is split into two institutional units, according to the principal activity, one being classified in the non-financial corporations sector (S.11), the other in the general government sector (S.13). In the case where it would be difficult to split the agency in this way, a convention is to adapt the usual sector classification test applying a 'principal activity' criterion on the basis of costs. If the costs of the unit are very significantly linked to the market managing activity, the unit is classified in the non-financial corporations sector. An 80 % threshold of costs to sales ratio is recommended. If the costs to sales ratio linked to the regulatory activity are less than this threshold, the unit is classified in the general government sector (S.13).

Supranational authorities

• 20.55Some countries are part of an institutional agreement whereby the countries form part of a supranational authority. Normally such an arrangement implies monetary transfers from the member countries to the supranational authority and the reverse. The supranational authority will also engage in non-market production. In the national accounts of the member countries, the supranational authorities are non-resident institutional units that are classified to a specific subsector of the rest of the world.

The subsectors of general government

• 20.56Depending on the administrative and legal arrangements, there is generally more than one level of government within a country. In Chapter 2, three levels of government are specified: central, state (or regional) and local, with a subsector for each level. In addition to these levels of government, the existence and size of social security and its role in fiscal policy require that statistics for all social security units be compiled as a fourth separate subsector of general government. Not all countries have all levels; some may have only a central government or a central government and one lower level. In countries that have more than three levels, the various units should all be classified to one of the levels above.

Central government

• 20.57The central government  (excluding social security funds) subsector (S.1311) consists of all government units having a national sphere of competence, with the exception of social security units. The political authority of a country's central government extends over the entire territory of the country. The central government can impose taxes on all resident institutional units and on non-resident units engaged in economic activities within the country. Central government typically is responsible for providing collective services for the benefit of the community as a whole, such as national defence, relations with other countries, public order and safety, and for regulating the social and economic system of the country. In addition, it may incur expenditure on the provision of services, such as education or health, primarily for the benefit of individual households, and it may make transfers to other institutional units, including other levels of government.

• 20.58The compilation of statistics for central government is important because of the special role it plays in economic policy analysis. It is mainly through central government that fiscal policy impacts on inflationary or deflationary pressures within the economy. It is generally at the central government level that a decision-making body formulates and carries out policies directed toward nationwide economic objectives.

• 20.59The central government subsector is a large and complex subsector in most countries. It is generally composed of a central group of departments or ministries that make up a single institutional unit plus miscellaneous bodies operating under the control of the central government with a separate legal identity and enough autonomy to form additional central government units.

• 20.60The main central group or primary central government is sometimes called budgetary central government emphasising the fact that an essential of its key reporting statement is the 'budget'. This suggests that the budget provides an implicit delimitation of this underlying institutional unit of central government. It is sometimes called the 'State', which should not be confused with the notion of state government such as provinces, Länder, cantons, republics, prefectures, or administrative regions in a federal system of government. When drawing up the complete sequence of accounts for budgetary central government, it is often appropriate to include the activities of extra-budgetary funds, when they are not institutional units, and generally all treasury operations not reported in the budget.

• 20.61The other component of central government consists of other central government bodies, also called extra-budgetary units, which comprise extra-budgetary agencies or entities that qualify as institutional units, non-market public enterprises with legal status and non-market public controlled NPI.

• 20.62Central government can be partitioned into two components: budgetary central government and other central government bodies. This partition is a matter of judgment and can be influenced by practical considerations. An important criterion is the institutional coverage of the 'budget'. However, the exact composition should be precisely known and agreed between compilers at the national level, to reinforce the consistency of source data. The ability to draw a complete sequence of accounts for these two 'subsectors' of central government is important in assessing the quality of the data.

State government

• 20.63The state government  (excluding social security funds) subsector (S.1312) consists of all government units in a federal system of government having a state or regional sphere of competence, with the possible exception of social security units. A state is the largest geographical area into which the country as a whole is divided for political or administrative purposes. Such areas are known by terms such as provinces, Länder, cantons, republics, or administrative regions. They all enjoy the sufficient level of power required in a federal system of government. The legislative, judicial, and executive authority of a state government extends over the entire area of an individual state, which usually includes numerous localities, but does not extend over other states. In many countries, state governments do not exist. In federal countries, considerable powers and responsibilities may be assigned to state governments, and compiling a state government subsector is appropriate in such cases.

• 20.64A state government usually has the fiscal authority to levy taxes on institutional units that are resident in, or engage in economic activities in, its area of competence. To be recognised as a government unit, the entity must be able to own assets, raise funds, and incur liabilities on its own account, and it must also be entitled to spend or allocate at least some of the taxes or other income that it receives according to its own policies. The entity may, however, receive transfers from the central government that are tied to certain specified purposes. A state government is able to appoint officers independently of external administrative control. If a government entity operating in a state is entirely dependent on funds from central government, and if central government also dictates the ways in which those funds are to be spent, then the entity is an agency of central government.

Local government

• 20.65The local government  (excluding social security funds) subsector (S.1313) consists of government units having a local sphere of competence (with the possible exception of social security units). Local governments typically provide a wide range of services to local residents, some of which may be financed out of grants from higher levels of government. Statistics for local government cover a wide variety of governmental units, such as counties, municipalities, cities, towns, townships, boroughs, school districts, and water or sanitation districts. Often local government units with different functional responsibilities have authority over the same geographic areas. For example, separate government units representing a town, a county, and a school district have authority over the same area. In addition, two or more contiguous local governments may organise a government unit with regional authority that is accountable to local governments. Such units are classified to the local government subsector.

• 20.66The legislative, judicial, and executive authority of local government units is restricted to the smallest geographic areas distinguished for administrative and political purposes. The scope of a local government's authority is generally much less than that of the central or a state government, and such governments may or may not be entitled to levy taxes on institutional units or economic activities taking place in their areas. They are often dependent on grants from higher levels of government, and act as agents of central or state governments to some extent. To be treated as institutional units, however, they must be entitled to own assets, raise funds, and incur liabilities by borrowing on their own account. They must also have discretion over how such funds are spent, and they should be able to appoint their own officers independently of external administrative control.

Social security funds