Changes to national accounting practices

There has been some comments in the media over the past week or so about changes to the way national accounts are compiled in the EU.

A good deal of this has focussed on changes relating to illegal/informal/underground economic activities.  It should be noted that there is no change to the treatment of these activities in ESA2010.  The definitions and conceptual approach to such activities remains exactly as it was in ESA95.  The major differences between ESA95 and ESA2010 are summarised here.

ESA95 required the inclusion of illegal and informal economic activities in national accounts but many countries failed to meet this requirement – likely because of poor, incomplete or, in some cases, no data.  Eurostat has undertaken a process to ensure consistent compliance across Member States to ESA95 in this regard, in particular as this relates to the estimates of Gross National Income (GNI).  GNI is used when calculating Member States’ contributions to the EU budget.  It is this process rather than the introduction of ESA2010 that has provided the recent focus on illegal and informal economic activities.

Some countries already do include these activities in their national accounts.  Estimates of prostitution are included in Final Consumption Expenditure (PCE) for Hungary, Greece, Czech Republic, Austria, Slovenia, Slovakia and Finland, though in some cases they may only be partial estimates.  The largest estimates are for Hungary and Greece at around one per cent of PCE while most of the others are only around one-tenth of that.  All of the estimates have data from 1995.

The list of countries that include an estimate for narcotics includes the above eight with the addition in this case of Estonia, Ireland and Sweden.  Again, all of these estimates go back to 1995.  The narcotics figure for Ireland is historical and likely incomplete.  The estimate for 1995 is €67 million and rose to €150 million by 2003.  For the past decade the figure has remained roughly at that level.  The latest figure (2012) is €146 million.  All the estimates back to 1995 are likely to revised by the CSO.

In 2011, Greek PCE was €160 billion.  Of this, €1.6 billion was attributed to prostitution and  €1.1 billion to narcotics.  The consistent application of the rules from ESA95 will not lead to an upward revision of Greek GDP as they are already included.  When other countries do include them it may lead to a relative reduction in Greece’s contribution to the EU budget.

The CSO already include an estimate for consumption of fuel and cigarettes from smuggled sources but these figures are likely to be reviewed and revised as well.

These revisions for prostitution, narcotics and smuggling are likely to be carried out on the estimates back to 1995 either by observation (if reliable data is available) or by interpolation (if it is not).  This means the changes will only have a level effect while the growth effect will be almost nil.  Nominal GDP will be revised up, which matters for debt contracts, but economic growth will be unchanged.

Of the actual changes in ESA2010 by far and away the most significant in terms of national income estimates is the change in the treatment of research and development expenditure.  In ESA95 this was included as part of Intermediate Consumption.  In ESA2010 R&D expenditure will be recognised as capital formation leading to assets of intellectual property.  In essence, R&D expenditure will now be counted as Added Value.

This will lead to an upward revision of GDP.  In the case of Ireland this is estimated to be somewhere between one and two per cent as shown in this Eurostat note.  Again the changes will result in level affects rather than growth effects.  As Eurostat note on the R&D changes:

The impact on GDP growth figures for recent periods will be very small, if not negligible.

The current work by national statistics agencies across the EU on illegal and informal activities and the changes to the treatment of R&D expenditure to be introduced from ESA2010 (as well as other lower-impact changes) are likely to result in a significant upward revision in the levels of GDP for most EU Member States.  Suggestions that the changes will influence growth rates shows a misunderstanding, or a deliberate misinterpretation, of the statistical work being undertaken and conceptual changes being introduced.

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2 thoughts on “Changes to national accounting practices”

  1. Breaking Newz

    Wonderful newz! Mirabile dictu! Phoneix like …

    … the PeeDee Nua has been launched …. having taking over FF and wrecked the state the strategy is to take over FG in gov and wreck it again ….

    Dosh is flowing in … hedge funds, vulture funds, purrfect mawrket hypothesis (sic) useful idiots, neoliberals, ordoliberals, the coke pros, the fracking fraternity etc

    A bid has been put in to take over All Hallows as the neu head office …. with a special throne for Cardinal “Error” MickDowell … and a professorship for the brudder in the back room ……

    Winston is thrilled, thrilled he is …. and studying accountancy …. O Brave Neu World ….

  2. I suppose, like some elements of already reported Irish GDP, the question of taxability might be relevant.

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