General government deficit and debt: An exceptional revision in the financial accounts statistics

Starting from the releases of June 2022, Statistics Finland will revise the method by which interest subsidy loans of rental dwellings and right of occupancy houses are treated in the national and financial accounts. The most significant change concerns financial accounts data. The methodological change affects general government consolidated EDP debt.

In financial accounts, ARA interest subsidy loans will in future be presented in general government financial assets and liabilities. The methodological change concerns interest subsidy loans granted to rental dwellings and right of occupancy houses, which are approved by the Housing Finance and Development Centre of Finland (ARA).

The basis for the methodological revision is the conditions of ARA interest subsidy loans that restrict the renting of dwellings and the management of right of occupancy houses for a fixed period. Due to these conditions, the loans of rental dwellings and right of occupancy houses should be presented in the statistical description of general government. So far, ARA interest subsidised loans have mainly been recorded in the statistics as outside general government.

The methodological change significantly affects general government consolidated EDP debt and increases the debt ratio of general government, i.e. the GDP share of the debt. The stock of interest subsidy loans was around EUR 14.9 billion at the end of 2021. The debt ratio calculated according to the new method is 5.9 percentage points higher than that calculated according to the old method in 2021. Divided into sub-sectors, the debt ratio grows by 3.5 percentage points in the central government sector and by 2.4 percentage points in the local government sector. The time series of financial assets and liabilities are revised in financial accounts until the year 2000.

In the sector accounts of national accounts, interests on loans increase the property income and expenditure of general government. The time series of property income and expenditure has been corrected until 2018. The time series is revised to the same starting year as loans in the next time series revision of the national accounts in 2024.

Manual on the European System of Accounts provides guidelines for general government statistics

Guidelines for the statistical description of general government are based on the manual of the European System of Accounts (ESA 2010), and it is an EU Regulation binding to the Member States. In addition, ESA 2010 is specified in the Manual on Government Deficit and Debt (2019), which gives more detailed instructions on the compilation of statistics on general government.

The reporting of the deficit and debt data in the Excessive Deficit Procedure (EDP) includes a regular examination of a Member State’s compilation of statistics on general government in cooperation with Eurostat, the Statistical Office of the European Union. Finland's compilation of general government statistics was last examined in a dialogue visit between Statistics Finland and Eurostat in 2021.

One of the issues discussed was the interest subsidy loan system of rental dwellings and right of occupancy houses. Statistics Finland was asked to ascertain whether the present statistical method and the interpretation of ESA 2010 fully describe the effect of general government in the public dwelling production system and whether there are preconditions for changing the delimitation of general government.

Statistics Finland and Eurostat jointly concluded that Statistics Finland would change the statistical methodology for ARA interest subsidy loans and extend for them the statistical description of general government in the sector accounts of national accounts and financial accounts. Statistics Finland implements the change by rerouting ARA interest subsidy loans through general government accounts. The methodological change does not affect general government’s net lending or deficit.

Application of the guidelines to interest subsidy loans

In addition to ESA 2010, the more detailed guidelines of the Manual on Government Deficit and Debt (MGDD 2019) define the compilation of statistics on general government. The guidelines of the MGDD concerning rearranged transactions must be taken into account in recording public programmes and specific transactions. These guidelines are particularly relevant when examining programmes set by general government and the related activities of entities classified outside general government.

Statistics Finland reviewed the public housing production system and examined whether there are grounds for classifying housing corporations into the general government sector category or rearranging the transactions of the ARA interest subsidy loan programme into general government accounts.

Changing the sector classification of a unit means that all its transactions, assets and liabilities are recorded in the accounts of the new sector. Transaction rearrangements, in turn, can be carried out in a variety of ways, one of which is rerouting. In rerouting, a transaction between two units can be recorded as having taken place through a third party. For example, transactions in a public programme can be rerouted through general government if the units implementing them are classified outside general government.

Because the Classification of Sectors is the primary method used in national accounts for describing the activities of a unit, Statistics Finland first examined the sector classification of housing corporations from the viewpoint of the definition of general government. When defining the sector classification, it is examined who controls the unit and what producer type it is.

Municipalities control the housing holding companies they own and, in their case, the position of local government as the controlling sector is clear. By contrast, general government's control of non-profit institutions, i.e., non-profit institutions as defined by law, requires more detailed application of ESA 2010 guidelines.

Based on ESA 2010, general government exercises control in non-profit institutions through the regulations that bind them. The terms of interest subsidy loans limit the units' ability to influence their activities. In addition, it is required from so called long-term interest subsidy loan borrowers that the unit has been appointed as non-profit, unless it is publicly controlled according to law. Non-profit institutions renting out and managing dwellings with ARA restrictions as their main activity are considered public producers and are controlled by central government in accordance with ESA 2010.

Restrictions concerning ARA interest subsidy loans are the determination of rents and maintenance charges through expenses, profit limitations, provisions on the selection of tenants and the conditions for the transfer of assets. In exchange for these restrictions, the loans have public interest subsidy and a supplementary state guarantee.

The deduction of a public producer as either a public corporation or general government is based on the definition of producer type. The producer type depends on the main output type of the unit. Public units engaged in non-market production are classified as general government, while market producers are classified as public corporations in the non-financial corporations sector.

Methodologically, activity subject to ARA restrictions is regarded as non-market production and its producers as non-market, if activity subject to restrictions forms the majority of it. Restrictions imposed by the public authority have an impact on the interpretation of economically significant prices and market access, even though rents can be set to cover capital and other production costs.

Public non-market activities are by nature part of general government. However, in practice the relationship between activities subject to restrictions and activity free of them, and the main type of output derived from it for the producer units, is challenging to define from the data available.

Statistics Finland eventually chose rearrangement of transactions as the method. The advantage of this method is that the public programme and related loans can be precisely defined and loans with activity restrictions in place can be rerouted. It should be noted that the guidelines of the MGDD on rearranged transactions determine the compilation of general government accounts, although the unit is not classified as general government. The conditions set by the programme are then relevant regardless of whether the activity subject to restrictions is the main activity of the unit.

According to the guidelines, transactions must be rearranged if the public programme is implemented by units outside general government, whose activities are subject to significant conditions by general government. Such conditions include predetermined pricing and beneficiaries, without ability of the implementing unit’s effective to influence them.

In financial transactions, the current relationships between the creditor and debtor sectors change as a result of rerouting. After the change, loans granted by financial corporations to housing corporations are recorded as two transactions: between financial corporations and general government and further between general government and housing corporations.

Interest subsidy loans are usually granted by financial corporations but can also be granted by municipalities and employment pension schemes. Units receiving interest subsidy loans are mainly classified into the housing corporations sector and non-financial corporations. In addition, municipalities can take them directly on their own account. In general government accounts, the loan is rerouted through the sector controlling the housing corporation.