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Changes in the National Accounts 1999 according to ESA95 (1/2000)

Introduction

Main changes

Summary of the effects of the reform

Main aggregates

Introduction

The new national accounts time series 1975 to 1998* introduce the outcome of the largest accounting reform in Finland since 1979, when the calculations of national accounts based on the UN's SNA68 were published. This time, the need for a reform was brought about by the adoption of SNA93 the most recent version of the global System of National Accounts, SNA. The European System of Accounts, relating to the EU Member States, was revised simultaneously and harmoniously with SNA93. In addition to economic monitoring, the EU uses national accounts data largely for the needs of the Community administration. The data in the statistics should be compiled as uniformly as possible and be delivered to the EU according to an agreed delivery programme. To ensure this, a regulation on the new national accounts was passed by the EU.

In addition to methodological uniformity, the EU administration expects the data in the national accounts and the reform to be as exhaustive as possible. The national accounts must include all the economic activities contained in the delimitation of accounting, whether or not registered or recorded elsewhere. This requirement has essentially been included in the international recommendations of national accounts, but it gains more emphasis in the EU area. The requirement for exhaustiveness is very important because the determination of the magnitude of the EU budget and of the payments collected from the Member States for the budget. In Finland, the source material and the methods used for compiling national accounts have been quite exhaustive until now, for which reason no great changes were needed in the data of the statistics to meet this requirement.

Main changes

The following section will present the major changes in classifications, concepts and definitions compared to the SNA68 accounting system used before the reform.

Sector approach from output to assets

The major change in the revised accounting system is in that the entire accounts are now examined by sector from output to assets. In Finnish national accounts this means that in addition to the usual industry level, such as forestry or manufacturing, output is now also described from the point of view of the producer sector, such as non-financial corporations or households. The establishment, or local kind of unit is the basic level when examining by industry, while institutional decision-making units are recorded when describing sectors.

New classifications

Changes in classification of sectors

The sector classification of decision-making units, or the classification of institutional sectors, has remained unchanged on the main group level, with only some changes to the order of groups. The contents of the groups were revised. The contents of the financial corporation sector were made more up-to-date, and housing corporations, which were previously classified under non-profit institutions in Finland, were transferred to the non-financial corporation sector as an independent sub-group. The 1993 revision of the classification of Finnish employment pension schemes remains unchanged and in the new system they are still included in the sub-group social security funds under general government. The units in charge of unemployment insurance are, as before, recorded into social security funds. The delineation between the corporation and household sector was revised.

Changes in industrial classification

The ESA95 adopted the EU's new industrial classification, NACE Rev. 1, which is based on the UN's industrial classification ISIC Rev. 3. This classification has been used in the publications of Finnish national accounts since 1993, for which reason the classification remains unchanged, with only a few minor revisions. The most significant change concerns the transfer of the road development industry (development of roads and railways) from prior group K Business activities into group I Transport.

Other classifications

The classification of households' consumption expenditure was revised into the classification of individual consumption expenditure according to the international COICOP classification. The classification of capital goods was renewed and extended to be in line with the ESA95 classification of assets. The classification of the functions of government COFOG was also revised.

Concept of capital formation extended

The most far-reaching change of the revised accounting system concerns investments as the concept of capital formation was extended. Capital formation also includes the acquisition of such intangible fixed assets as computer software programmes, mineral exploration, and entertainment, literary or artistic originals. Investments in software programmes are the most significant in size, estimated at about FIM 6.7 billion in 1995.

Cultivated assets, such as dairy cattle, used in the production process were transferred from inventory capital to gross fixed capital formation. Beef cattle was considered, as before, as changes in inventories. Ownership transfer costs, such as the proportion of the asset transfer tax relating to articles of capital or land, were also recorded as capital formation.

In future, net purchases of valuables (jewellery, objects of art, etc.) will also be registered under capital formation. As yet, there is no information about them.

Consumption of fixed capital expanded

In national accounts, the concept used for depreciation, consumption of fixed capital, refers to capital input used in the production process. Its scope was extended in the new system. The extension concerns public sector infrastructure, such as roads, bridges, tunnels and other such civil engineering work, on which consumption has not been recorded before. This change will raise the value added of the public sector by FIM 4.5 billion in 1995. The proportion of the public sector in the gross domestic product will rise by one percentage point to 20 per cent. The change has no effect on general government deficit.

Consumption of fixed capital increased also due to the fact that in connection with the reform, new, shorter life periods of capital goods were taken into use in some industries, such as manufacturing.

New income concepts

Operating surplus has a new parallel concept, mixed income, in the new accounting system. It is only used for the household sector and refers to households' income combining both entrepreneurial income and profits gained from one's profession.

For each sector operating in the national economy, it is possible to calculate the income of that sector corresponding to the national income. This is called primary income. It is the income which resident units of the sector receive by virtue of their direct participation in the production process, and/or the income receivable by the owner of financial assets in return for providing funds to another unit. The income can contain compensation of employees, taxes on production and imports less subsidies, operating surplus or mixed income and property income.

The English term for gross national income was previously GNP, or gross national product. Now the concept was changed into GNI, or gross national income. In Finnish, the term GNP has for years been translated as gross national income (BKTL), which is the Finnish abbreviation used for GNI.

Gross national income, GNI, as well as national disposable income, is calculated both in nominal and real terms.

New consumption concept

Consumption was considered only from the point of view of final consumption expenditure in the system of national accounts complying with the SNA68. The new accounting system uses the concept of actual final consumption alongside final consumption expenditure. Final consumption expenditure is allocated to the sector that is the final consumer. For the calculation, final consumption expenditure has to be divided into two parts: individual and collective. Individual final consumption expenditure, such as health, educational and social services provided by the public sector are allocated to households, and collective expenditure remains with general government. Actual individual expenditure includes both final consumption expenditure paid by the person him/herself and the services received without payment. Collective consumption comprises that final consumption expenditure which cannot be allocated to any individual households or persons, such as general administration, legislation and national defence.

Actual final consumption makes it easier than before to compare countries where health care, for example, is arranged on the private basis in one country and as a public service in the other.

To retain the balance between income and consumption, the concept of actual final consumption requires that a comparable income concept is also used. Social transfers in kind is an income concept corresponding to services received by individuals without payment and compensations for goods and services from social security funds. A concept corresponding to disposable income is called adjusted disposable income, where social transfers in kind are taken into consideration.

In 1995, households' actual final consumption amounted to FIM 374 billion and final consumption expenditure to FIM 280 billion. The difference of FIM 94 billion was the value of individual goods and services provided by general government or non-profit institutions, i.e. social transfers in kind.

Delineation between consumption expenditure and social benefits changed

The proportion of the purchases of medicine, health services and the like recompensed by the Social Insurance Institution (SII) are recorded under public consumption expenditure and they are transferred as social transfers in kind to households' actual final consumption. This change will diminish social insurance benefits and households' consumption expenditure by FIM 3 to 5 billion in different years, but it will have no effect on savings. Previously, compensations were registered in gross amounts into social insurance benefits paid by the SII and into household's consumption expenditure.

Because of the new delineation of consumption expenditure, the connection of public consumption expenditure to general government production will cease to exist. Prior to this, the difference between output and sales, or other non-market output, then called production for own use, was recorded into public consumption expenditure. Now the goods and services bought on the market and supplied further to households are recorded directly into final consumption of general government in addition to other non-market output.

Changes in the definition of output

Output for own final use

When calculating the output of an industry or a sector, output is determined separately for own final use, either for consumption or for gross fixed capital formation. Output used for own consumption typically concerns agricultural products produced for own use or accommodation services for owner-occupied dwellings. Own capital formation can include production of computer software programmes or dwelling construction.

Agriculture

Agricultural output is calculated in gross terms: output also contains intermediates farms produce for their own use, such as crops grown for cattle fodder. The output and use of own intermediate inputs were not previously presented in the production account.

FISIM - financial intermediation services indirectly measured

The previous imputed bank service charge is replaced by the concept of financial intermediation services indirectly measured. The concept refers to the part of the output of credit corporations not covered by actual service charges collected from customers. So far, output is calculated, as usual, as the difference between interest receivable and payable and is given as the intermediate consumption of a nominal industry in market production. It thus has no effect on the gross domestic product. After 2002, financial intermediation services indirectly measured will be divided by actual consumption into final consumption and exports in addition to the intermediate consumption of market production. This change will raise the gross domestic product.

Changes in foreign trade

Until now, imports of goods have been recorded at the c.i.f. value, including transport and insurance costs at the border of the importing country. In the new system of accounts, imports, similarly as exports, are recorded on the level of the whole economy at the f.o.b. value, i.e. free on board at the border of the exporting country. Revisions corresponding to the registration change will also be made to transport and insurance services. The change will improve Finland's trade balance but impair the balance on services. The change has no effect on the balance of goods and services, or current external balance. The calculations made on the product group level still employ the c.i.f. value.

Goods exported and imported for processing are now included in foreign trade. Before this they were removed from the import and export figures.

Because of the revisions, imports went up by 2.1 per cent and exports by 0.9 per cent in 1995.

Changes in treatment of taxes, subsidies and capital transfers

The classification of taxes on products and other taxes on production, or former commodity taxes and other indirect taxes, has also undergone a few changes. The most important of them is to record stamp duty (and asset transfer tax) as taxes on products. Previously they were registered under other indirect taxes and compulsory fees.

The most significant alterations in subsidies concern agricultural subsidies. The majority of the EU's CAP (Common Agricultural Policy) subsidies are now recorded as subsidies on products, while prior to this, they were other subsidies. Crop failure compensations were moved from capital transfers to other subsidies on production. The registration of subsidies aims at being accrual based, which will change the production volume of agriculture between different statistical years.

In the new accounting system, the subsidies received from the EU are mainly recorded directly from abroad to beneficiaries. Previously they were first recorded as income transfers received by the State from abroad and then as subsidies paid by the State. The change will increase the Finnish gross national income by FIM 2.9 billion in 1995 but has no effect on net lending by general government.

In taxes on products and indirect taxes, cash basis accounting was replaced by accrual basis, which is carried out by timing cash recording to the actual moment of the transaction. This will change net lending by central and local government and households' disposable income and savings in different years.

Compulsory payments are not handled in the new accounts but they are included in direct taxes. Fines and penalties are recorded under other income transfers.

Changes in interest calculation

In the ESA95 accounting system, economic activities are, as a rule, recorded on accrual basis. In addition to taxes and subsidies, this has brought about some changes to the registration of interests as well. Central government interest receivable and payable has been recorded on accrual basis in the new accounts since 1997, from which year accrued data are available. Central government interest also includes accrued issue premiums and losses.

The levels of interest receivable and payable were also revised. Corrections were made especially to the corporation sector where receipts went up by almost 13 per cent, expenditure went down by 9 per cent and interest receivable in net terms rose by almost FIM 5 billion in 1995.

Changes in employment data

The national accounts give data on population and the unemployed alongside the previous data on employed persons and hours worked.

The data on employment and labour input were revised upwards on the basis of comparisons made with the Labour Force Survey. The revision was made to ensure exhaustiveness of the data, especially to incorporate the hidden economy and to amend the employment concept. In the national accounts the employed concept is measured per person. In some industries, employment was previously calculated on the basis of person years, in which case part-time employees were modified into full time equivalent employees. The increase in the number of employed persons corresponds therefore only partly to output growth. The number of employed persons went up by 4.8 per cent in 1995, but the number of hours worked by just 2.3 per cent.

Changes made previously in accordance with ESA95

When the base year of the national accounts was last changed in 1993, some changes known at the time were made in advance to be in line with the SNA93 and ESA95. These included registering financial leasing investments under investments of the renter industry and sector, presenting reinvested earnings in Finnish and foreign property income and expenditure, and recording licence and inspection fees payable to general government as service charges instead of indirect taxes.

Ensuring exhaustiveness of data

When compiling the new system of accounts, particular attention was given to exhaustiveness of data. The basic sources of exhaustive data included Statistics Finland's Business Register and Business taxation data files where company data of the Business Register, the taxation authorities and Statistics Finland's structural business statistics are combined. The grey economy, which is possibly present in different industries but does not appear in registers, was estimated on top of these data using various methods and data sources. Illegal economy was not estimated. The most important sources were the surveys made by Pekka Lith for Statistics Finland and the employment and labour input data in the Labour Force Survey. Because of the way the national accounts are compiled, it was not possible to give a separate estimate of the size of the hidden economy on the level of the whole economy.

1995 new base year for calculations at basic prices

The new base year for national accounts calculations at basic prices is 1995. In the revised system of accounts, the figures at fixed prices are calculated similarly as before for data on output and capital formation by industry, consumption expenditure, exports and imports and changes in inventories. New in this system is gross and net national income and national disposable income in real terms, calculated on the basis of the price level of the base year. When calculating figures at fixed prices, each series is calculated for each year genuinely at base year prices and aggregates at fixed prices are summed up from sub-items. In the long run, a yearly changing base year, i.e. the year preceding the present one, will be taken into use for calculations at fixed prices.

Summary of the effects of the reform

According to the calculations made in accordance with the ESA95, Finland's gross domestic product in the 1990s was somewhat higher than previously calculated. The value of the gross domestic product was FIM 565 billion in 1995, which is FIM 14.7 billion and 2.7 per cent more than previously calculated.

The reasons for the rise can mainly be found in the changes of concepts in the new system and also to a lesser degree, in the new evaluations of the grey economy. The central conceptual change raising the domestic product is the new definition of investments. Intangible fixed capital, computer software in particular, is now included in capital formation, while it was previously treated as current expenses.

Because of the revision, the value of capital formation in the 1990s is 7 to 13 per cent higher than previously calculated. The value of intangible investments was about FIM 8 billion in 1995.

The extension of the concept corresponding to depreciation, i.e. consumption of fixed capital, will also enlarge the domestic product and the proportion of the public sector. In the new system, civil engineering, such as road construction, is also considered to be subject to consumption. The revision will increase the gross domestic product by 0.8 per cent in 1995.

Described by the quantifiable development of the gross domestic product, Finland's economic recession evened out slightly. The new data indicate that the volume of the domestic product fell most, by 6.3 per cent, in 1991, while a drop of 7.1 per cent was recorded in the old accounting system. In contrast, the growth for 1994 and 1995, the first years after the recession, is now calculated slightly lower than before. This is mainly due to changes in the relative proportions of industries when the year 1990 was replaced by 1995 as the base year in the calculation of the gross domestic product. For example, the new calculations show that construction and primary production, which are subject to sharp economic fluctuations, contributed clearly less to the gross domestic product in 1995 than in the previous calculations in 1990. In contrast, the proportion of manufacturing and real estate and business services has gone up.

The revision improved general government net borrowing in most years. Net borrowing changed especially because of timing revisions of taxes and subsidies and methodological changes to central government interest calculation. In 1995, net borrowing amounted to just under FIM 21 billion, which is FIM 8 billion more positive than previously calculated.

Households' disposable income and savings ratio were on a little lower level than previously. This was primarily attributable to the revisions made to households' entrepreneurial income, interest payable and receivable and timing of taxes. Disposable income was FIM 297 billion in 1995, which is nearly FIM 12 billion less than before. Savings ratio was 6.0 per cent of disposable income, previously 6.4 per cent.

Main aggregates

GDP, gross domestic product at market prices is the final result of the production activity of resident producer units. It can be defined in three ways: as the sum of gross value added of the various institutional sectors or the various industries plus taxes and less subsidies on products; as the sum of final uses of goods and services by resident institutional units (consumption and gross capital formation, plus exports and minus imports); as the sum of incomes (compensation of employees, taxes on production and imports less subsidies, gross operating surplus and gross mixed income). (ESA 8.89)

By deducting the consumption of fixed capital from the gross domestic product, we obtain the net domestic product at market prices, NDP. (ESA 8.90.)

Value added (gross) refers to the value generated by any unit engaged in a production activity. In market production it is calculated by deducting from the unit's output the intermediates (goods and services) used in the production process and in non-market production by adding up the compensation of employees, consumption of fixed capital and possible taxes on production and imports. (ESA 8.11.)

GNI, gross national income represents total primary income receivable by resident institutional units: compensation of employees, taxes on production and imports less subsidies, gross operating surplus or gross mixed income and property income. It equals GDP minus primary income payable by resident units to non-resident units plus primary income receivable by resident units from the rest of the world. National income is an income concept, which is more significant if expressed in net terms, i.e. after deduction of the consumption of fixed capital. (ESA 8.94.)

Primary income is the income which resident units receive by virtue of their direct participation in the production process, and the income receivable by the owner of a financial asset or other such assets in return for providing funds to another unit. The income can contain compensation of employees, taxes on production and imports less subsidies, operating surplus or mixed income and property income. (ESA 8.22.)

Operating surplus, net is obtained when the compensation of employees and other taxes less subsidies on production and consumption of fixed capital are deducted from the value added. It is the surplus or deficit on production activities before interest, rents or charges and corresponds to the income which the units obtain from their own use of their production facilities. (ESA 8.18.)

Mixed income represents the balancing item of unincorporated enterprises in the households sector corresponding to remuneration for work carried out by the owner or members of his family including profits gained as entrepreneur. (ESA 8.19.)

Final consumption expenditure consists of expenditure incurred by resident institutional units on goods or services that are used for the direct satisfaction of individual needs or wants, or the collective needs of members of the community. Final consumption expenditure may take place on the domestic territory or abroad. Final consumption expenditure is incurred by households, non-profit institutions serving households and general government. Non-financial corporations, financial and insurance corporations do not have final consumption expenditure. (ESA 3.74.-3.80.)

Actual final consumption consists of goods or services that are acquired by the institutional units mentioned directly above for the direct satisfaction of human needs, whether individual or collective. Some of the goods and services may be provided as social transfers in kind.

Actual final consumption of households comprises goods and services acquired by households themselves and goods and services obtained from non-profit institutions or general government as social transfers in kind. The latter includes health, educational and social services.

Actual final consumption of general government comprises collective services provided by general government for all members of a community or of a certain group. Examples of these are general administration, national defence and environmental protection. (ESA 3.81.-3.88.)

Gross fixed capital formation consists of resident producers' acquisitions, less disposals, of fixed assets. Fixed assets are tangible or intangible assets produced as outputs from processes of production that are themselves used repeatedly, or continuously, in processes of production for more than one year. (ESA 3.102.)

Changes in inventories are measured by the value of the entries into inventories less the value of withdrawals and the value of any recurrent losses of goods held in inventories. The inventories may consist of materials and supplies, work-in-progress, finished goods and goods for resale. (ESA 3.117.-3.119.)

Exportsof goods and services consist of transactions in goods and services (sales, barter, gifts or grants) from residents to non-residents. (ESA 3.128.)

Importsof goods and services consist of transactions in goods and services (purchases, barter, gifts or grants) from non-residents to residents. (ESA 3.129.)

Disposable income is the balancing item of the current income in the secondary distribution of income account. It is obtained for each sector by adding current transfers receivable to primary income and by deducting all current transfers payable. It can be used for consumption or saving. (ESA 8.31.)

Adjusted disposable income is a corresponding item in the redistribution of income in kind account.

Savingis the balancing item in the use of income accounts. It is the positive or negative amount resulting from current transactions which establishes the link with accumulation. If saving is positive, non-spent income is used for the acquisition of assets or for paying off liabilities. If saving is negative, certain assets are liquidated or certain liabilities increase. (ESA 8.42.-8.43.)

Net lending/borrowing corresponds to the amount available to a unit or sector for financing, directly or indirectly, other units or sectors, or a net borrowing corresponding to the amount which a unit or sector is obliged to borrow from other units or sectors. (ESA 8.47.)

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Last updated 18.6.2007