General Government Impact on the Economy

Presentation Outline Role of Government in the Economy Definition of General Government Sector Delimitation Impact on the economy / ESA2010

General Government The activities of General 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 the other sectors. ESA2010 dedicates a specific chapter (20) to the compilation of government accounts.

Governments’ Role in the Economy To ensure a just system of income redistribution: Trying to bridge the gap, as far as possible, between rich and poor. To provide public goods and services: Provide those goods and services which the market has no interest in providing. (examples: street lighting, security, fresh air)

Governments’ Role in the Economy To deal with externalities: An externality is defined as a cost or benefit that results from an activity or transaction and that affects an otherwise uninvolved party who did not choose to incur that cost or benefit. (example: pollution) To foster stability (catalyst of economic growth): Through fiscal policy (adjusting spending and tax rates), governments can decelerate or accelerate the economy’s rate of growth.

How “big” should governments be? Economic theory provides interesting insights to the debate. Most economists tend to favour a conservative view on the matter. In other words, they maintain that government intervention should be limited. However, the credit crunch unveiled the necessity to adequately regulate the financial markets.

Source: Eurostat Database

Source: Eurostat Database

Source: Eurostat Database

Source: Eurostat Database

Source: Eurostat Database

Background Sectors and sub-sectors Notion of control Market/Non Market Non Market Public Enterprises Public Holding Corporations Special Bodies (SPVs)

Guidelines The Manual on Government Deficit and Debt is the definitive reference manual for determining the sector classification The latest edition (2013) is based on ESA95 After September 2014, ESA2010 will bring about further updates

Sector definitions: ESA2010 The general government sector (S.13) consists of institutional units which are non-market producers whose output is intended for individual and collective consumption, and are financed by compulsory payments made by units belonging to other sectors, and institutional units principally engaged in the redistribution of national income and wealth.

Sector Definitions (ESA 2010) The institutional units included in sector S.13 are for example the following:

Sector Definitions General Government Central Government State Government Local Government Social Security Funds

Sector Definitions PUBLIC SECTOR (public companies that are indirectly owned and controlled by government). ESA2010 – chapter 20 – defines the public sector.

Sector Definitions A resident unit is regarded as constituting an institutional unit if it has decision-making autonomy in respect of its principal function, and either keeps a complete set of accounts or it would be possible and meaningful, from both an economic and legal viewpoint, to compile a complete set of accounts if they were required.

Delimitation In both SNA93 (paragraphs 6.45 and 6.50) and ESA95 (paragraph 3.19), the distinction between market and non-market producers depends on whether or not prices charged for sales are economically significant. •A price is said to be economically significant when it has a significant influence on the amounts the producers are willing to supply and on the amounts purchasers wish to buy.

Delimitation The 50% criterion In ESA95, economically significant prices are defined as prices that generate sales covering more than 50% of production costs.

Delimitation The biggest issue concerning general government delineation is the market/non-market borderline.

Production costs “production costs” are the sum of intermediate consumption, compensation of employees, consumption of fixed capital and other taxes on production. For this criterion other subsidies on production are not deducted.

Delimitation ESA2010 introduces a new update to the definition of costs: Costs: “production costs are equal to .... plus costs of capital. .... For the sake of simplicity, the costs of capital may in general be approximated by the net actual interest payments.”

Special Purpose Entities - Special Bodies ESA 2010 provides more specific guidance on treatment of SPEs. (chapter 2.17-28)

CMFB as a consultative body CMFB is the competent body which will provide the necessary direction in case of borderline cases. CMFB / Eurostat make such decisions public (for the sake of transparency).

ESA 2010: Specific Updates Capitalisation of Research and Development Expenditure Eurostat set up a dedicated Task Force to prepare templates for supplementary tables of R&D with the long-term aim of capitalisation of R&D

ESA 2010: Specific Updates Task Force on R&D – Summary R&D expenditure will be capitalised under ESA2010 Estimates for the sector general government include freely available R&D The capitalisation of R&D expenditure impacts on GDP and affects via this channel the deficit ratio for general government.

ESA 2010: Specific Updates Change in the treatment of lump sum payments received from pension schemes. In ESA95, these had a direct impact on the deficit as they were treated as revenue (capital transfer received). In ESA2010, these will now be treated as financial advances, without any direct impact on the deficit.

Thank you for your attention Joseph Bonello Acting Director General National Statistics Office Malta joseph.a.bonello@gov.mt