1. Depreciation in EU Member States Bernd Görzig

2. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Overview n Introduction n Depreciation in EU countries n Measurement of depreciation n Impact of service life assumptions n Conclusions

3. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Introduction n CFC ratio: u Depreciation / Net domestic product (NDP) at factor costs n CFC ratios in EU member states differ between u 11 % in Greece, and u 24 % in Finland

4. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Depreciation in NDP* * At factor costs EU15

5. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Economic Theory suggests: n Production Functions u Demographic and geographic factors è Mountainous or flat, shape and borders, population density and composition, institutions, culture, a. o. n Market Structures u Monopolised markets è Protected output markets, è Input markets (labour, capital), institutional settings, a. o. u Economic specialisation è Heavy or light industries, small and big countries, intensity of use, a.o.

6. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Selected Indicators and CFC Ratio

7. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Depreciation and Services EU15 Coefficient of Correlation with CFC ratio: + 0.19 Excluding Finland :+ 0.34 Greece: + 0.29 I B FIN PDK D NL A IRL L GR GB E SF

8. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Depreciation and Income Distribution EU15 Coefficient of Correlation with CFC ratio: - 0.73 Excluding Finland :- 0.77 Greece: - 0.59 F D B NL FIN E A IRL S GR DK L P GB I

9. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Possible Impact of Depreciation Differences n GDP u CFC is part of value added for non-market producer è Political implications n Operating surplus (incl. mixed income) u Changes with CFC è Analytical implications

10. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Assessment for non-market activities Percentage change of GDP with same CFC ratio in all countries

11. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Assessment for market activities Percentage change of Operating Surplus with same CFC ratio in all countries

12. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Results n Some differences in CFC ratios of EU member states might be explainable n However: u Measurement differences cannot be excluded

13. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Differences in CFC Measurement n Sources u Depreciation u Capital stock u Service lives n Service lives: degree of differentiation n Service lives: comparisons n Models n Depreciation schedule

14. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Sources of Depreciation n Direct observation (only Ireland, some new member states) n Gross or net capital stock (most countries)

15. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Sources of Capital Stock n Direct observation u Survey (mainly new member states) u Administrative register n Perpetual inventory method u Model based è Discard function (most countries) è BEA model (2 countries) u Survey based è BFA approach (some new member states)

16. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Service Lives: 12 years instead of 10 years, is that important? n In general a 20% increase in service life leads to: u Capital stock: + 20 % u Depreciation - 20 % n In Germany total economy 2001: u Net operating surplus + 14%, but u Rate of return on net stock - 8 %

17. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Service Lives: Sources n Tax register n Experts advice n Survey n Other countries estimate

18. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Service Lives: Breakdown of estimates n Asset breakdown for Service Lives ranges from u AN classification (mainly: 4 tangibles, 3 intangibles) to u > 400 types of asset n Additional industry breakdown u Applied by many countries for calculating capital stock u Rarely with specific Service Life for the particular industries

19. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Service Lives: Difficulties of comparisons n Role of Service Life in geometric depreciation is different from the linear case n Comparison possible only for specified assets

20. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Comparison of Service Lives

21. EU 6 th Framework Programme Bernd Görzig 9.6.2005 What have we learned? n Variety of methods, but n Are we able to u Quantify their impact on depreciation? u Separate between è Economic and è Methodological influences? u Separate between the various components of the applied methods? u Separate the impact of the underlying service life assumptions?

22. EU 6 th Framework Programme Bernd Görzig 9.6.2005 The Inverse PIM Model (InvPIM) n PIM u Input: è Investment time series è Estimate for the average service life u Output: è Depreciation è Capital stock n InvPIM u Input è Available depreciation figures è Available investment figures u Output è Service life estimate è Necessary additional investment

23. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Results of InvPIM n Good adaptation for most countries n Not plausible results need u Additional research u Better and more investment data

24. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Service Life Estimates by InvPIM

25. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Best results of InvPIM

26. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Worst results of InvPIM

27. EU 6 th Framework Programme Bernd Görzig 9.6.2005 High Service Lives in InvPIM

28. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Depreciation and Service Lives EU15 Coefficient of Correlation with CFC ratio: - 0.06 Excluding Finland :- 0.06 Greece: - 0.03 NL D FIN E A IRL S GR DK FL UK I P B

29. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Conclusions n CFC ratios in European Economies vary considerably u No unique explanation possible u Impact of Service life assumptions seems to be overestimated n More research in the impact of methodological differences necessary

30. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Questions for the consortium n Can we change national depreciation figures? n How is the movement of assets between industries considered?

31. Depreciation in EU Member States Bernd Görzig Thank you for listening