This box explored the implications of the new 2010 European System of Accounts (ESA10) on our public finances forecast, ahead of its incorporation in our December 2014 EFO. Annex B of our March 2014 EFO explained these changes in more detail.

Public finances data are subject to regular classification and methodological changes. But the most recent changes have been broader than usual in scope, with the ONS now having taken on board the conclusions of its review of the statistics and the implications of the new 2010 European System of Accounts (ESA10). It is important to stress that these are changes to the way the public sector’s finances are measured, not changes to the underlying activities being measured. Our forthcoming December 2014 EFO will present forecasts on the new basis.

The headline measure of the deficit is now ‘public sector net borrowing excluding public sector banks’ – which removes the effect of the public sector banks from overall borrowing – rather than ‘public sector net borrowing excluding financial interventions’ – which also excluded the effects of other unusual operations deemed to result from the financial crisis, such as the Special Liquidity Scheme, but not the cash transfers to the Exchequer from the Asset Purchase Facility (APF) related to quantitative easing. These transfers cancel out in the new headline measure, as does the stream of gilt coupon payments the Exchequer makes on the gilts held by the APF.

The main changes following the alignment with ESA10 have been in the following areas:

  • Network Rail: has been classified into the public sector, with its liabilities now adding to public sector net debt and PSNB;
  • Royal Mail Pension Plan: the value of its future pension liability now increases PSNB in 2012-13. The assets were previously recognised upfront and the payments over time. Imputed revenues are now being added to offset the annual pension payments;
  • spectrum auction proceeds: proceeds from the sale of 3G and 4G licences are now spread over the licence period, rather than reducing PSNB upfront;
  • local government pension schemes: the underfunding of these schemes is now being added as imputed spending;
  • research and development and most single use military expenditure: are now treated as capital rather than current spending. As capital assets, they will also attract depreciation. PSNB is unaffected, but the current budget deficit will generally be slightly lower;
  • tax write-offs: council tax and business rate write-offs are now netted off receipts, rather than being treated as capital spending; and
  • VAT-based contributions to the EU and tax credits: VAT contributions and (from next year) tax credits that are currently scored as negative tax will both be treated as spending, rather than being netted off tax, with no effect on measures of the deficit.

Of the ESA10-related changes, only the Network Rail reclassification affects public sector net debt. Net debt has also been raised due to the widening of the ex-measures boundary and the decision to treat bank shares bought by the government as illiquid rather than liquid assets (so that they no longer reduce net debt).

This box was originally published in Forecast evaluation report – October 2014

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