Public finances data are subject to regular classification changes due to real world events, such as the sale of Royal Mail shares in October 2013, or methodological changes, such as the treatment of artistic originals in Blue Book 2013.
Over the coming months, the headline measures of PSND and PSNB are likely to be revised significantly following: first, the conclusion of ONS’s review of its published Public Sector Finances (PSF) statistics, which aims to ensure the ‘ex’ measures remain relevant and are easily understood; and second, the ONS making the PSF data consistent with the new 2010 European System of Accounts (ESA10).a
It is for the ONS to decide which changes to implement and to determine their quantitative impact. But, in the interests of identifying risks to the published public finance aggregates that form the basis of our forecasts in this EFO, we can draw on existing data and our forecasts to quantify some aspects that are subject to potential revision.
The ONS has already announced that, among other things, the PSF review will consider:
- the ex-measures boundary: the ex-measures definition currently excludes a number of large bodies or schemes from the headline measures of debt and borrowing, including Lloyds Banking Group, Royal Bank of Scotland and the Bank of England’s Asset Purchase Facility (APF), plus a number of smaller interventions. The public sector banks currently add a little under £1 trillion to debt including financial interventions – ‘PSND inc’ – which is almost double PSND ex. The gilts currently held by the APF, purchased for £375 billion, have a nominal value of £326.5 billion. The £48.5 billion difference between the nominal value and purchase price currently increases PSND inc by around 3 per cent of GDP, but not the headline PSND ex measure that we forecast. Our projections of the flow of transfers between the Exchequer and the APF that affect borrowing are set out in Box 4.1. The ONS will consult on the Review’s recommendations, with any resulting changes likely to affect both the deficit and debt; and
- the definition of liquid assets: unlike other shares held by the public sector, shares purchased as a result of financial sector interventions are currently treated as liquid assets, as is compensation to depositors. Liquid assets net off against the public sector’s gross debt when calculating PSND and so these currently reduce PSND by over £55 billion or 3.3 per cent of GDP.
Areas that the ONS and/or Eurostat have said publicly might be subject to revision as ESA10 is implemented include:
- the treatment of the Royal Mail Pension Plan transfer: this currently appears as £28 billion of negative capital spending that improves borrowing in 2012-13, equal to the value of the assets transferred to central government. The future pension liability of £37 billion only affects PSNB as the pension payments are made. The final effect on borrowing under ESA10 is not yet clear and will depend on further Eurostat guidance. However, the largest change to borrowing would happen if it was decided that the one-off effect on PSNB under ESA10 reflected the £9 billion difference between the value of the assets and the future liability, rather than only the value of the assets. This would increase PSNB by 0.6 per cent of GDP in that year, rather than reducing it;
- imputed contributions to local government pension schemes: the ONS may decide under ESA10 guidance to include imputed employers’ contributions for local government funded pension schemes (and other funded schemes) in order to record the under- or over-funding of these schemes. Such an imputed contribution would have a small impact on local government net borrowing;
- the classification of Network Rail: Network Rail is currently classified as a private sector body. The ONS is reviewing that classification against the revised guidance in ESA10. Network Rail had £30 billion of debt recorded in its latest accounts, up from £8 billion at formation in 2002. Based on published plans, its operations imply the equivalent of around £3 billion of borrowing a year on average over the coming years. A change of classification could therefore increase PSND by about 2 per cent of GDP and PSNB by 0.2 per cent of GDP on average, with implications for future debt;
- neutral movements between capital and current spending: research and development spending will be capitalised under ESA10, potentially adding around £7 billion to spending with an offsetting reduction in current spending. Most expenditure on Single Use Military Equipment (SUME), which is around £4 to 5 billion a year in our forecast, will also be treated as capital rather than current spending; and
- neutral movements in receipts and spending: VAT paid to the EU, around £2 to 3 billion a year in our forecast, will be recorded as VAT paid to government with offsetting spending on current transfers to the EU. Together, these two changes would increase receipts and spending by around 0.3 per cent of GDP in 2013-14. In 2015, ONS will change the classification of tax credits that currently score as negative tax so that these will be treated as spending (also raising receipts and spending by the same amount). Tax credits were around £3 billion in 2012-13, but are expected to fall over the forecast period as personal tax credits are replaced by Universal Credit.
To summarise, there are potentially a number of significant methodological changes or classifications in prospect over the coming year. In most cases, these reflect methodological decisions rather than real world changes affecting the public finances, but they could have large measured effects that will need to be borne in mind when considering outturns against our forecasts. We will provide a further update in our March EFO and will discuss the implications of any specific ONS decisions in our monthly commentaries on PSF data releases.