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Economic Policy Review Volume 3
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CHAPTER 8
RECENT CHANGES TO THE TREATMENT OF NATIONALISED INDUSTRIES AND TRADING ACTIVITIES IN THE PUBLIC SECTOR ACCOUNTS
by T. S. Ward
In October 1976, the Treasury announced changes to the conventions adopted in the annual Public Expenditure White Paper, a major object of which was to correct the misleadingly high impression of public spending given by the official figures. These changes had the effect of reducing the ratio of public expenditure to GDP (at factor cost) - a figure which is widely quoted - from around 60 per cent to 52 per cent. The concern of this chapter is, however, not with which particular figure best indicates the size of public expenditure. Rather the purpose is to consider whether the new concepts introduced by the Treasury enable the potential influence of government expenditure decisions on the economy to be clearly seen.
The changes in question relate to the treatment of nationalised industries and other trading activities in the Public Expenditure White Paper and consolidated public sector accounts. In the first section we set out an appropriation account for such agencies and explain how they were incorporated in the White Paper under the old conventions. We then indicate what information needs to be included in the public expenditure figures in order to show the financial position of public sector trading concerns. Finally we appraise the new form of presentation adopted by the Treasury in the light of this.
The White Paper conventions before October 1976 Table 8.1 sets out our rough estimates of an appropriation account for nationalised industries and other trading activities in 1976; no published figures exist.
In Table 8.1 those activities for which revenue is insufficient, after covering current costs, to meet interest charges are separated from other activities. In these cases - the 'loss makers' in the table - the interest charges which are not met from any operating surplus are considered to be financed by subsidies, mostly from the central government. But since the interest is largely being paid to the central government, in paying subsidies it is in effect giving with one hand in order to be able to take back with the other.
The 'other' (i.e. non 'loss making') state trading activities are shown in Table 8.1 to produce a surplus of £I ,300 million after meeting their interest commitments. In aggregate, therefore, state trading activities have a total operating surplus of £2,800 million and interest charges of £3,500 million, leaving a deficit of £700 million.
But in the consolidated public sector accounts! all that was observed under the old conventions, as indicated by the final column of Table 8.1, was a figure for subsidies of £2,000 million and a figure of £4,800 million for gross trading surplus plus rent, defined to
'As published, for example, in the Financial Statement and Budget Report or National Income 'Blue Book'.
include subsidies. The entryfo~ subsidies, therefore, vastly exceeds the overall trading loss made by the public sector after servicing debt.2
Table 8.2 illustrates alternative methods of incorporating the trading activities summarised in Table 8.1 into the total figures for public expenditure as they might appear in the annual Public Expenditure White Paper. Again the figures are intended to convey no more than broad orders of magnitude with regard to 1976. The first column of Table 8.2 sets out the official method of presentation before the recent modifications. The public expenditure figures indicate what would have been shown in the annual Public Expenditure White Paper. Before the October 1976 changes, the White Paper included subsidies paid to public enterprises as described above, even though they represent transactions internal to the public sector. Since subsidies were also included in gross trading surplus (i.e. on the receipts side), the borrowing requirement was nevertheless correctly measured.
A consistent form of presentation The second column in Table 8.2 shows how public expenditure would look if trading activities were incorporated into the accounts using conventions which are identical with those used to represent all other public expenditure. Thus in the case of the health or education programme, for example, charges for prescriptions or school meals are classified as negative expenditure and netted off gross current outlays to give the entry for current expenditure on these programmes in the White∑ Paper. Fully consistent treatment would .require the same procedure for nationalised industries and other trading bodies, in which case the operating surplus of £2,800 million in Table 8.1 would be deducted from the figure for current expenditure on goods and services in column I of Table 8.2 (giving public consumption of £23,600 million) and subsidies would disappear. Thus total public expenditure - and public sector receipts would be reduced by £4,800 million compared with the previous convention.
The same result in terms of total outlays can be obtained by showing the operating surplus on trading activities separately as a negative expenditure item. This form of presentation (column 3 of Table 8.2) is in our opinion the most satisfactory way of setting out the expenditure side of the accounts, in that it yields the 'consistent' total of column 2 while preserving the familiar (and useful) concept of public consumption intact. Intra-public sector subsidies no longer appear in the accounts, but, as was demonstrated
2Subsidics are intended to measure the extent to which consumers benefit via prices being lcss∑than costs; but the figure takes no account of the extent to which certain other prices exceed costs.
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Public sector accounts
Table 8∑1 Appropriation account of nationalised industries, housing accounts and other public enterprises:
illustrative 1976 figures
(£ million)
1. Operating surplus (i.e. before interest) 2. Interest
'Loss makers'
600 2,600
Others
2,200 900
Total
2,800 -3,500
3. Subs1dies (I + 2) 3(a). Balance available for financing capital
expenditure
2,000 -
-
1,300
2,000 1,300
4. Gross trading surplus including rent (I +3)
2,600
2,200
4,800
Notes: 'Loss makers' are those activities for which operating surplus is insufficient to meet interest payments.
'Operating surplus' equals revenue or actual rent receipts (in the case of housing accounts) less operating costs.
'Rent' in the official accounts is defined as loan charges plus amortisation, which is equivalent to operating surplus plus
subsidies.
.
Table 8∑2 Alternative treatments of nationalised industries and other trading activities in the public sector accounts:
approximate 1976 figures
(£ million)
Old Consistent Preferred New*
New
Public expenditure
I. Current expenditure on goods and sources, net of charges
2. Capital expenditure of nationalised industries
3. Other capital expenditure 4. Subsidies to nationalised industries
and o~her trading bodies 4(a). Operating surplus, before deduct-
ing interest 5. Debt interest 6. Other transfers
26,400
4,500 6,000
2,000
5,800 15,500
23,600
4,500 6,000
-
-
5,800 15,500
26,400
4,500 6,000
-
-2,800 5,800 15,500
26,400
-
6,000
2,000
-
2,300" 15,500
26,400
-
6,000
2,000
-
1,300C 15,500
7. Expenditure, excluding financial transactions
8. Capital transactions with nationalised industries
9. Other financial transactions
60,200
-
1,300
55,400
-
1,300
55,400
1,300
52-,200
3,200b 1,300
51,200
2,000d 1,300
10. Total public expenditure
61,500
IO(a). Nationalised industries' borrowing
abroad
---
56,700 -
56,700 -
56,700 -
54,500 1,200
Public sector receipts II. Gross trading surplus plus rent 12. Interest receipts 13. Other public sector receipts
4,800 1,000 45,500
1,000 45,500
-
1,000 45,500
1,000 45,500
45,500
14. Total receipts
51,300
46,500
46,500
46,500
45,500
15. Borrowing requirement (14-IOa)
10,200
10,200
10,200
10,200
10,200
Notes: 'Old' refers to the former public expenditure White Paper presentation. 'Consistent' shows the effect of treating nationalised industries' current expenditure and receipts in the same way as other public consumption and charges. 'Preferred' shows what we regard as the most satisfactory way of setting out the expenditure side of the accounts. 'New*' shows how the same total for expenditure can be obtained as in columns 2 and 3 by rearrangmg items in the way proposed by the Treasury. 'New' refers to the method of presentation in the January 1977 public expenditure White Paper. ∑∑ Interest payments to private sector less interest paid by nationalised industries and other government trading bodies. ∑ Capital grants and lending to nationalised industries by the central government and loans raised abroad to finance capital expenditure not covered by internally generated funds. c " less interest receipts from the private sector. d ∑ less nationalised industries' borrowing from abroad.
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Economic Policy Review
above, the figure shown for these fails in itself to provide a meaningful indication of the overall financial position of state enterprises, or of the extent to which consumers of goods and services produced in the public sector benefit from prices being below market prices. Instead, what is included -as a negative item is a figure for operating surplus which does provide a useful indicator of trading performance.
The new conventions The presentational changes recently introduced by the Treasury and incorporated in the January 1977 White Paper are intended to indicate the extent to which public spending gives rise to a need for taxation or government borrowing. They can be most easily understood by considering them in two steps. Column 4 in Table 8.2 shows the effect of rearranging items according to the Treasury's new form of presentation while still reaching the same total for public expenditure as in columns 2 and 3. Capital expenditure of nationalised industries is no longer shown: instead what appears. as a financial transaction, is a sum equivalent to that part of capital expenditure which is financed by capital transfers and loans rather than by internally generated funds (the operating surplus after interest of £I ,300 million in Table 8.1 ).. Subsidies to finance interest payments made by trading concerns to the government are brought back again but such interest payments together with those covered by operating surplus (totalling £3,500 million in Table 8.1) are deducted from public sector gross debt interest payments to the private sector.
In our opinion this represents a less satisfactory way of resolving the problem of overstating the size of public spending, in that it reduces the amount of information that is imparted by the figures which appear in the accounts and may possibly cause confusion. Thus the figure for capital transfers and loans to the nationalised industries does not show how much capital expenditure is being undertaken by them and the interest figure does not show how much interest is being paid by the public sector as a whole to the private sector as a whole. It would seem that in order to retain the misleading figure of subsidies paid to trading concerns, familiar concepts which have a clear meaning have been replaced by concepts which cannot be usefully interpreted without additional information.
It should be emphasised that full details of nationalised industries' capita! expenditure continue to be shown in the White Paper in a separate section, together with additional information on how this expenditure is financed. Similarly, estimates of gross debt interest also still appear and indeed are explained more fully than hitherto. Our concern here, however, is not with how much subsidiary information is made available, but only with the concepts which go towards making up the total for public expenditure in the summary tables and which inevitably will be the focus of attention.
In the case of debt interest, the amount of such transfers financed by operating surplus on trading activities is an additional - and subsidiary - point of interest, in much the same way as would be the amount of expenditure on social security benefits financed by national insurance contlibutions. In our view, the two items of expenditure should be treated in the same way
82
in the accounts, the principal object being to show how much income is being transferred via the government from one section of the community to another.
There is a further difficulty in this regard insofar as tax is levied on gross interest payments, so reducing the amount of income received by' holders of government stock and therefore the true cost of payments, in terms of the demand for currently produced output associated with this category of expenditure. The problem of interpreting the 'net' interest figure in column 4 is emphasised by the fact that the yield of tax on interest with respect to 1976 is of around the same order of magnitude as that figure.
An additional point is that governmental control of nationalised industries in practice does extend beyond the amount transferred to them by means of loans and capital grants, and this fact ought to be reflected in their treatment in the accounts. In our opinion, the similarities are large enough for their investment to be treated in the same way as, say, that undertaken by local authorities, since successive governments in the past have not tended to make any general distinction between the two, when manipulating capital programmes for demand management purposes. And it remains the case that arrangements exist to enable the government to exercise close supervision over the level of capital formation. Indeed the Treasury themselves have emphasised that the modifications to the treatment of nationalised industries in the accounts 'will not imply a less stringent regime'.t The precise effect, for example, of the cuts in central government lending to nationalised industries which were part of the Chancellor's December measures whether they are achieved by a reduction in investment or an increase in charges - is to be determined in close consultation with government, in much the same w.1y as the cuts to other programmes.
The final step in the transition to the Treasury's new conventions is shown by comparing column 4 with column 5 in Table 8.2. First, the figure for interest is further reduced by netting off public sector interest receipts from the private sector (of £1.000 million). This produces a concept which is even less informative than that in column 4, especially as there is little reason to expect interest receipts from the private sector to be related in any clear way to interest payments by the public sector.
Second - and more controversially - loans raised abroad to finance nationalised industries∑ capital expenditure (£I ,200 million) are deducted from the figure for their total borrowing (£3,200 million in column 4) and excluded from the total for public expenditure. This, in our view, is a procedure which cannot be justified on the basis of the institutional arrangements at present in force, since there is no difference between the two forms of borrowing so far as the nationalised industries are concerned. An effective cash limit is applied to nationalised industries' borrowing in total rather than merely to that part raised from the central government. Loans raised abroad are arranged by the government and are guaranteed by the Treasury (usually at a specified
'"Planning and control of public expenditure∑. Memorandum by the Treasury to the Expenditure Committee, October 1976. para. 23.
rate of exchange). The government is therefore able to reduce total public expenditure as shown in the White Paper, by arbitrarily attributing its own foreign borrowing to nationalised industries.
The net Jesuit ot these two changes is to reduce total public expenditure as shown in the White Paper by £2,200 million, but to reduce public∑ sector receipts by only £I ,000 million (through t1 ansferring interest receipts from one side of the account to the other).
An additional effect is to make the definition of total public expenditure different in the White Paper as compared with the full public sector accounts published in the National Income 'Blue Book' or Financial Statement. Since the public sector borrowing requirement is defined in the same way as before, nationalised∑ industries' borrowing abroad has to appear in the public sector accounts as part of public expenditure, even though it is not treated as such in the White Paper.
Public sector accounts
Conclusions The main conclusions to be drawn from the analysis are: I. The previous conventions meant that public expen-
diture used to be overstated in the annual Public Expenditure White Papers and in the official public sector accounts. 2. The most informative method of eliminating this overstatement and of treating trading activities in the accounts is to set out explicitly figures for operating surplus. 3. The form of presentation chosen by the Treasury produces concepts which are difficult to interpret in themselves. It moreover involves the unjustifiable exclusion of nationalised industries' borrowing abroad from public expenditure.
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Chapter 8
Recent Changes to the Treatment of Nationalised Industries and Trading in the Public Sector Accounts
Creator
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T S Ward
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Economic Policy Review Volume 3, pages 80 - 83
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March 1977