ASSESSMENT AND PROJECTION OF
MACROECONOMIC INDICATORS BASED
ON INSTITUTIONAL SECTORS ACCOUNTS
1
Cristian Nicolae STĂNICĂ, PhD2
Abstract
The integrated theoretical framework of main non-fi nancial indicators by
institutional sectors, based on which a system of identity equations is to be developed, is built up starting from the basic accountancy rules of the system of national accounts. The respective system of equations, which illustrates the relationships between sectors’ income/expenditure and the main aggregates of national economy, could be used as a nucleus of any macroeconomic model. As an example, an application for a model with
three sectors is presented, related to economy response to a fi scal policy measure.
Key words: national accounts, institutional sectors, identity relations, macroeconomic modelling
***
The System of National Accounts (ESA 95) is the most elaborated model for the compilation of macroeconomic indicators, structured in a coherent package
of tables by institutional sectors in view to characterize the real and fi nancial fl ows
in the economy. The ESA 95 methodology makes a clear distinction between fi ve
institutional sectors:
- Non-fi nancial corporations (S11), consisting of market producers, whose income
are based on production selling;
- Financial corporations (S12), comprising another category of market producers,
whose income are based on contractual commitments (fi nancial intermediations,
insurances and pension funds);
- General government (S13), consisting of other public non-market producers, with incomes from compulsory payments from the other sectors;
- Households (S14), considered as market producers or producers for
self-consumption, whose income are based on earnings, social allowances, income from production sales;
- Non-profi t institutions serving households (NPISHs) (S15), other private
non-market producers, with incomes from voluntary contributions of households. - The “Pseudo-sector” Rest of the World (ROW) (S2), in view to take into account
the operations concluded between resident and non-resident units.
1. This paper is supported by the Sectorial Operational Programme Human Resources Devel-opment 2007-2013 (SOP HRD), fi nanced from the European Social Fund and by the Roma-nian Government under the contract number SOP HRD/89/1.5/S/62988.
The incomes and expenditures of the institutional sectors and the relationships between them are pointed out in the Integrated Economic Accounts Table (IEAT). The main accounts that we refer to, used for building up the macroeconomic models, are as follows: production account (pointing out the gross value added), generation of income account (whose balancing item is gross operating surplus), allocation of primary income account (from which the balance of primary income is compiled), secondary distribution of income account (whose balancing item is gross disposable income), use of disposable income account (based on which gross saving is compiled).
The production account keeps record of operations linked to the production. This account has as resources the production value and as uses the intermediate consumption. The balancing item of this account is the Gross value added at factor costs, since the production is considered at basic prices (less taxes but including subsidies on products).
Resources: The value of production at basic prices, by sectors = PDi
Uses: Intermediate consumption at purchasing prices, by sectors = CIi
Balance: Gross value added, by sectors = VAB i
VAB i = PDi – CIi , where (i) shows the institutional sectors
From the production approach point of view, the gross value added
measures the surplus resulting from the value of goods and services produced over the value of goods and services consumed for production purposes, representing the newly created value in the production process.
The production of goods and services has three distinct components, specifi c
to each institutional sector:
- market production of goods and services (sold or intended for sale on markets).
- output for own fi nal use, comprising goods or services produced and retained
by an institutional sector, either for fi nal consumption, or for gross capital
formation. The only one institutional sector that may retain products for own fi nal
consumption is that of the households (agricultural goods); on the contrary, all sectors could retain products for gross capital formation (machine-tools produced by any kind of enterprise, dwellings or extensions to dwellings produced by households, construction produced for their own use by enterprises);
- other non-market output produced by general government and NPISHs that are supplied free: services for the whole collectivity or for certain groups of population households, for free or quasi-free.
Resources: Production =PD = Σ i PDi Taxes on products (IP)
Value added taxes (TVA) Other taxes on products (IPP) Import taxes, Import duties (TVM) (-)Subsidies on products (SP)
Uses: Intermediate consumption = CI = Σ i CIi
Balance: Gross domestic product (GDP)
PIB = VAB + IP – SP: GDP equation based on the production method
Where, at economy level, the following are obtained by aggregation:
VAB = Σ i VABi = PD – CI = Σ i PDi – Σ i CIi
IP = TVA + IPP + TVM
Generation of income account shows how value added of the institutional sectors is used for Compensation of employees and Other taxes on production / Other subsidies on production. Subsidies on production (SE) are inscribed with minus in the account uses. The balancing item of this account is the Gross operating surplus:
Resources: Gross value added, by sectors = VAB i
Uses: Compensation of employees, by sectors = REMi
Gross wages and salaries = SBi
Employers’ social contributions= CPi
Other taxes on production = IDi
(-)Other subsidies on production = SEi
Balance: Gross operating surplus, by sectors = EBEi
EBEi = VABi – SBi – CPi – IDi + SEi,
where (i) shows the institutional sectors
From the income approach point of view, the gross value added points out the
primary incomes created in national economy – from the activity of production factors. These are, on one side, incomes from labour received by employees (compensation of employees) and, on the other side, gross operating surplus – incomes retained by the institutional sectors from the use of own production assets.
For the households, the gross operating surplus represents the mixed income
consisting of the benefi ts of small handicraftsmen, plus the incomes resulting from
housing services production (actual rents and rents imputed to occupier owners), as well as the assessment of household industry production.
From the standpoint of salary costs, the compensation of employees corresponds to the expenditure made by the employer as direct counterpart for the use of employees:
- Wages and salaries
- in kind (goods and services and other benefi ts provided free or at reduced prices by employers to their employees)
- Employers’ social contributions.
At the national level, Taxes on products less Subsidies on products are added in the account uses, since the resources include the value of Gross domestic product:
Resources: Gross domestic product (GDP)
Uses: Compensation of employees =REM = Σ i REMi
Gross wages and salaries = SB = Σ i SBi
Employers’ social contributions = CP = Σ i CPi
Taxes on production and imports, net = IS Taxes on products (IP)
Other taxes on production = ID = Σ i IDi
(-)Subsidies on products (SP)
(-)Other subsidies on production = SE = Σ i SEi
Balance: Gross operating surplus (EBE)
PIB = EBE + SB+ CP + IS: GDP equation based on income method
assigned to factors before the redistribution of income
where, by aggregation, the following are compiled:
EBE = Σ i EBEi
SB = Σ i SBi ; CP = Σ i CPi ; ID = Σ i IDi ; SE = Σ i SEi
IS = IP + ID – SP – SE
Allocation of primary income account presents the primary income’s
formation for the institutional sectors. ESA 95 defi nes the primary incomes as the
disposable incomes of resident units due to their direct participation in the production
processes (primary incomes pointed out in the fi rst two accounts), together with the
incomes obtained by owners of non-produced fi nancial and non-fi nancial assets for
making them available for other institutional units.
Particularly, the compensation of employees (for households) and net taxes on production and imports (for public administration) are added in the account resources. The compensation of employees on economy from the generation of income account is adjusted with net transfers of wages and salaries received from / paid to the rest of the world (∆SB), thus obtaining the compensation of employees received by co-nationals’ households (REMgosp):
REMgosp = REM + ∆SB = (SB + ∆SB) + CP = SBgosp + CP IS = IP + ID – SP – SE
Resources: (households.) Compensation of employees =REMgosp = Σ i REMi + ∆SB
Gross wages and salaries = SBgosp = Σ i SBi + ∆SB
Employers’ social contributions = CP = Σ i CPi
(publ. adm.) Taxes on production and imports, net (IS)
Gross operating surplus (EBEi)
Property income, receivable (PRi)
Interest, Dividends, Rents Other property income, receivable
Uses: Property income, payable (PUi)
Interest, Dividends, Rents Other property income, payable
Balance: Balance of primary income (VPi)
VPi = EBEi + (PRi – PUi) + Ai = EBIi + ∆Pi + Ai
where the specifi c indicator Ai was defi ned as:
SB + CP + ∆SB for households;
Ai =
{
IS = IP + ID – SP – SE for public administration;0, for the rest.
∆Pi = (PRi – PUi) corresponds to the net transfers of property incomes
between sectors, while ∆SB represents net transfers of wages and salaries to / from
the rest of the world.
At the national level the following computations are done: ∆P = Σ i ∆Pi = Σ i PRi – Σ i PUi
VP = Σ i VPi = (SB + CP + ∆SB + IS) + EBE + ∆P
VP = (EBE + SB+ CP + IS) + (∆P + ∆SB)
VP = PIB + ∆P + ∆SB
Resources: Compensation of employees =REMgosp = REM + ∆SB
Gross wages and salaries = SBgosp = SB + ∆SB
Employers’ social contributions (CP) Taxes on production and imports, net (IS)
Gross operating surplus (EBE)
Property income, receivable = PR = Σ i PRi
Uses: Property income, payable = PU = Σ i PUi
Balance: Gross national income (VP)
PIB = VP - (∆P + ∆SB): GDP equation based on primary income method
∆P is equal to net transfers of the property incomes to / from the rest of the
In accordance with the ESA95 harmonisation with the other data sources (∆P + ∆SB) will correspond to the balance of Income Account from Current Account of
Balance of Payments (gross wages, interests, dividends, profi ts, rents).
GDP corrected with cu net transfers of income from work and property to/from the rest of the world is Gross National Income (VP). Under this assumption, the two indicators are equivalent since they are summing up the primary incomes obtained by the production factors, while being different in terms of coverage: GDP is summing up total incomes achieved inside a country (obtained by residents), while VP refers to total incomes obtained by co-nationals both inside the borders and on external territories.
Secondary distribution of income account records disposable income after the redistribution of primary incomes, under the form of social contributions and social
benefi ts (except for social transfers in kind), current taxes on income and wealth, other
current transfers.
In ESA95 methodology, all sectors (including the pseudo-sector Rest of the World) have current taxes on income and wealth in the account uses, excluding public administration. The amount of taxes on incomes at national level, corrected with net taxes to/from the rest of the world, is to be found under resources in the public administration account. The public administration receives social contributions to resources, while being found under uses in the households sector and, conversely, households receive social
benefi ts under resources, while being found under uses for public administration.
Resources: (publ. adm.) Social contributions CPS = CP + CS
Employers’ social contributions (CP)
Social contributions by employees and non-employed
persons (CS)
(publ. adm.) Current taxes on income and wealth IVPgov = Σ i IVPi + ∆IVP
(households) Social benefi ts (PS)
Balance of primary income (VPi)
Other current transfers, receivable (TRRi)
Transfers within general government, international
cooperation
Non-life insurance premiums, miscellaneous current
transfers
Uses: (publ. adm.) Social benefi ts (PS)
(households) Social contributions CPS = CP + CS
Employers’ social contributions (CP)
Social contributions by employees and non-employed
persons (CS)
Current taxes on income and wealth (IVPi)
Other current transfers, payable (TRUi)
Transfers within general government, international
cooperation
Non-life insurance premiums, miscellaneous current
transfers
Balance: Gross disposable income (VDBi)
Where the specifi c indicator Bi was defi ned as: (PS – CPS) for households;
(CPS – PS + IVP + ∆IVP) for public administration,
{
∆IVP being transfers from taxes to/from the rest of the world0, for the rest.
The indicators drawing the attention in economic analyses are the gross disposable
incomesof households and of public administration. In this specifi c case, the combination
of computation relations described above is leading to the following results:
For the households’ sector:
VDBgosp = VPgosp – IVPgosp + ∆TRgosp + PS – CP – CS VPgosp = EBEgosp + ∆Pgosp + SB + CP + ∆SB
VDBgosp = EBEgosp +SN + PS + ∆Pgosp + ∆TRgosp – CSindep – IVPgospatr
where SN represents net incomes paid to population, CSindep are social contributions by employees and non-employed persons, while IVPgospatr are other taxes on income and wealth paid by the households.
For the public administration sector:
VDBadm = VPadm + ∆TRadm + CP + CS – PS + IVP + ∆IVP VPadm = EBEadm + ∆Padm + IP + ID – SP – SE
VDPadm = EBEadm + (IP + ID + CP + CS + IVP + ∆IVP) – (SP + SE) – PS + ∆Padm + ∆TRadm
The actual transfers received by households from public administration are
Social benefi ts, other than social transfers in kind.
At national level, by aggregation, the following are obtained: IVP = Σ i IVPi ; ∆TR = Σ i∆TRi = Σ i TRRi – Σ i TRUi
VDB = Σ i VDBi = Σ i VPi – Σ i IVPi + Σ i ∆TRi + IVP + ∆IVP
VDB = VP + (∆TR + ∆IVP)
Knowing the equation
VP = PIB + ∆P + ∆SB
one could reach Gross National Disposable Income VDB as depending on
GDP
Resources: ∆IVP transfers from taxes to/from the rest of the world
Gross National Income (VP)
Other current transfers, receivable = TRR = Σ i TRRi
Uses: Other current transfers, payable = TRU = Σ i TRUi
Balance: Gross National Disposable Income (VDB)
∆TR is equal to Other current transfers to/from the rest of the world (international cooperation, private transfers) which, together with net transfers from
taxes ∆IVP should lead to the balance of Current Transfers Account from Current
Account of Balance of Payments (cash transfers of workers, donations, private and public aids). The following result is obtained:
PIB = VDB – ∆V : GDP equation based on disposable income method
∆V is equal to the balancing item of Income and Transfers Account from Current Account of Balance of Payments. Thus, the GDP corrected with net transfers of income from work, property, other current transfers to/from the rest of the world (∆V) is the Gross national disposable income and, at the same time, is the balancing item of secondary distribution of income account at national economy level, compiled by ESA95.
Use of disposable income account determines the gross saving starting
from the disposable incomes and fi nal consumption expenditure achieved by the three
institutional sectors: households, public administration and non-profi t institutions
serving households. The account also comprises an adjustment element for the variation of households’ rights upon the pension funds.
Resources: Gross disposable income (VDBi)
Adjustment households’ rights upon pension funds (AP) (households.)
Uses: Final consumption expenditure (CFi)
Adjustment households’ rights upon pension funds (AP) (fi n. comp.)
Balance: Gross saving (ECBi)
ECBi = VDBi – CFi + Ci
where Ci is a specifi c indicator equal to AP in case of population households
and to (– AP) in case of fi nancial companies.
At the level of national economy: CF = Σ i CFi ;
ECB = Σ i ECBi = VDB – CF
goods and services by public administration and by non-profi t institutions, intended
for households, in the form of social transfers in kind, belong to the fi nal consumption
expenditure of these sectors.
a) The fi nal consumption expenditure of households consists of:
- Purchases via retail and commercial services rendered to the population,
including transports and communications; purchases on peasant’s market.
- imputed rent of owner-occupied dwellings; dwellings current maintenance
expenditure; production for self consumption (consumption from self production and consumption of goods processed within the household).
- wages and salaries and income in kind of employees, social benefi ts in kind
(price compensation etc.).
- residual sales and territorial correction.
Final consumption means the consumption of resident households, irrespective of taking place on the economic territory or in the rest of the world. The
balance between fi nal consumption of residents in the rest of the world and fi nal
consumption of non-residents on the economic territory cannot be broken-down by products, being globally assigned to an item called „territorial correction”.
b) Final consumption expenditure of non-profi t institutions (NPIs – trade
unions, political parties, religious organisations etc.) comprises:
- goods and services purchased on the market by NPIs and delivered as such to households.
- non-market goods and services produced by NPIs and delivered to
households.
c) The fi nal consumption expenditure of public administration comprises:
- goods and services purchased on the market and delivered as such to
households
- non-market goods and services produced by public administration in the
following fi elds:
- education, health, social security and social actions, sport, culture.
- general public services, national defence, public order, public health, environment
protection, scientifi c research, infrastructure and economy development.
Non-fi nancial accounts point out the multiple correlations between the
incomes and the expenditures of institutional sectors, thus allowing for an extensive analysis of the macroeconomic indicators within an integrated theoretical statistical framework. The purpose of this presentation, to ensure the passage from the statistical
theoretical approach to the analytical one, is justifi ed by the need for building up
a macroeconomic model for the Romanian economy, using indicators specifi c to
As application, the national economy was considered as being broken-down into three sectors: households, public administration and private sector, consisting of
fi nancial and non-fi nancial companies and non-profi t institutions serving households.
The fi scal policies impact upon the economic growth could be assessed if the GDP,
implicitly the gross value added, is analysed based on income method, since they are taxation bases of direct revenues of the general consolidated budget.
Projection of indicators
The offi cial macroeconomic forecast of Government was drawn up starting
from the IMF recommendations, under the conditions of keeping unchanged the fi scal
policies. That is the reason why the offi cial forecast could be seen as the baseline
scenario of the model, observing the conditions of unchanging the fi scal policies
during the forecasting period 2012-2013. This scenario foresees the continuation of
positive effects of economic growth recovery recorded in the fi rst semester of 2011.
Industry and exports would be further the main catalyst elements of economic growth. On the labour market, in the private sector, over 45 thousand employees by year are to be hired in 2012-2013, after losing 160 thousand employees during the crisis year 2010. As for the governmental sector, the employees’ number would decrease with 60 thousand persons in 2011, due to the measures meant to restructuring government expenses negotiated with IMF, further on keeping it at a relatively constant level of 2011.
The main objectives envisaged by the baseline scenario for 2012-2013 are
the sustained growth of GDP to over 4% in 2012-2013, infl ation diminution to 3%
by the end of 2013, investments average growth by more than 5%, exports increase by more than 9.5%, due to new input of foreign direct investments in the national
economy. The weight of budgetary defi cit in GDP will gradually diminish to about
2.6% in 2013, according to the budgetary planning negotiated with the IMF.
Baseline Scenario
2010 2011 2012 2013
Budget defi cit (% GDP) -6.5% -4.4% -3.0% -2.6%
Infl ation rate 6.1 6.5 3.5 3.2
Economic growth GDP -1.3 1.5 4.0 4.5
Private sector -1.2 2.3 4.6 5.6
Government sector -10.9 -8.1 -0.5 -1.0
rhythms of private sector consumption as compared to national average, on behalf of the lower performance of governmental sector.
Let us considering an alternative scenario, where a major fi scal relaxation
measure is applied, that is the reduction of fl at tax (tax on income and tax on
profi t) from 16% to 13%. Based on the simulations within the three sectors model,
this governmental measure will change the economy behaviour in the sense of accelerating the economic growth, due to the multiplicative effect of incomes from
fl at tax remaining at population and companies. During the initial stage, net population
incomes and companies’ profi ts would increase by the difference of 3% of the taxes
on income and on profi ts. The incomes and profi ts infl ow would materialise in an
increased private consumption on the market and in the allocation of domestic funds for investments. During the next stage, the demand surplus would generate its own domestic supply. The external economic environment would positively react, in its
turn, to this fi scal measure, by new inputs of foreign direct investments or, at least, by
stopping the capital outfl ows towards neighbour countries with lower rates of direct
taxation. Likewise, the increase in economic activities could be also supported by other indirect factors, such as restarting the activity of small and medium enterprises
which have faced fi nancial diffi culties during the economic crisis period.
Alternative scenario – fl at tax decrease by 3pp
Baseline Alternat. Baseline Alternat. 2012 2012 2013 2013 Budget defi cit (% GDP) -3.0% -3.4% -2.6% -2.8% Economic growth GDP 4.0 5.2 4.5 4.7
Private sector 4.6 5.8 5.6 5.7
Number of employees (th. pers.) 4655 4705 4705 4775
Difference Alternat./ Baseline
Difference Alternat./ Baseline Households disposable income 6960 8110
of which, from offi cial earnings 4780 5450
Public administration disposable income -2380 -1570
Taxes on production and imports 1530 2140 Current taxes on income and patrimony -5110 -5240
Social subscriptions 1200 1530
The simulations’ results show that a fi scal relaxation with 3pp. for the taxes
on income and on profi ts entail, on one side, the diminution of budgetary resources
with 5 billion lei and, on the other side, positively infl uences the budgetary revenues
from VAT, indirect taxes and social contributions (2.7 bill. - 3.7 bill. lei in 2012-2013
indirect infl uences). The major gain is the acceleration of economic growth in 2012
Conclusions
The national accounts methodologies and the correct signifi cance of statistical
series are seen as starting point for economic modelling. Otherwise, any economic theory, directly applied to statistical series available from the Statistical Yearbook, would lead in most cases to unrealistic estimates of economic behaviours. Another problem on the modelling side arises from changing, several times during the last 20 years, the statistical indicators’ methodologies, a natural situation also faced by other countries which have gradually joined the new European Statistical System.
The national accounts methodologies transposition into an integrated framework and the drawing up of an equations’ system for institutional sectors
account for a fi rst step in setting up more complicated macroeconomic models. In this
sense, one of the simple applications presented in this paper is based on the identity
and behaviour relations of three sectors: households, private sector of fi nancial and
non-fi nancial companies and the public administration sector. This approach, by
sectors, allows for the behaviour simulation through econometric equations, since the
institutional sectors show well defi ned behaviours explained by economic theory.
The impact of a fi scal measure, such as a shock reduction of taxation on
incomes and profi ts, is directly assessed by the model: on one side, the taxation bases
(income) react and entail an expansion of demand and supply, on the other side, the budgetary revenues increase due to additional collection of indirect taxes (VAT,
excise duties, custom duties) that do not have a direct relation with the fi scal measure.
The lack of budgetary revenues entailed by the decrease in direct taxes is partially covered by the surpluses collected from indirect taxes, so that the budgetary effort,
implicitly the additional defi cit, diminishes. This fi scal measure needs the reduction
of certain budget expenditures in view to preserve the short term defi cit target but, on
the long run, this lack of resources is reabsorbed, being fed by the additional economic growth.
Acknowledgments
This paper is supported by the Sectorial Operational Programme Human
Resources Development 2007-2013 (SOP HRD), fi nanced from the European Social
Fund and by the Romanian Government under the contract number SOP HRD/89/1.5/
S/62988, Project “Scientifi c Economic research, support of welfare and human
development in the European context”, National Institute of Economic Research
“Costin C. Kiriţescu”, Romanian Academy.
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