Methodological description for government sector functional expenditures based on the EU methodology
The government sector
Those financial statistical .methodologies of the IMF and the EU, which can be used for international comparison take into account the state budget’s expenditures from a statistical point of view, which in case of most of the countries differs from the group of institutions that are defined as the group of state budget institutions by the national law. According to the national law the units (institutions, funds and programs) which belong to the state budget sector, usually fulfil the statistical requirements for belonging to the government sector. It is rare that a budget unit does not belong to the statistical government sector. (There has not been an example for this in Hungary.) However, a bulk of non-budget units (based on their organisational, legal form) can be assigned to the governmental sector, like business organisations and nonprofit organisations.
According to the EU statistical standards, the government sector includes all those organizations that produce public goods, take part in the distribution of national income and national wealth, are led by government bodies and for which the rate of revenue coming from market transactions within the total revenue is lower. The statistical concept of the government sector is based on an organisation level association, therefore an organization either belong to the sector or not. In order to ensure stability of the economic sectors’ accounting, the characteristics of an organisation’s economic behaviour and its classification needs to be assessed based on a tendency which is at least 3-5 years long. New organisations should preferably be classified in the appropriate sector right at its foundation, on the basis of its business plans.
The scope of the non state budget organisations to be assigned to the government sector is established by a statistical working group in each member state.
According to EU regulations, the list of organisational units which are included in the government sector needs to be presented in the methodological description of the government sector national accounts and the so-called EDP report.
Each year since 2005 a methodological chapter called „THE DEFICIT AND DEBT OF THE GOVERNMENT SECTOR ACCORDING TO THE METHODOLOGY OF THE EUROPEAN UNION” appears in the justification of the Hungarian final budget law, which explains the difference between the scope of the government sector and the state budget sector, as well as the current classifications. The list of the non state budget entities that get classified into the government sector gets published assigned to the EDP report by the Ministry for National Economy.
Measuring the expenditures according to the EU methodology
In terms of measuring the government activities’ functions, the international statistical standards require that the statistical governmental sector’s organisational coverage is ensured and that the expenditures are taken into account based on the national accounts methodology (ESA= European System of Accounts). The table below shows the total ESA expenditure and its components, along with the formal codes and names.
Intermediate consumption Intermediate consumption / P2 P2Compensation of employees, payable Compensation of employees, payable / D1 D1
Other taxes on production, payable Other taxes on production, payable / D29 D29
Subsidies, payable Subsidies, payable / D3P D3P
Property income, payable(1) Property income, payable (1) / D4 D4
- Interest, payable(1) - Interest, payable (1) / D41 D41
- Other property income, payable(1) - Other property income, payable (1) / D4N D4N
Current taxes on income, wealth etc., payable Current taxes on income, wealth etc., payable / D5 D5
Social benefits other than social transfers in kind, payable Social benefits other than social transfers in kind, payable / D62 D62
Social transfers in kind - purchased market production, payable Social transfers in kind - market Purchased production, payable / D632 D632
Other current transfers, payable(1) Other current transfers, payable (1) / D7 D7
Capital transfers, payable(1)(2) Capital transfers, payable (1) (2) / D9 D9
- Investment grants, payable - Investment grants, payable / D92 D92
- Other capital transfers, payable - Other capital transfers, payable / D9N D9N
Gross capital formation and acquisitions less disposals of non-financial non produced assets Gross capital formation and acquisitions less disposals of non-Financial non - produced assets / P5L P5L
- Gross fixed capital formation - Gross fixed capital formation / P51G P51G
- C hanges in inventories and acquisitions less disposals of valuables - C Hanges in inventories and acquisitions less disposals of valuables / P5M P5M
Acquisitions less disposals of non-financial non-produced assets Acquisitions less disposals of non-produced non-Financial Assets / NP NP
Total expenditure Total Expenditure / OTE OTE
Beyond the organisational differences there are further ones between the two kinds of methodology. One group of these is caused by the different approach. The Hungarian system is based on a money circulation approach, while the EU and IMF GFS national accounts based statistics use accrual based data. The other group of differences comes from the fact that different scopes of transactions need to be taken into account in the two systems. According to the Hungarian system the loans provided with a policy purpose are considered as expenditures (and the payback of these as an income), while the international approach takes into account the final expenditures only. However, policy loans can be assigned to expenditures if their payback has a risk. Similarly, strict statistical rules apply for capital increases and share purchases. For example if it is expected that the required yield on the divident is not going to be realised, then the transaction can not be considered as a financial investment but has to be taken into account as final expenditure. This worsens the balance according to the EU methodology and the functional classification of teh transaction has to be performed too. In the Hungarian system capital increases and share purchases are considered as expenditures. Transactions in kind are also taken into account.The EU methodology rearranges the budget expenditures and incomes for certain items. For example accrual based expenditures on fixed assets need to be decreased by the incomes from the selling of these, so basically a net approach has to be applied. Sickness benefit however needs to be calculated using a gross approach. Due to these differences careful consideration is neccessary when comparing data that are based on different methodologies.
The COFOG methodology
To measure the functions of government the (COFOG) standard, "Classification of the Functions of Government" issued by the United Nations is used by the EU and the IMF in their government finance statistics. This nomenclature is a methodological tool that ensures that the extent and functional structure of the different countries’ government sectors can be compared and analyzed. Some countries directly implant the COFOG functional classification in their fiscal system without changes, either interpreting the classification at the level of institutions/programmes (like the Hungarian system) or at the level of transactions. Other countries apply a classification that is closer to the national characteristics, but these are usually still COFOG compatible.
The Hungarian government functional classification system created and included in the budget presentation belongs to the latter group. In contrast to the 10 main groups of the COFOG nomenclature, Hungarian classification defines 16 main groups. The Hungarian government involvement in the economic sectors is significant, therefore the Hungarian nomenclature assigns a separate function to each economic sector, while COFOG includes all industries in one major group and presents them at sub-group level only. Another substantial difference between is that there is a separate main group showing the debt service related interest payments, while the COFOG methodology classifies them into the main group „01 General public services”, which makes it difficult to keep a clear vision considering that there are only 10 goups in the system.
In 1998 the Hungarian classification already implemented the developments which have renewed the COFOG methodology currently being applied. E.g. establishing a main group for environmental protection and the placement of R&D into main groups.
COFOG main functional groups are as follows:
F01 / General public servicesF02 / Defence
F03 / Public order and safety
F04 / Economic affairs
F05 / Environment protection
F06 / Housing and community amenities
F07 / Health
F08 / Recreation, culture and religion
F09 / Education
F10 / Social protection
The Central Statistical Office provides detailed information about the COFOG methodology
statistical classifications.
The bridge between the two kinds of classification is ensured, the list on the matches is the following:
State budget functions / COFOG functionsF01 General public services / F01 / General public services
F02 Protection / F02 / Protection
F03 Law Enforcement and Public Safety / F03 / Public order and security
F04 Training / F09 / Education
F05 Health / F07 / Health
F06 Social Security, welfare and social services / F10 / Social Protection
F07 Home Affairs, municipal and communal services / F06 / Housing and Urban Affairs
F08 Leisure, cultural and religious activities and services / F08 / Recreation, culture and religious life
F09 Fuels, fuel - and energy supply
F10 Forestry, fish and wildlife management
F11 Mining and Industry
F12 Transport and communications
F13 Other economic activities and services / F04 / Economic Affairs
F14 Environmental protection / F05 / Environmental Protection
F15 F15 Debt management, government financing / F01 F01 / General public services
F16 Items thatI can not be classified into groups / itemized functional classification
The list that presents the mathches between the state budget functions and the COFOG methodology’s second level classification (which contains 6 to 9 items in each main function) is available in the table called „Functional correspondence”.
From September 2014 the functional composition of government expenditures by the COFOG methodology should be reported to the EU at the second COFOG level, previously only the data of the 10 major functional groups has to be presented. The EU countries have switched to a more detailed statement after several years of experimental data service, but some countries still have incomplete data only. Hungary has a complete time series between 1995-2013.
Functional data on the government activities according to the COFOG methodology
The annex of the actual discharge bill regularly presents the differences between the statistical data based on the Hungarian approach and those presented in the EDP data provision. In addition, time series and the current status are presented in the environment of the latest EU member state data and EU aggregates.
The latest time series of the Hungarian functional government expenditures according to the EU methodology as % of GDP is shown in the table below: „COFOG expenditures of the government sector between 1995 and 2013 as % of GDP”.
The final budget laws shows the COFOG expenditures in time series. Three major dimensions are involved when presenting the Hungarian data:
· within the government sector: central government, local government and social insurance sectors
· by main functional groups,
· by share of subsectors.
The above time series is a statistical product which is mainly based on state budget data but also uses other sources, like company reports and data provisions from non profit organisations. While in the budget presentation it is the law record which forms the basic unit of the procedure, in the statistical calculations it is the data on the activitites that serves as a basic unit, therefore in case of institutions with several activities it is possible to apply different functions. Due to differences between the two kinds of classification, data should ideally be compared with data based onthe same methodology.
Important changes were introduced in 2014, which support transparency and budgetary implementation: the COFOG methodology has to be followed by the institutions when conducting functional classification.
International comparability of the data based on the same methodology has limitations, too because different countries have different constructions for financing economic, social purposes. For example, comparing the family support system of two countries has a risk if looking at expenditures only because tax allowances to families should also be taken into account.for.
Breaks in the time series for functional expenditures, methodological changes, one-off transactions can also significantly affect the data of each year, therefore it is recommended to examine longer time series or the average of several years.
The meta data in the databases of international organizations vary in terms of how much detail they include on changes in structure, methodology or data sources.
The first few examples show breaks in time series, changes due to budget or statistical methodology modifications.
· In 1999 tax-deductible family tax allowance was introduced, which accounted for 0.3-0.5% of GDP between 2000 and 2005, however this does not appear in the functional expenditures. Between 2006 and 2010 the tax relief equaled to the 0.1% of GDP each year. From 2011 the tax reduction has become a tax base discount, so it was not taken into account when calculating the functional expenditures at all. In order to handle these kinds of special cases, ESA methodology has been modified in a way that ensures that in the event of lack of sufficient tax a part of the normative tax benefit was lost and the state should pay this amount, then this latter one will be considered as functional expenditure.
· The MÁV Zrt. (National Railways) has been decomposed by business branches. As a result of this, MÁV START Zrt., which deals with passanger transport, had to be assigned to the government sector, because in financing its expenditures incomes from market transactions represented a minor part only. Consequently, it is not the amount of state subsidies given to the organisation that is considered as government sector expenditures but expenditures on wages, material and investment expenditures and paid interests as part of the functional group „F.04.5 Transport, and delivery”.. The MÁV START Zrt. began its operation on 1 July 2007, so figures for 2007 reflect half-year effects only.
The impact of the MAV START Zrt.’s assignment to the government sector on the government sector expenditures (as % of GDP) / 2007 / 2008 / 2009 / 2010 / 2011 / 2012 / 2013% of GDP
The net effect of classification / 0,10% / 0,80% / 0,90% / 0,20% / 0,20% / 0,20% / 0,20%
MÁV START Zrt. total expenditure (ESA) / 0,40% / 1,50% / 1,60% / 0,80% / 0,80% / 0,80% / 0,80%
from which P.2 Intermediate consumption (purchase of goods) / 0,30% / 0,70% / 0,70% / 0,70% / 0,70% / 0,70% / 0,60%
from which D.1 Compensation of employees, payable / 0,00% / 0,10% / 0,10% / 0,10% / 0,10% / 0,10% / 0,10%
Minus: Budget support to MÁV START Zrt / -0,30% / -0,70% / -0,70% / -0,60% / -0,60% / -0,60% / -0,6%
· From 2011 no special contribution has to be paid to the Pension Fund by armed bodies. Previously this was used to finance additional social security burdens due to early retirement in this special service. The amount of this special payment formed part of the „D1 Compensation of employees”. The ESA national accounts statistics considers the employers' social security contributions as if the amount had been paid as wages by the employer, and the employee had paid it to the social security system – in order to ensure international comparability. Termination of payment to the pension fund therefore appears in the statistical accounts as if the wage bill in „F02 – Defence” had decreased by a sum amounting to 0.3% of the GDP.