12. Blue Book 2017

This section provides the background to Tables 1a to 1d, providing details of individual changes introduced as part of Blue Book 2017 and the effect these changes have on public sector net borrowing.

Transfer costs

Transfer costs are the fees and taxes incurred as a result of the ownership of an asset being transferred from one owner to another. In both national accounts and public sector finances an estimate of the cost of transferring assets is added to the underlying cost of the asset. These transfer costs include, for example, stamp duties and legal fees.

A programme of work took place to improve transfer costs estimates to take advantage of the best available data as well as ensuring that they are conceptually correct. As a result of this work, for Blue Book 2017 an improved method is being used, which uses the House Price Index (HPI) as part of the calculation of current price transfer costs data. A new HPI (with associated back series) was introduced in 2016 and data based on this new methodology is being used in the compilation of GFCF for Blue Book 2017.

In addition to the above, annual Blue Books published since 2000 have included negative transfer costs data for non-produced non-financial assets in 4 institutional sectors, including the Public Corporations’ sector. This is conceptually incorrect as transfer costs should only be capitalised by the buyer, including both the costs of the buyer and seller, and as a result may only be positive. We had previously been aware that these negative transfer costs had been impacting public sector net borrowing and so had removed these in the public sector finances from April 2014 onwards while awaiting the outcome of the national accounts improvement work. Now that this work has been complete we are able to implement the revised transfer costs in the public sector finances for the period 1997 onwards. This has led to some large upward revisions to public corporations’ net borrowing and so public sector net borrowing pre-April 2014, in particular in the period 1997 to 2009.

There still remains a small difference between public corporation transfer costs in public sector finances and those that will be reported in Blue Book 2017. This is as we have verified that our source data for many public corporations’ capital formation already include transfer costs calculated on a different basis, in accordance with the International Accounting Standard 16 – Property, Plant and Equipment. As such, in the August 2017 PSF bulletin, we applied an additional adjustment to prevent double-counting of transfer costs. The adjustment has not been applied to the National Accounts dataset for Blue Book 2017 and will be incorporated at a future date.

Pensions

Improvements to pension estimates in the national accounts have resulted in better data for recording the effect of both funded and unfunded public sector pension schemes in the public sector finances. Data improvements related to unfunded pension schemes have been introduced in Blue Book 2017; however, improvements in data of funded pension schemes will be introduced in a future Blue Book.

Unfunded public sector pension schemes

Improvements have been made to the way imputed pension contributions are modelled, where we had previously judged that zero is a reasonable approximation to the true value of imputed contributions, into schemes which regularly adjust the contribution rates.

We have also concluded that pension transfers in and out of unfunded schemes should be separated from social contributions and social benefits, and should instead be recorded as (other) capital transfers.

These changes have been introduced with effect from the financial year ending March 1997 and will both increase and decrease estimates of central government net borrowing and subsequently public sector net borrowing over the time series, with the larger changes visible in earlier years.

Funded public sector pension schemes

Methods for estimating Local Government Pension Scheme (net) liability and associated imputed flow have been reviewed and improved estimates produced. We have also reviewed several other large funded public sector pension schemes to identify cases whereby government should be considered the pension manager. As a result, new methods and data sources have been used to quantify government’s net pension liability and associated flows for these schemes.

This change has been introduced with effect from the financial year ending March 1997 and will both increase and decrease estimates of local and central government net borrowing and subsequently public sector net borrowing over the time series. There are no effects on public sector net debt as pension liabilities are not included in the measure. However, public sector net financial liabilities (PSNFL) is significantly effected by the revisions to the government’s net pension liability which have reduced PSNFL at the end of March 2017 by £49.2 billion.

Housing associations

Although implemented in public sector finances in January 2016, the reclassification of English private registered providers of social housing (referred to here as housing associations) was implemented in the UK National Accounts, in Blue Book 2017, for the first time.

The reclassification work for national accounts identified minor inconsistencies in our original data sources, which have now been resolved. These improvements have been applied to the public sector finances this month, and in doing so affect our estimates of public sector net debt (PSND), public sector net borrowing (PSNB) and public sector net cash requirement (PSNCR) from July 2008 to date.

A methods article describing the implementation of the reclassification of English housing associations into the UK National Accounts was published on 5 June 2017. This article includes the effect of the change on PSNB and PSND for financial years ending March 2009 to March 2012. Table 1d in this bulletin shows the impact on PSNB of these improvements for the full period July 2008 onwards.

In both national accounts and public sector finances, English housing association data beyond the financial year ending March 2016 are based on Office for Budget Responsibility (OBR) forecasts and so estimates for this period have not been affected by these changes.

General government aggregates are not affected by these improvements in any periods.

British Broadcasting Corporation subsidiaries

We have improved our data covering the British Broadcasting Corporation’s (BBC) commercial subsidiaries. These subsidiaries are considered to be market bodies and have therefore been classified to the public corporation sector, whereas the remainder of the BBC is classified to central government.

Improved data are now sourced from audited and published financial statements of the BBC's commercial subsidiaries.

This change has been introduced with effect from the financial year ending March 2009 and has reduced central government net borrowing and subsequently public sector net borrowing but has had no effect on public sector net debt.

Current transfers to government

Previously we announced a programme of quality assurance work undertaken by Office for National Statistics (ONS) and HM Treasury that had identified some additional departmental income that was not incorporated in the public sector finances. As a result of this work, we have improved the data sources used to measure a small number of fees and fines and introduced, for the first time, the proceeds of the Victims Surcharge and a small number other miscellaneous fines not previously recorded.

Any additional departmental income has the effect of reducing central government net borrowing and subsequently public sector net borrowing.

Parking fines

Income from parking fines received by local authorities is no longer being recorded in the category payments for non-market output – a negative component of current expenditure – and is instead being recorded in the category other current transfers, a component of current receipts.

This change has been introduced with effect from the financial year ending March 1998 and is neutral for local government net borrowing and public sector net borrowing, because both local government current expenditure and local government current receipts increase by equal amounts.

Vehicle Excise Duty

Historically, Vehicle Excise Duty (VED) was split by fixed proportions between a tax on production for private producers and a tax on income from household consumers. This method has been improved, with estimates from the Annual Business Survey for all producing sectors being used to more accurately estimate these proportions.

This improvement in changes to the proportion of VED attributable to taxes on production and taxes on income (see Table PSA6D). Taxes on production from private producers will increase from April 1997 onwards, with those recorded as taxes on income from household consumers decreasing by an equal and opposite offsetting amount over the same period.

This change has no net effect on central government receipts and so is neutral for central government net borrowing and public sector net borrowing.

Other changes introduced in this release that will be implemented in national accounts in due course, but have not been implemented in Blue Book 2017

Rail for London

This month, we have implemented the reclassification of Rail for London (RfL) from the local government sector to the public corporations sector. This reclassification is effective from April 2011.

The reclassifications reduce public sector net borrowing by around £100 million per financial year, because the subsidy received by Rail for London from Transport for London will now be recognised when calculating the gross operating surplus of public corporations.

In addition it has been identified that subsidy payments reported in the Rail for London accounts were already being captured in Department for Communities and Local Government (DGLG) expenditure source data. As a result, public sector net borrowing was overstated by around £100 million per financial year. This has been corrected as part of the implementation of the reclassification.

Tube Lines Ltd

The revenue received by Tube Lines Ltd, which is classified to the local government sector, is now included in the category payments for non-market output. During a review of Transport for London data it was identified that this revenue was not previously included. This revenue is around £500 million per financial year, therefore reducing public sector net borrowing by this amount, from April 2011.