August 2000

1.The Purpose of the Revisions
The National Economic Institute is now releasing the first results of a comprehensive revision of the Icelandic national accounts. The purpose of the revision is twofold:

First, to bring the Icelandic national accounts into conformity with the international standards that have been developed and adopted by the relevant international institutions and that other countries are in the process of introducing. This encompasses on the one hand the United Nations standard, SNA 93 (System of National Accounts 1993) and on the other the European Union’s standard, ESA 95 (European System of Accounts 1995). ESA 95 is in the main in line with SNA 93 but is in some respects more detailed and lays out more specific working rules reflecting the fact that European Union countries are much more alike than the diverse member countries of the United Nations. All European Union countries have now adopted this new standard, and, through the European Economic Area (EEA) agreement, Iceland has committed itself to adopting it as well. The current revision is, therefore, based on ESA 95 rather than SNA 93. These standards replace older standards with Iceland having adhered to the United Nation’s 1968 standard. The new standards are in particular intended to reflect changing economic and social patterns over the last few decades, including software development, leasing and use of transport infrastructure. In parallel with the adoption of the new standards considerable resources are being put into harmonizing national account compilation in the European Union. This harmonization is driven by the fact that individual country contributions to the European Union are to a significant and increasing degree based on their GNP. Similar considerations apply to countries linked to the European Union through the EEA agreement. The coordination effort has mainly focused on arriving at cross-country level estimates of GDP but in recent years attention has also been given to assessing the economic growth of individual countries.

Second, to improve and reassess older estimation procedures, either because new sources of information are used or better procedures have been developed. An effort is made to cumulate such changes and incorporate them simultaneously at an interval spanning a number of years. The reason is that the GDP amount needs to be continuous and comparable from one year to the next through being based on the same estimation methodology. A change for one year can, therefore, not be implemented without making the corresponding correction for the entire time series. This would entail the constant changing of the GDP amount for earlier years. This is avoided by gathering changes together over a number of years and introducing all of them at the same time, and then also adjusting whole time series. One such change is now introduced in conjunction with the adoption of ESA 95. The change is linked to the compilation of supply and use tables. Work has been underway at the National Economic Institute for a number of years to link in a systematic fashion the production and expenditure sides of the national accounts, and eliminate the difference that currently exists between GDP estimates arrived at according the two approaches. This work has confirmed earlier indications that some items on the expenditure side had been overestimated; this has now been taken into account.

The revision extends back to 1990 and replaces earlier estimates from the National Economic Institute for this period. The National Budget presented in early October will be based on the revised estimates. Below, the main quantitative changes introduced are presented and discussed.

The increased share investment enjoys in GDP leads to a commensurate increase in the national saving rate out of GDP.

3.Changes in Household Final Consumption Expenditure
The decline in estimates of household consumption expenditure is the net effect of increasing and decreasing items. The new standard causes only marginal changes, an increase of about 0.1 percent in all years. The changes, therefore, result from other improvements. In percentage terms, the decline in household consumption is 2-8 percent each year. Most significant is a decline in expenditure on the purchase and operation of private cars because of an earlier overestimation of operating costs and a revision in the division of expenditure on car purchases between consumption and capital investment. The decline in household consumption because of this is in the range 5-7 billion kronur for most of the period but rises to 15-17 billion kronur during the last two years.

The estimation of imputed rents for owner-occupied housing have been revised in part to take into account Statistics Iceland’s survey of market rents whereas earlier rents had been estimated based on the operating cost of housing, including a yield on the capital tied up in the housing. These changes are done with the view to harmonizing with general practice in other EEA countries, which now all use market rents. Previously, some countries, including Norway, had employed similar methods to the ones applied in Iceland. These changes cause private consumption to drop by ½ to almost 3 billion kronur each year during 1990-1999.

Consumption expenditure in restaurants and hotels also declines somewhat, partly because of a reassessment of activity levels in these sectors but also because a larger share of the activity is counted as intermediate consumption of industries. Entertainment expenditure also declines because of a lowering of the estimated activity levels in the various industries.

Balancing these declines in household consumption expenditure is a more formal assessment of the activities of non-profit institutions serving households, as mandated by international standards. The expenditure of these institutions financed in one way or another by households are now included in household consumption, resulting in an increase in household consumption levels of 7-13 billion kronur each year during the period. Some of this was already included in other components of consumption which have, therefore, been lowered commensurately.

4.Changes in General Government Final Consumption Expenditure
The current revision results in an increase in general government consumption expenditure of 4-5 percent each year. Most of the increase is a consequence of the new ESA 95 standard while changes caused by other factors largely balance out. ESA 95 brings about two changes. First, transport infrastructure, meaning roads and bridges, is now depreciated, raising government consumption by 3-5 billion kronur every year. The older standard did not call for such depreciation. Second, the treatment of reimbursement of value-added tax (VAT) to government entities in connection with the purchase of expert services, garbage pick up, etc. is changed. In the past, this reimbursement has in the national accounts in Iceland, as in many other countries, been treated like deductible VAT. The reimbursement has, therefore, been subtracted from tax. This is now changed, and the reimbursement is now recorded gross. The result is that tax revenue and government consumption expenditure rise, by about 1½ billion kronur per year for the recent period.

Other changes, not connected with ESA 95, include an effort to count as government fixed capital formation various tools, furniture, office equipment and machinery which was earlier counted as government consumption. This causes government consumption expenditure to decline but investment expenditure to rise commensurately. The change amounts to 1-1½ billion kronur per year.

Furthermore, an underestimate of government depreciation has been corrected.

Finally, the recording of Central government pension liabilities for the current year has been changed so that one part of the liabilities are recorded as interest charges and another part as income transfers whereas earlier the entire liability had been viewed as compensation of employees and therefore been recorded as Governments final consumption. This change causes government final consumption expenditure to decline by more than 1 billion kronur during the early part of the period and by more than 2 billion kronur during the latter part.

5.Changes in Gross Fixed Capital Formation
The revision leads to increases in estimates of gross fixed capital formation by 9-14 percent each year. For the most recent years, a fourth to a third of the increase results directly from the wider definition of capital formation under ESA 95. Two factors are most important. First, expenditure on computer software is now counted as capital formation whereas previously such expenditure had been recorded as intermediate consumption. Estimates of this item are highly uncertain, but for recent years it has been put at around 3 billion kronur annually, thus raising gross capital formation by the same amount. Second, fees charged in connection with changes in ownership are now to be included in investment, boosting capital formation by 1-2 billion kronur per year for the recent period.

Other changes, not linked to ESA 95, include increasingly counting expenditure on various tools, furniture and office equipment as investment. For recent years, it is estimated that this change adds 4-5 billion kronur to fixed capital formation.

Also, the break down of car purchases into household consumption and capital formation has been revised, with the latter rising at the expense of the former, as mentioned above. Over the last two years, this adds 5-6 billion kronur to gross capital formation but significantly less in earlier years.

6. The Impact of the Changes on Estimates of Economic Growth
The above discussion focuses on the current price changes flowing from the revisions. It is equally important to examine the results at constant prices to obtain estimates of volume changes for GDP, and thereby of economic growth, and its individual components. In short, the current revision only marginally alters the earlier estimate of economic growth. Thus, overall growth during 1990-99 is now put at 23.3 percent whereas before it was at 24.2 percent.

7.The Results of Comparable Revisions in Other Countries
All the countries encompassed by the EEA have now adopted the new national accounts standard, ESA 95. Most countries adopted it in 1999, although Norway had done so already in 1995. At the same time, all countries have sought to make various other improvements in their statistical material as in the case of Iceland, somewhat complicating comparison. On the whole, though, the GDP of European Union countries has generally increased by 1-4 percent as a result of ESA 95 and other changes.