For Official Use STD/NA(2002)5 Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development ___________________________________________________________________________________________ _____________ English - Or. French STATISTICS DIRECTORATE STD/NA(2002)5 For Official Use National Accounts THE VARIOUS MEASURES OF THE SAVING RATE AND THEIR INTERPRETATION Paper prepared by Cédric Audenis, Stéphane Grégoir, Claudie Louvot INSEE - PARIS OECD MEETING OF NATIONAL ACCOUNTS EXPERTS Château de la Muette, Paris 8-11 October 2002 Beginning at 9:30 a.m. on the first day stephane.gregoir@insee.fr cedric.audenis@dp.finances.gouv.fr English - Or. French Translation n° 14255 Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format STD/NA(2002)5 TABLE OF CONTENTS I. WHAT SAVING RATE, AND FOR MEASURING WHAT? ............................................................5 II. A COMMON MEASURE THAT CAN BE CONSTRUCTED TODAY ............................................7 2.1 The role of individually identifiable consumption ......................................................................8 2.2 The role of saving for retirement ................................................................................................9 III. NECESSARY ACCOUNTING IMPROVEMENTS: THE TREATMENT OF CAPITAL DEPRECIATION AND INDIRECT TAXES ...........................................................................................10 3.1 The role of capital depreciation .................................................................................................11 3.2 The role of the system of tax collection.....................................................................................12 IV. THE TREATMENT OF CAPITAL GAINS AND DURABLE GOODS - TWO AREAS THAT WOULD MERIT CLOSER STUDY.........................................................................................................13 4.1 The role of capital gains ............................................................................................................13 4.2 The treatment of durable goods .................................................................................................15 V. CONCLUSION ..................................................................................................................................20 BIBLIOGRAPHY ......................................................................................................................................22 2 STD/NA(2002)5 THE VARIOUS MEASURES OF THE SAVING RATE AND THEIR INTERPRETATION Abstract : The household saving rate measures the unconsumed share of household income. It is widely used in both short and long-term economic analysis. In the short term, changes in the saving rate often serve to cushion economic fluctuations : the higher the saving rate, the less household consumption is affected by a sharp slowdown in household income. In the longer term, as household saving is a major component of a country’s lending capacity, it plays an essential role in the functioning of the economy and helps to anticipate future growth conditions. In the absence of a theoretical model, it is difficult to gauge the absolute level of saving required to sustain an economy’s rate of growth. International comparison does, however, make it possible to analyse a country’s relative situation. While the standard economic measures are precisely defined in national accounting, some of them have different acceptations. To a certain extent, therefore, the choice of concept remains a matter of judgement; economists may choose to depart from the usual definitions on theoretical grounds. This is particularly true of the saving rate. To start with, the definition of income can be broad or narrow. Should one include the depreciation -- or appreciation -- of household assets, and take account of the ageing of housing assets? Should indirect taxes be deducted in the same way as direct taxes? Also, how should one count individually identifiable consumption in the form of social benefits in kind paid to households, and how should private pension saving be treated? The boundary between consumption and saving can also shift if purchases of durable goods are treated as investment. These choices are not always neutral with regard to the evaluation of saving. Depending on a country’s institutional rules, and household consumption and saving habits, they can modify the measure of the saving rate quite markedly. For example, depending on the definitions used, the French saving rate can vary within a range of 10 points or even more. For the purposes of international comparison, a common definition is needed. However, even if a single definition of the saving rate were agreed internationally, other difficulties would still reduce the comparability of aggregates, in particular institutional differences. It is desirable to choose a definition of the household saving rate that is the least sensitive to these institutional differences. At the present time, the unavailability or unreliability of data obliges us to opt for a definition of the saving rate as the ratio of gross saving to the sum of adjusted gross disposable income and a pension fund adjustment. Alternative definitions might be more useful and complete. We introduce some of them and illustrate from a quantitative point of view the modifications they imply on the measurement of French saving rate. 3 STD/NA(2002)5 THE VARIOUS MEASURES OF THE SAVING RATE AND THEIR INTERPRETATION 1. The saving rate is usually defined at the fraction of income that is not consumed. Its measurement depends on the content of two fundamental aggregates -- income and consumption, which can vary depending on the point of view one adopts. There are thus several definitions of the saving rate, giving rise to different interpretations. In particular, countries are free to choose the saving rate they wish to publish, which makes international comparison difficult. The OECD publishes the saving rates of its Member countries but they are not necessarily harmonised. 2. It is thus difficult to identify in the differences between saving rates, the share that is ascribable to real differences in behaviour and that which stems from accounting conventions. The spread of saving rates published is very wide; according to the statistics published by the OECD, the saving rates of the main countries can vary from 1% of household income, for the lowest -- the United States and the United Kingdom, to 16% for the highest -- the case of France (Figure 1). 3. Being relatively contingent, the choice of accounting conventions can lead to measures of aggregates that are highly dependent on a country’s institutional organisation, and thus not without impact on the diagnosis of its economic situation. To make that impact clearer, we shall review those conventions and evaluate their impact for a few main countries. To start with, we shall recommend the use of a saving rate calculated solely on the basis of national accounting concepts. Then, we shall examine a number of alternative conventions that would improve the comparability of measures of the saving rate but which depart from those concepts. However, to apply this new method, additional information would have to be collected and harmonised accounting rules would have to be developed. 4 STD/NA(2002)5 Figure 1 : Household saving rates published by the OECD in % of disposable income 20,0 16,0 12,0 8,0 4,0 0,0 1991 1992 Belgium Germany 1993 1994 1995 Spain France 1996 1997 Italy United States 1998 Netherland sJapan 1999 2000 United Kingdom I. WHAT SAVING RATE, AND FOR MEASURING WHAT? 4. The concepts used in national accounting were defined conventionally on the basis of economic considerations and the use to be made of them. They are described in the System of National Accounts (SNA 93) and its European adaptation, the European System of Accounts (ESA 95), drawn up by the national accountants of the UN, the World Bank, the IMF, the OECD and Eurostat. These texts should be considered as recommendations, their aim being to promote the harmonisation of country approaches; ESA lays down a set of rules with which all European Union countries must comply. 5. Several definitions of consumption and income are to be found alongside one another in these texts, making possible different measures of the saving rate. Statisticians and economists thus have some latitude in the manner in which they construct the rate; on theoretical grounds they may also wish to modify the definition of either of these aggregates. The definition chosen should therefore correspond as closely as possible to the economic interpretation one wishes to give to the saving rate. Several interpretations can be given to this statistic, partly corresponding to the different objectives of household saving. These objectives are of various orders and are constrained by the institutional setting in which they are pursued. In the short term, households save as a precaution against transient risks that can evolve over time and that can covered against only partly, such as the loss of one’s job. In the longer term, they save in order to constitute a capital to supplement their income1 and enable them to maintain their level of consumption when they retire. In turn, their 1. It can also lead to a reduction in their current expenditure, for example, when a household becomes a home owner after having been a tenant. In national accounting, home-owner households pay themselves a rent which adds to their resources, and consume a housing service which adds to their consumption. 5 STD/NA(2002)5 saving serves to finance productive investment. A savings surplus or shortfall thus has an impact on the short and long-term robustness of the economy. Without a theoretical model, it is difficult to gauge the absolute level of saving required to support a given rate of growth of an economy. On the other hand, international comparison makes it possible to analyse each country’s relative position. 6. There are two main interpretations of the saving rate. In the short term, it shows a country’s capacity to cope with a cyclical downturn. In the long term, it indicates the economy’s capacity to finance itself2. In particular, it should show households’ saving to provide for their future needs. For the purposes of international comparison, a common definition is needed. However, even if a single definition of the saving rate were agreed internationally, other difficulties would still reduce the comparability of aggregates, in particular institutional differences as we saw above. It is desirable to choose a definition of the household saving that is the least sensitive to these institutional differences between countries. 7. Before going any further, it should be pointed out that in national accounts, the accounts of the “households” institutional sector comprise those of sole proprietors. In order to treat the “entrepreneur” side separately from the “household” one, it would first be necessary to identify and measure the two related aggregates such as for instance investment, which is not simple. We shall therefore try to draw as far as possible on the standard concepts in ESA 95 and then we shall propose modifications to them which we consider would be useful. 8. The saving rate is currently defined as the unconsumed fraction of income derived from gross or net production3. However, this measurement is unsatisfactory for various reasons. For example, the capital gains made by households vis-à-vis other sectors unquestionably increase their wealth but are not included in their saving. Likewise, a country that heavily taxes housing investment will, other things being equal, have a higher saving rate, but this will not mean that the provision made for future needs is greater. Lastly, the manner in which social benefits are treated will also affect the evaluation of households’ actual income. Some countries have social protection systems that are more developed than others; depending on whether health expenditure is imputed to the government that makes it, or to the households that receive it, the evaluation of households’ income and their consumption will be different. 9. It is thus preferable to use adjusted4 disposable income and to deduct indirect taxes from it. Changes in households’ claims on pension funds may also be considered as saving in so far as contributions to such funds being voluntary, they supplement pay-as-you schemes. The saving rate should also take account of households’ precautionary saving against future risks; fixed capital consumption should therefore be deducted from income. Part of their consumption of durable goods could therefore also be treated as investment, since like investment, such consumption is not immediate but spread over time. Similarly, capital gains made by households vis-à-vis other institutional sectors could be added to income since they contribute just as much as saving flows to capital formation. 10. While this definition would be preferable to the one in current use, it still has some drawbacks. In particular, several characteristics of saving need to be taken into account. Is it risky or not? Is it 2. As households are the source of an economy’s structural financing, a low saving rate means that the economy is dependent on the decisions of foreign investors. 3. Including capital income. 4. Adjusted gross disposable income is the sum of disposable income and social transfers in kind (or individually identifiable consumption by general government). 6 STD/NA(2002)5 available in the short term? What is the return on it5? The latter may vary from one country to another; it is affected by taxation as well as by corporate profits in the case of households that hold shares, or by government debt in the case of those that hold bonds. These issues are not addressed in this paper. 11. A last point must be addressed : The changes in the definition we introduce here have for sole objectives to get more internationally comparable statistics. They are not always desirable when statistical or econometric analyses of household saving or consumption behaviour in a given country are considered. II. A COMMON MEASURE THAT CAN BE CONSTRUCTED TODAY 12. For all sorts of practical reasons -- unreliability or lack of data, difficulties of harmonisation -- at the present time it is impossible to construct the saving rate as defined above. Nevertheless, a saving rate that is insensitive to cross-country institutional differences can be constructed with data that are sufficiently reliable. That rate is defined as the ratio of gross household saving to the sum of adjusted gross disposable income and an adjustment for pension fund contributions. It differs from the rate usually published in the French national accounts by the fact that it includes individually identifiable consumption in income. It was calculated for a number of industrialised countries. The results are shown in Figure 2 below. Figure 2 : Household saving rate Gross (including FCC), in % of adjusted disposable income 27% Belgium Netherland s France Spain United Kingdom United States Italy Germany Japan 24% 21% 18% 15% 12% 9% 6% 3% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 5. This is a function of capital income, capital gains and the taxation of saving. 7 STD/NA(2002)5 2.1 The role of individually identifiable consumption 13. The cost of producing the public services delivered to households, such as health care and education, is borne by government in varying degrees from one country to the next. In continental Europe, for example, health expenditure is to a large extent borne by the government. In accounting terms, it may be considered that such expenditure is virtually absent from household consumption; on the other hand, households contribute to social security funds, so their disposable income is decreased accordingly. Health expenditure appears as consumption in the general government account. In the United States, in contrast, a large part of health expenditure is shouldered by households; their income is not reduced by contributions but their expenditure is booked under household consumption. At the macroeconomic level, if contributions and expenditure are balanced, the additional income offsets the health care consumption. These institutional differences thus do not have any (or only little) impact on the level of saving. On the other hand, with this method of counting, the household saving rate in countries with the least socialised systems is understated relative to those with more socialised systems, since contributions are not deducted from household income in the denominator, while saving in the numerator is unchanged (Table 1). The latest version of the international systems of national accounts (SNA93) includes a concept of income that is less sensitive to institutional differences. This concept, known as “adjusted disposable income”, corresponds to disposable income plus social transfers in kind, such as refunds of social security benefits and certain individually identifiable public expenditures, notably health care and education. To this adjusted gross disposable income corresponds the notion of “actual consumption” (Table 1)6. On the basis of these definitions, the saving rate is revised downwards compared with the definition that refers to disposable income, all the more in that the share of social transfers is large. The adjustment required is thus not uniform -- 2.2 points for Germany, 3 points for France and 0.7 point for the United States. The share of social transfers in kind in gross disposable varies from about 16 per cent in Germany, Spain, Italy, the United Kingdom and the United States, to 23 per cent for Belgium, France and the Netherlands, and to over 30 per cent in Denmark, Finland and Sweden. A part of this adjustment may be due in practice to different borderline between individual and collective goods and services, but these differences must remain small in Europe as its members use the same classification of the functions of government (COFOG). 6. While this concept of the saving rate is insensitive to the method of financing -- public or private -- of health and education systems, etc., it is not less sensitive than usual to the financial balance of the system. Let there be two countries in which households receive the same amount of education and health services. In the first country, the system is balanced, in the second the contributions or taxes paid by households are less than the services delivered. Household saving is thus higher in the country in which the system is not in balance, but the additional saving serves to finance the public deficit generated by the imbalance. This being so, the higher saving rate cannot be interpreted as bolstering the long-term financing of the economy, nor as households’ financial provision against future risks. As the financial balance of individually identifiable consumption is not currently available, there is no solution to this problem. 8 STD/NA(2002)5 Table 1 Treatment of social transfers in kind As taxes but not as benefits Income account Uses Resources Employee social Gross wages contributions As taxes and as benefits Income account Uses Resources Employee social Gross wages contributions Employer social contributions Employer social contributions Employer social contributions Employer social contributions Income tax, CSG,CRDS Solely monetary social benefits Income tax, CSG,CRDS Social benefits and social transfers in kind DISPOSABLE INCOME Use of income account Disposable income Consumption expenditure ADJUSTED DISPOSABLE INCOME Use of income account Adjusted disposable Actual consumption income SAVING SAVING This table shows the main operations relating to the household income account. Two manners of treating social transfers are presented. On the right, transfers in kind are included in adjusted disposable income and actual consumption. Items affected by this change are shown in bold. Balances are in capitals. 2.2 The role of saving for retirement 14. Population ageing is affecting very many countries, and will have numerous consequences, inter alia on pension funding in the developed countries. Insofar as one of the reasons for saving is to constitute an income for retirement, the decision to save can be sensitive to the types of pension provision on offer. Some countries have decided to supplement public schemes by pension funds, but the degree of development of these funds varies. Other countries have not implemented reforms but various insurance products which not do offer the usual tax breaks associated with pension funds are proposed. As private pension saving (via pension funds) is likely to become increasingly important in coming years, this should be partly taken into account when measuring the saving rate. 15. ESA 95 treats pension funds as follows. Payment by households into such funds are deducted from disposable income and pension benefits are added to it, in line with accounting practices for transfers to public pension schemes. The difference between the amount of payments by households and the amount of benefits received is thus deducted when calculating gross disposable income (Table 2). The further the system is from equilibrium, the more positive the variation in pensions fund rights. Moreover, the variation shows up in households’ financial accounts. In order to match the balance of their real accounts with that of their financial accounts, and insofar as households are considered to be the owners of the funds, this quantity is added to disposable income in the use-of-income account. It thus finally appears in saving like a life insurance product. But in the case of life insurance, as payments are not deducted from disposable income and benefits are not added to it, this quantity is considered from the outset to be unconsumed disposable income. 16. The important question is whether we want, from an economic point of view, to treat pension funds as an alternative to pay-as-you pension schemes, or as a financial investment enjoying specific tax 9 STD/NA(2002)5 breaks7. On the definitions of ESA 95, the flows that they generate are considered to be similar to those of a pay-as-you scheme for the calculation of income, but like those of a life insurance product for the calculation of saving. If we want to treat them in the same as a pay-as-you go pension scheme, the saving rate should be defined as the ratio of saving less the pension fund adjustment, to gross disposable income. If not, this adjustment should be added to disposable income. 17. For the purposes of spatial and temporal comparison of saving rates, it seems preferable to treat funded pension schemes as insurance products similar to life insurance, for several reasons. First, it is consistent with financial account flows and the fact that in national accounts, households are treated as the owners of pension funds. Second, the partial transition to a funded pension system is accompanied by employee saving, the scale of which will vary according to their income level. If saving by the least-well paid is low, from an economic point of view it should be possible to observe this in the trend of the saving rate. Lastly, from a more microeconomic point of view, it seems that pension fund pay-outs rarely take the form of an annuity8. There is little pooling of survivor’s risk, unlike in a pay-as-you-go scheme. In this, pension funds differ from pay-as-you-go schemes. 18. Admittedly, this is not a crucial issue in most countries of continental Europe since funded pension schemes currently account for only a small proportion of households’ saving products. On the other hand, if pension funds do develop in coming years, the saving rate will be lower on an accounting basis if contributions to them are treated as contributions to pay-as-you schemes, but without allowing the real amount of saving for retirement to be gauged. Empirically, it is not in those countries where pension funds have existed for the longest and are the most developed that the level of the saving rate is most affected, since when the system matures, the benefits paid out partly offset the contributions. Thus, in the United Kingdom and the United States, the change in households’ claims on pension funds amounts to 3% of income, whereas in the Netherlands, where pension funds are more recent, it amounts to nearly 8% of income. III. NECESSARY ACCOUNTING IMPROVEMENTS: DEPRECIATION AND INDIRECT TAXES 19. For purposes of international comparison of saving rates, fixed capital consumption and indirect taxes should be deducted from income. The data needed to do this are not yet sufficiently THE TREATMENT OF CAPITAL 7. ESA95 para. 4.87 “In order for an individual policy to be treated as part of a social insurance scheme, the eventualities or circumstances against which the participants are insured must correspond to the risks or needs listed in paragraph 4.84 above (§ 4.84 -d : old age), and in addition, one or more of the following conditions must be satisfied: a) Participation in the scheme is obligatory either by law for a specified category of worker, whether employees, self- or non-employed, or under the terms and conditions of employment of an employee, or group of employees; b) The scheme is a collective one operated for the benefit of a designated group of workers, whether employees, self- or non-employed, participation being restricted to members of that group; c) An employer makes a contractual (actual or imputed) to the scheme on behalf of an employee, whether or not the employee also makes a contribution. 8. This seems to be due to an adverse selection effect insofar as the insurance companies that pay out the annuities must comply with a set of prudential rules. Due to a selection of the persons taking out such contracts, insurers produce a costly service for which there is little demand from agents with a low life expectancy, thus justifying the high cost (Mitchell, Poterba, Warshawsky and Brown (1999), Gaudemet (2001), Finkelstein and Poterba (2002), etc.) 10 STD/NA(2002)5 harmonised or even published. However, they do exist, and provide that the current attempt to harmonise them succeeds, they could be used to construct the saving rate we are advocating. Table 2 treatment of pension funds in ESA 95 Income account Uses Resources Employee social contributions Gross wages Employer social contributions Employer social contributions Payments into pension funds Social benefits including public pensions Payments into pension funds Income tax, CSG,CRDS DISPOSABLE INCOME Use of income account Consumption Disposable income SAVING Adjustment for changes in households’ claims on pension funds 3.1 The role of capital depreciation 20. The loss of value through obsolescence of households’ housing assets and sole proprietors’ productive capital is equivalent to a production cost called “consumption of fixed capital”. This may or may not be deducted from value added: in the former case, we speak of net value added, in the latter, of gross value added. Similarly, households’ disposable income and savings may be gross or net. 21. As saving can serve in part or even in whole to offset capital depreciation, many countries publish, in line with the recommendations of SNA 93, a saving rate net of fixed capital consumption. Nevertheless, households’ assets consist essentially of housing but also comprise the productive capital of sole proprietors. While the notion of net saving is easy to grasp for the second form of capital insofar as sole proprietors must regularly renew equipment with a relatively short life, it is less so for the first form. The life of housing is more difficult to define. Apart from accidental destruction such as domestic fires, housing fixed capital consumption ought to correspond to the investment that households must make in order to maintain the quality of the housing service they receive. However, a priori it is difficult to measure. 22. Household fixed capital consumption represents 4% of income in the United Kingdom and the United States, and over 6% in Germany, Italy and Belgium. France is in an intermediate position, with 5% of income. In all countries, therefore, there is a big gap between gross and net saving rates. In the light of this comparison, one sees once again the importance of conventions. The German 11 STD/NA(2002)5 saving rate in particular is published net -- 10% -- which misleads some commentators when they compare it with the gross rate as defined in the French national accounts. 23. The methods of measuring capital depreciation differ widely from one country to another (especially as regards the life and valuation of installed capital). Several countries use service lives as reported by enterprises. But a recent report by the OECD emphasises that “they are misleading statistics and have no place in the accounting system”. It is possible that the uncertainty surrounding this measure9 is of the same order as the differences observed between countries. For the purposes of international comparison, it is probably preferable at the present time to use gross rates. 3.2 The role of the system of tax collection 24. Gross disposable income is income after deduction of taxes collected directly by government. In contrast, indirect taxes on products (value added tax, tax on petroleum products, etc.) are, as their name indicates, levied on consumption or investment10. Their characteristic is that they affect households only insofar as they consume or invest. They are thus deducted neither from their income nor their consumption or investment expenditure. Other things being equal, the measure of income is higher in countries where indirect taxes represent a large share of taxation. However, insofar as a larger share of indirect taxes is passed on to retail prices, all taxes included, the additional nominal income does not give households more purchasing power. 25. For the purposes of international comparison, an alternative definition -- and which would be independent of the structure of tax revenue -- would be to record indirect taxes on products in the uses of the household income account, and to deduct them from income just like direct taxes, and from consumption and investment (Table 3). Saving would be reduced accordingly but solely by the amount of indirect taxes levied on investment. A priori, the impact on the saving rate is ambiguous: the tax revenue from consumption is higher than for housing investment, but the former modifies the denominator (second order) while the latter modifies the numerator (first order). An estimate was done for France: treating indirect and direct taxes in the same way raises the saving rate by 1.7 point. It was not possible to do the same estimate for other countries because indirect taxes could not be cross-matched with institutional sectors. At the most, it may be noted that the burden of indirect taxes is relatively uniform in Europe, between 15 and 22 points of household income. France is in mid-way position with 18.5 points. In the United States and Japan, this share is much smaller -- respectively 6.5 and 7.8 points. The adjustment that would have to be made for these two countries would thus be much smaller. 9. Measurement of the depreciation of household housing capital is just as unreliable. 10 . In France, for example, VAT is levied on housing investment. In 2000, the VAT paid on such investment represented 9% of the total VAT paid by households. 12 STD/NA(2002)5 Table 3 Treatment of indirect taxes : Included in income Income account Uses Resources Employee social Gross wages contributions Treated as taxes Income account Uses Employee social contributions Resources Gross wages Employer social contributions Employer social contributions Employer social contributions Employer social contributions Income tax, CSG,CRDS Income tax, CSG,CRDS Indirect taxes Social benefits DISPOSABLE INCOME (including indirect taxes) Use of income account Consumption (including Disposable indirect taxes) income(including indirect taxes) DISPOSABLE Social benefits INCOME (excluding indirect taxes) Use of income account Consumption (excluding Disposable indirect taxes) income(excluding indirect taxes) SAVING SAVING IV. THE TREATMENT OF CAPITAL GAINS AND DURABLE GOODS - TWO AREAS THAT WOULD MERIT CLOSER STUDY 26. It does not seem feasible to us, or cost-effective, to modify today the way capital gains realised by households, or their expenditure on durable goods, are treated. As regards capital gains by households, only those realised vis-à-vis another sector actually increase their wealth as an institutional sector. But the accounts are unable to distinguish unrealised capital gains from those that have been realised. In the case of durable goods expenditure, one has to distinguish that which is akin to expenditure on other saving products, from that which is akin to current expenditure. In addition, one has to allow for their depreciation on account of their short life. One then encounters the same problems as when calculating the consumption of fixed capital, but compounded by the fact that not enough is known about the life of these products. 4.1 The role of capital gains 27. The foregoing definitions propose alternative measures of the saving rate that are less sensitive to institutional differences between countries, but they deal essentially with income from production. As regards investment income, only interest and dividends are included in household income. The value of household assets -- housing and monetary and financial investments -- also varies over time. As long as these asset have not been sold, these “holding gains” are only potential -- hence the term “unrealised capital gains (or losses)” applied to them. The day a household actually makes a capital gain by selling an asset, it is said to be “realised”. Unlike interest and dividends, these unrealised or 13 STD/NA(2002)5 realised capital gains are not derived from production. They are not therefore included in household income. In contrast, capital gains taxes are deducted from disposable income. 28. Thus, other things being equal, a country in which households make large capital gains could see its saving rate fall simply by virtue of the taxes levied on those gains. Households would apparently dispose of a resource that they could either consume or invest, but for accounting purposes only their wealth increases. Accordingly, if we wish to gauge saving by households to cover future risks, the analysis of fluctuations in their saving rate “on a national accounts basis” should take into account any changes in their wealth, all the more in that the amount of capital gains varies widely from one country to another, depending in particular on how risky the structure of investments is. Some authors therefore argue that capital gains should be included when calculating the saving rate. 29. Given the amounts involved, including capital gains in income would radically modify the relative levels of cross-country saving rates. The level of wealth as measured by the national accounts in points of income, varies widely across Europe. In the case of financial wealth, for which we have comparable data for 2000, the financial wealth of Belgian, Dutch and UK households is equal to or more than four times their income. They are followed by French and Italian households, with less than three times their income, and then by Spanish and German households, with less than twice their income. France is thus in a median position. Large disparities in capital gains stem directly from these differences in wealth. Between 1995 and 1999, the increase in the financial assets of UK, Belgian and Dutch households represented more than 150 points of disposable income, compared with 100 in France and Spain, 50 in Italy and 25 in Germany. The disparities in saving rates would in comparison seem derisory if the measure of capital gains was not to a large extent a matter of convention. 30. The inclusion of capital gains in income poses all sorts of difficulties. 31. To start with, only realised capital gains could be incorporated in household income. Unrealised capital gains are virtual: they have not yet been converted into liquidities, and cannot be so without the risk of triggering a fall in share prices. However, unrealised and realised capital gains are not distinguished in national accounts, and the former represent the large bulk of capital gains. Furthermore, unrealised capital gains are not only virtual, for the reasons explained above, but their valuation is a matter of convention and only approximate. The uncertainties inherent in their valuation affect each country differently, depending on the structure of households’ assets and in particular the proportion of unlisted shares in households’ assets. In France, 95% of the increase in households’ financial assets between 1995 and 1990 was due to the increase in the “shares” item. But the latter was due partly to the increase in the value of listed shares, which represent less than 20% of the shares held by households, and for a very large part to unlisted shares, valuations of which are very approximate. They are valued in relation to changes in stock market prices. It is difficult to obtain comparable cross-country data. Knowing however that UK and Dutch households hold shares primarily via pension funds, it may be assumed that the observed increase in their wealth is less conventional. This assumption seems borne out by the fact that more than 50% of the capital gains of Dutch and UK households between 1996 and 1999 stemmed from “changes in households’ claims on pension funds and life insurance schemes” while in the other countries more than 80% of the capital gains were due to an increase in the “shares” item. 32. Lastly, the book increase in households’ assets that results from capital gains being realised does not represent an increase in real assets for households as an institutional sector as long as they do not sell assets to another sector: as long as they only trade assets between one another, even if the price of 14 STD/NA(2002)5 those assets increases, they are not richer overall11. Accordingly, only capital gains realised vis-à-vis another sector represent an addition to wealth that can be used for other expenditures, and could possibly be considered household saving. 4.2 The treatment of durable goods 33. If we consider that saving enables households to manage their expenditure over time, whereas consumption reflects their preference for the present, we have to look at the contents of the latter, relatively heterogeneous, aggregate. The components of household consumption are distinguished according to their degree of “durability”. The following are usually considered to be durable goods: vehicles, furniture, domestic electrical appliances, electronic equipment (photo and video equipment, computers, etc.); routine maintenance work in the home can also be included, and the list is not exhaustive. Most countries publish sub-aggregates of household consumption according to the degree of durability of the goods in question. The “durable” character of the aforementioned goods is recognised by all countries; in contrast, some countries consider to be “durable goods” goods that other countries tend to regard as semi-durable goods, for example, furnishing fabrics or dishware. 34. In contrast with consumable items, a number of which are basic necessities, durable goods are not intended for immediate consumption. Also, they are not usually indispensable and their life can be extended, which allows households to postpone their purchase decisions if they have to replace them. In response to fluctuations in their income, they make decisions regarding this expenditure similar to those they make regarding investments. Their decisions have a temporal dimension: they are based on the possibilities of financing the purchases, themselves dependent on their saving capacity and credit conditions rather than on satisfying an immediate need. One may therefore ask whether it would not be just as appropriate to classify durable goods in the household capital account as in consumption. 35. As this would increase saving, the saving rate would also increase, all the more in that the proportion of expenditure on durable goods in household expenditure were large. It would thus be expected that this change would have a bigger impact on the saving rate of US households than on that of French households (see below). 36. Another factor warrants treating expenditure on durable goods as investment. Both US and French data show that households’ purchases of durable goods are very sensitive to variations in their income. Measured by the average elasticity of this expenditure with regard to income, the sensitivity is similar in the United States to that in France. When the economy is growing, favourable expectations prompt households to increase their expenditure on durable goods by an amount that exceeds the increase in their income. Conversely, they may reduce this expenditure during periods of economic slowdown. In contrast, non-durable goods consumption, which satisfies more immediate needs, is much more inert. 37. That said, the “durable goods” aggregate is itself heterogeneous. Purchases of domestic durable goods (furniture, domestic electrical appliances, etc.) are closely correlated with the housing investment cycle, while those of other durables (computers, cars, photo and video equipment, etc.) are much more volatile (Figure 3). If we reason that behaviour is homogeneous within the accounting aggregates, it would seem that housing durable goods can be treated -- much more so than other durable goods -- like investment. Non-housing-related durable goods are themselves 11 . They are even poorer if they finance their purchases by borrowing from another sector. 15 STD/NA(2002)5 heterogeneous. The need for this type of purchase can be accentuated by certain social choices. For example, when public transport facilities are poor, the need to have a car is greater. The public investment corresponding to such facilities is deducted from households’ resources via taxation, and households pay a user charge which shows up in consumption. In the absence of such investment, however, households must constitute a capital to provide the service. By treating such durable goods as investment, one is saying that the two situations are similar. Admittedly, it highlights the differences in ownership in national accounting terms, but when investment flows are small as a proportion of disposable income (including the share of direct taxes relating to these investments), the aforementioned treatment gives, other things being equal, saving rates that are much closer in both situations. 38. Treating purchases of durable goods as investment has technical repercussions. Not only does it mean that expenditure on durable goods is booked in the capital account instead of the use-ofincome account, it is also necessary to value the service rendered by the fixed capital constituted by the durable goods. The value of this service is then treated as additional own-account income which is entirely consumed by the household (Table 4, Box No. 1). Lastly, it should be pointed out that, in the corporate account, durable goods are obligatorily treated as investments since by definition firms do not “consume” in the sense of “final consumption”. The production of the service relating to these goods is thus included in the company’s production. 39. The complete calculation was done for France and the United States for the period 1978-2000. For want of long series and given the problems of nomenclature, it was not possible to do the same calculation for the other European countries. 40. The increase in saving that results from booking durable goods in the capital account is, proportionately, much bigger than the increase in income stemming from the value of the service (Figure 4). The saving rate thus rises markedly -- in the case of French households, by 6 to 8 points. The increase in the saving rate of US households is even bigger -- in the range of 8 to 11 points. Figure 3 : Trend of expenditure by French households on durable goods and housing investment (in volume) 18 16 14 12 10 8 6 en % 4 2 0 -2 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 -4 -6 -8 -10 -12 Housing-related durable goods Other durables 16 Ihousing invesment 19 98 19 99 20 00 STD/NA(2002)5 41. The magnitude of the difference between the size of the two saving rates is directly related to the share of expenditure on durable goods in income ; the data used show this to be bigger in the United States than in France -- 12% compared with about 8%. Not surprisingly, purchases of cars and new technology (NTIC) products represent a larger chunk of the budget of US households than of French households, especially during the recent period. However, the comparison is based on the standard aggregates of durable goods published by the BEA in the case of the United States, and French national accounts, the boundaries of which may be slightly different. In any case, the uncertainties arising from these problems of nomenclature do not modify the magnitude of the difference nor the economic interpretations or accounting conclusions that stem from it. The effect of treating durable goods as investments is thus to bring the French and US saving rates closer together, especially during the recent period.The highly cyclical nature of purchases of durable goods explains why the adjustment is bigger during periods of growth. In France, it attains 8 points for the period between 1987 and 1989, and then falls sharply to under 6 points in 1997. In the United States, the biggest adjustments relate to the middle of the 1980s and the recent period. During the recent period in particular, US households’ purchases of durable goods rose sharply, accompanied by an historic fall in the saving rate. Figure 4 : Difference between ha rmonized sa ving ra te a nd the sa ving ra te corrected for dura bles consumption 12 11 10 9 8 7 6 5 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 Fra nc e 19 88 19 89 19 90 19 91 United -Sta te s 17 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 STD/NA(2002)5 Box N° 1 Evaluating the service arising from the use of durable goods If the purchases of durable goods were classified under investment, they would be treated in the household account in the same way as housing, which for national accounting purposes is the only capital good households are considered to have. A service is assigned to each housing property corresponding to its use, irrespective of whether the property is occupied by a tenant or its owner. The value of the service rendered is measured by the rent -- the actual rent in the case of tenants, the “imputed rent” in the case of owner occupiers. The service relating to the use of durable goods is of the same type. In order to evaluate the service produced, it is necessary to make various assumptions. It is reasonable to assume that, in terms of volume, the service relating to the good is independent of the good’s age. As long as the good is being used, every year a service is assigned to successive investment flows I k , which is equal in volume to the ratio between the initial value of the investment flows, and the life of the good disposable income (-). The production related to this good ST , at a given date T, is obtained by summing cross-wise these annual flows and by adding the production relating to the initial stock. This stock is unknown but it is possible to get round the difficulty. The life of durable goods being relatively short, the service corresponding to the stock becomes negligible after twenty years. As the series used go back at least as far as 1949, it may be considered that from 1970, the service corresponding to a given durable good is no longer undervalued. It is valued correctly, for any date T after 1970, by the following formula : ST pT k T Ik , where pT is the price of the investment. k T d 1 d The value of the service, i.e. the use value of the good, is thus considered to be equal to the consumption of fixed capital as measured by a straight-line depreciation formula. In order to allow for the disparity in the lives of the various durable goods, the calculation was done separately for seven to eight groups of goods classified according to the nomenclature of the French and US annual accounts. They include new and second-hand cars, televisions, washing machines, computers, furniture and maintenance work, etc. For want of a better estimate, the lives of the durable goods were taken to be the same as industry estimates, but provided they are plausible, the calculation is relatively unaffected if the values are different. In the gross calculation, the service arising from the use of the durable goods increases household income but is also consumed (Table 4). It therefore enters into the calculation of the saving rate only via the denominator. It is thus primarily the fact of adding durables expenditure to saving that modifies the saving rate. 18 STD/NA(2002)5 Table 4 calculating the saving rate before and after reclassification of durables expenditure before reclassification of durable goods Income account Uses Resources Wages and sole proprietors’ GOS Housing service production after reclassification of durable goods Income account Uses Resources Wages and sole proprietors’ GOS Production of housing service Production of durablegoods-related services (S) Transfers Modified gross disposable income = GDI + S Use of income account Uses Resources Modified gross disposable income = GDI + S User cost of durable goods (S) Other consumption, including housing service Modified saving = Sav. + P Capital account Uses Resources Modified saving Investment, mainly in housing Purchases of durable goods (P) Capital transfers Lending capacity Transfers Gross disposable income (GDI) Use of income account Uses Resources Gross disposable income Purchases of durable goods (P) Other consumption, including housing service Saving (Sav.) Capital account Uses Resources Saving Investment, mainly in housing Capital transfers Lending capacity 19 STD/NA(2002)5 V. CONCLUSION 44. All told, the saving rate obtained will be very different depending on which definition is used. Table 5 shows, for France in 2000, the impact on the saving rate of each of the modifications to the convention used by French national accountants. TABLE 5 IMPACT OF CHANGES IN ACCOUNTING DEFINITIONS ON THE LEVEL OF THE SAVING RATE (in points of gross disposable income in 2000): Impact of: Individually identifiable consumption Change in the saving rate -3 FCC -5,5 Indirect taxes Pension funds Durable goods Capital gains12 +1,7 0 +6,3 +4,5 Note : the French national accounts give a gross saving rate, with non-adjusted income that includes indirect taxes but not capital gains, and saving that does not include expenditure on durable goods. The adjustment for pension funds is zero. A modification, for example ,in the treatment of depreciation of households’ physical assets (FCC) reduces the saving rate by 5.5 points. Depending on the definition used, the French saving rate in 2000 varies between 7.4 (15.9-3-5.5) and 28.4 points (15.9+ 1.7+ 6.3+4.5) 45. In order to be able to compare meaningfully the saving rate across countries, it is necessary to choose a measure which is insensitive to institutional differences and meets the usual economic interpretations of that measure. Statisticians need to co-ordinate their efforts to enable the most comparable statistics to be published. The following measure of the saving rate can be constructed today: The income used is gross and adjusted, and includes an adjustment for pension funds. To adjust the income, it is necessary to include social transfers in kind -- i.e. total individually identifiable consumption by general government and NPIHS -- in gross disposable income. The adjustment for pension funds corresponds to the increase in households’ net claims on pension funds. It is construed as the difference between payments into funds and funds paid out to households. 46. Secondly, for a relatively small extra cost, other improvements can be made. They relate to fixed capital consumption and indirect taxes (on products). These should be deducted from income, consumption then being considered net of indirect taxes on products. The measurement of fixed capital consumption is a particularly difficult task. A report by the OECD (Measuring Capital, 2001) explains precisely how it should be estimated and sharply criticises a few national accountants for using service lives reported by companies. Harmonisation is needed in this area. Indirect taxes should be calculated by institutional sector and uses. Indirect taxes paid by households on their consumption expenditure should be deducted from consumption. Those paid by households on their investment expenditure should be deducted from their investment. Both should obviously be deducted from income. When indirect taxes are paid only by households, the 12 This figure, which was deduced from capital gains taxes, was estimated by Babeau (2002) for 1999. It is not equal to the net balance of capital gains realised by households vis-à-vis other sectors. 20 STD/NA(2002)5 operation is simple. In the opposite case, information or reasonable assumptions can be used. Although these data are not public, VAT is usually broken down by sector and use in most countries. It does not seem customary however to break down other indirect taxes by institutional sector. In the case of taxes on petroleum products for example, a rough estimate can be made by including enterprises’ intermediate consumption of fuel in their overall expenditure on fuel, and by assuming that the tax is the same across sectors. One can thus calculate the taxes on petroleum products paid by enterprises, and then by subtraction that paid by households. 47. Lastly, the possibility of including two other elements -- capital gains and durables expenditure -- in saving, should be examined more closely. However, precise statistics are lacking. It is important to define the measures constructed as precisely as possible so as to ensure that they can be meaningfully compared across countries. Capital gains realised vis-à-vis other sectors are included in income. Two problems of measurement arise. First, national accounts do not distinguish between unrealised and realised capital gains. The amount of realised capital gains can be estimated from capital gains taxes. This estimate is necessarily rough however due to the various reliefs and exemptions that exist 13. It nevertheless gives a fairly accurate idea of the order of the magnitude involved. Unfortunately, it does not allow capital gains realised vis-à-vis other sectors to be distinguished. Certain durables are also included in saving. Firstly, two things need to be done. It is necessary to decide which durables should be treated as investment. Next, the service rendered by the durables, and their depreciation, has to be estimated. For want of information, the two are often confused. Surveys of the rental market could probably be used to evaluate the service rendered. To calculate depreciation, the same approach should be taken as for fixed capital consumption; methods need to be harmonised. 13. It is also necessary to take account of the fact that short-term and long-term capital gains are taxed differently. 21 STD/NA(2002)5 BIBLIOGRAPHY Babeau A. (2001). «Les Européens et leur épargne», Economica. Babeau A. (2002). «Mais où passent donc les plus-values réalisées par les particuliers ?», Sociétal, April. Baudchon H. et V. Chauvin (1999), « Les cigales épargnent-elles ? 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