Capital Stocks and Fixed Capital Consumption QMI

Capital stocks and fixed capital consumption QMI

Quality and methodology information for the annual estimates of the value and types of non-financial assets used in the production of goods or services within the UK economy and their loss in value over time.

Contact: Release date: Next release: 2 January 2018 To be announced [email protected] +44 (0)845 6041858

Table of contents

1. Methodology background

2. Important points about capital stocks data

3. Overview of the output

4. About the output

5. How the output is created

6. Glossary of terms

7. Data sources

8. Other information

9. Sources for further information or advice

10. Useful links

Page 1 of 11 1 . Methodology background

National Statistic

Survey name Business Investment

Frequency Annual

How compiled Perpetual Inventory Method (PIM)

Geographic coverage United Kingdom

Last revised 2 January 2018

2 . Important points about capital stocks data

There are three measures of capital stocks: gross, net and capital consumption; these measure replacement value, current value and depreciation.

Data come from a combination of sources including surveys such as the Annual Business Survey and Trade in Services and administrative data such as government expenditure (including central and local government).

Data are available from 1995 onwards and are Blue Book-consistent.

Results are published annually around 4 to 5 weeks after Blue Book.

3 . Overview of the output

Outputs are estimated using the Organisation for Economic Co-operation and Development (OECD) (PDF, 2.11 MB) definitions of the main measures of capital stocks and capital consumption and are published around 8 to 10 months after the end of the reference year, in the annual publication of UK National Accounts: the Blue Book. These estimates are re-published with more detailed breakdown in the Capital stocks, capital consumption and non-financial balance sheet publication. Data are published for both current prices (CP) and chained volume measures (CVM).

Capital stocks and capital consumption estimates are produced annually. They are used internally by Office for National Statistics (ONS) in the national and sector accounts, public sector finances and the Blue Book, and externally by the Bank of England, the Office for Budget Responsibility and Her Majesty’s Treasury (HMT). These organisations use the estimates to monitor economic performance and inform monetary and fiscal policy decisions. These estimates are also used by the business and research communities, education, the media and the general public.

Capital consumption is used in various ways in the national accounts, in particular:

Page 2 of 11 for all sectors, capital consumption is used to convert the gross-based estimates, such as gross domestic product or gross operating surplus, into the net estimates such as net national income

for the non-market sectors (central and local government and non-profit institutions serving households), capital consumption forms part of the sectors’ contributions to the economy as measured using gross value added and is the only component of gross operating surplus for these sectors, leaving the net operating surplus as zero

A trade-off of cost over potentially better-quality data is made by using a perpetual inventory method (PIM) to model capital stocks and capital consumption data instead of conducting a survey to gather this information direct from companies. However, the use of PIM model data is internationally recognised as the preferred method of measuring capital data with the assumption that little accuracy is lost by use of the model, since much of the data companies could provide would not meet national accounts standards and definitions. The OECD Manual Measuring Capital (PDF, 2.11MB) supports the use of a PIM over survey data.

Output quality

This report provides a range of information that describes the quality of the output and details any points that should be noted when using the output.

We have developed Guidelines For Measuring Statistical Quality; these are based upon the six European Statistical System (ESS) quality dimensions. This report addresses these quality dimensions and other important quality characteristics, which are:

relevance

timeliness and punctuality

comparability

coherence

accuracy

output quality trade-offs

assessment of user needs and perceptions

accessibility and clarity

More information is provided about these quality dimensions in the following sections.

4 . About the output

Relevance

The degree to which statistical outputs meet users’ needs.

Page 3 of 11 Capital stocks and capital consumption estimates are produced annually. They are used internally by Office for National Statistics (ONS) in the national and sector accounts, public sector finances and the Blue Book, and externally by the Bank of England, the Office for Budget Responsibility and Her Majesty’s Treasury. These organisations use the estimates to monitor economic performance and inform monetary and fiscal policy decisions. These estimates are also used by the business and research communities, education, the media and the general public.

Capital consumption is used in various ways in the national accounts, in particular:

for all sectors, capital consumption is used to convert the gross-based estimates, such as gross domestic product or gross operating surplus, into the net estimates such as net national income

Additionally, capital stocks and capital consumption estimates are also used in the calculation of quarterly profitability estimates of UK companies.

Timeliness and punctuality

Timeliness refers to the lapse of time between publication and the period to which the data refer. Punctuality refers to the gap between planned and actual publication dates.

Capital consumption and capital stocks estimates are published around 8 to 10 months after the end of the reference year, in the annual publication of the Blue Book. These estimates are re-published with more detailed breakdown in the Capital stocks, capital consumption and non-financial balance sheet publication.

For more details on related releases, the GOV.UK release calendar is available online and provides 12 months’ advance notice of release dates. In the unlikely event of a change to the pre-announced release schedule, public attention will be drawn to the change and the reasons for the change will be explained fully at the same time, as set out in the Code of Practice for Official Statistics.

5 . How the output is created

Outputs are estimated using the OECD (PDF, 2.11MB) definitions of the main measures of capital stocks and capital consumption. These are as follows:

gross capital stocks represent the value of all fixed assets still in use when a balance sheet is drawn up; it is valued at the actual or estimated current purchasers’ prices for new assets of the same type irrespective of the age of the assets

net capital stocks measure the sum of the written-down values of all the fixed assets still in use when a balance sheet is drawn up (that is, the value of the capital stocks after depreciation)

consumption of fixed capital represents the reduction in the value of the fixed assets used in production during the accounting period resulting from physical deterioration, normal obsolescence or normal accidental damage

These measures are consistent with international best practice and are produced by Office for National Statistics (ONS) using a perpetual inventory method (PIM) by asset, industry and sector.

Page 4 of 11 A PIM is an economic model that enables balance sheets (or stocks) to be calculated from the associated flows; a PIM separately models the stocks levels of various assets owned by different industries. The ONS PIM takes gross fixed capital formation (GFCF) data by industries and uses it to form estimates of the value of capital stocks in use in the UK. Assumptions about the life of these capital stocks are used to ensure that they are withdrawn from the model when they are no longer economically useful.

For estimates of capital consumption and net capital stocks these assets are written down over their lifetime. For gross capital stocks, the asset is valued at its new replacement cost until such time as it is retired.

At any given point in time, the PIM estimates the constant price value of capital stocks still in use by summing the original investment data for these assets over their lifetimes. For example, some buildings have life-lengths of a hundred years, so the PIM will aggregate those hundred years of investment data to measure gross capital stocks. To measure net capital stocks, each vintage of investment is adjusted to reflect capital consumption (depreciation).

In the ONS PIM, straight-line depreciation is assumed, so that the stock of each vintage decreases each year by a constant amount, falling to zero at the end of the asset’s life-length. This is a depreciation profile based on a constant annual amount of capital consumption over the service life of the asset. This service life is the total period during which the asset remains in use or ready to be used, in a productive process, even if the asset has more than one owner. The depreciation of each asset and industry within each year is aggregated to provide the capital consumption measure.

Assumptions are made in the PIM about the average life-length of different assets across industries. While an asset might have an average life length of 10 years that does not mean that all such assets are retired exactly 10 years after being purchased. In fact it is likely that these assets will be retired over a period of a few years, with 10 being the average. To ensure that the model reflects this, a retirement function is used where retirements of assets are assumed to be normally distributed around the mean asset life length. To model this, the parameters for the distribution of asset retirements are entered into the PIM. This is called the coefficient of variation for each asset.

In addition to the average life lengths, premature scrapping of assets is modelled, since evidence of the 1980s downturn suggested that in economic downturns, industry-specific plant and machinery may be scrapped early reflecting unforeseen obsolescence, such as production becoming uneconomical and companies being unable to sell the equipment for further use. Such behaviour has been assumed to only take place to plant as other assets such as vehicles and buildings have second-hand markets, suggesting that businesses facing closure would sell these assets, keeping the assets in the capital stocks. The PIM relates such unforeseen obsolescence to data from the Department for Business, Energy and Industrial Strategy (BEIS) statistics on business insolvencies to model firm closures and it is assumed that half the plant of insolvent firms is prematurely scrapped.

The PIM uses GFCF in chained volume measures (CVM) for low-level assets, industries at the whole economy level and calculates the capital stock and consumption series at constant prices at this level. It then applies proportions to sectorise these across the economy. These CVM series are then reflated using implied deflators based on the GFCF current price and CVM data to give current price estimates. In the model, the constant price estimates are made at a very detailed level of disaggregation; each of the approximately 100 industries has measures for each asset. However, the results are published at a more aggregated level, broken down into asset categories.

Further information on the PIM model can be found in these articles:

UK capital stocks developments in coverage and methodology (PDF, 446KB)

Improving non financial balance sheets and capital stocks (PDF, 610KB)

Validation and quality assurance

Page 5 of 11 Accuracy

The degree of closeness between an estimate and the true value.

The capital stocks and capital consumption estimates are quality assured using a variety of standard practices, such as movement analysis at sector and asset level. Any atypical movements are investigated to ensure the quality of the data to be published and understand or explain the movements.

As the capital stocks and capital consumption estimates are used in the production of the national accounts and Blue Book estimates and are produced according to the national accounts framework, they are subject to the same revisions policy (PDF, 71KB) as the Blue Book.

Quality assurance is a very important part of the compilation of these estimates and the main driver for agreeing the publication to be fit for the users’ requirements. In 2012, ONS announced it would not be publishing estimates of capital stocks and capital consumption due to ongoing conversion and quality assurance of historical data.

Comparability and coherence

Comparability is the degree to which data can be compared over time and domain, for example, geographic level. Coherence is the degree to which data that are derived from different sources or methods, but refer to the same topic, are similar.

Every effort is made to ensure that the series are comparable over time. Comparable time series are available going back to the year 1948 for capital stocks and capital consumption.

Where possible, changes to the methodology are applied to the whole series to ensure this comparability is maintained. These changes are implemented in line with the national accounts revisions policy.

Since international standards such as System of National Accounts: SNA 2008 and European System of Accounts: ESA 2010 are used in the production of the capital stocks and capital consumption estimates, the figures should be directly comparable with the accounts of other countries. However the revisions policies of these countries should be examined before comparing data for back periods.

Concepts and definitions

Concepts and definitions describe the legislation governing the output and a description of the classifications used in the output.

The capital stocks and capital consumption estimates are compiled in accordance with SNA 2008 and ESA 2010 with additional guidance produced by OECD (PDF, 2.11MB).

Where industry breakdowns are provided, these are in line with the Standard Industrial Classification 2007.

Page 6 of 11 Calculating capital stocks and consumption of fixed capital

Figure 1 shows how gross capital stocks are calculated using the perpetual inventory method (PIM). The cumulative sum of net investment in assets (GFCF), that is, the capital stock, is calculated by adding investment this period to the capital stock in the previous period and subtracting the value of assets that have reached the end of their useful life or that have been scrapped as a result of bankruptcy. The PIM replicates this process for each industry and asset combination for every year of data in the model.

Figure 1: Gross stock calculation

Source: Office for National Statistics

Figure 2 shows how net capital stocks are calculated. This is also a “stock” measure and estimates the value at the end of the year. The same process that is used for the estimation of gross stocks is used; however, an additional component for depreciation (for example, from wear and tear) is subtracted from the gross value. This can be thought of as the quantity of assets “used up” in a year. At the end of an asset’s service life, its whole value has been “used up” and it no longer contributes to the net (or gross) stock level.

Figure 2: Net stock calculation

Source: Office for National Statistics

The consumption of fixed capital is an estimate of a “flow”. It represents the change in the value of assets during the year. Figure 3 shows that it is made up of the sum of transfer costs (costs associated with purchasing or disposing of an asset) from GFCF, the depreciation or loss in value of assets due to usual wear and tear as well as the value of assets lost when companies go bankrupt. This value is calculated for each year within the model.

Figure 3: Consumption of fixed capital calculation

Source: Office for National statistics

6 . Glossary of terms

Capital stocks

Capital stocks represent the value of all fixed assets used in production in the economy that are still in use, such as machinery, dwellings and intellectual property products and formerly intangible fixed assets, such as software.

Page 7 of 11 Economic assets

Economic assets are a store of value representing the benefits the economic owner will get by holding or using the asset over a period of time.

Fixed assets

Fixed assets are non-financial items which are used repeatedly in the process of production for more than one year. For example, a machine on a production line or software used in production.

Gross capital stocks

Gross capital stocks tell us how much the economy’s assets would cost to buy again as new, or their replacement cost. All of the fixed assets in the economy, that are still productive and in use, are added up to calculate this, regardless of how old they are or how much they may have deteriorated since they were first used. This measure shows the value at the end of the year. This is mainly calculated as an intermediate step towards net capital stocks but individually provides a broad indicator of the productive capacity of an economy.

Net capital stocks

Net capital stocks show the market value of fixed assets. The market value is the amount that the assets could be sold for, which will be lower than the value of gross capital stocks. This reflects the fact that the assets will have had some wear and tear compared with a new asset. This measure shows the value at the end of the year. This measure is used in preference to gross capital stocks as it provides a valuation of assets in the economy after the removal of depreciation.

Consumption of fixed capital

The consumption of fixed capital is the decline in the value, or depreciation, of fixed assets in the economy over a time period. The decline in value can be due to wear and tear, assets no longer being used, or normal accidental damage. It can also be described as the quantity (or value) of the capital stocks which is used up in that period. Whilst these data are interesting in their own right, their primary purpose is to move from various gross measures of economic flows to the corresponding “net” variable, in particular for production and income (net domestic product, net value added) and a number of demand variables such as net investment.

Gross fixed capital formation (GFCF)

Gross fixed capital formation is the acquisition less disposals of produced fixed assets; that is, assets intended for use in the production of other goods and services for a period of more than a year. Acquisition includes both purchases of assets (new or second-hand) and the construction of assets by producers for their own use. New buildings and dwellings, and major improvements to buildings and dwellings are included in GFCF, but the acquisition and disposal of existing buildings and dwellings are not.

7 . Data sources

Estimates of capital stocks are calculated using the perpetual inventory method (PIM).

The input data for the PIM are at a low level of aggregation with industries classified using the 2007 version of the Standard Industrial Classification: SIC 2007. The main input datasets entering the PIM are given in this section.

Page 8 of 11 GFCF (investment) estimates

The PIM uses a long-run constant price time series of GFCF estimates (investment in capital assets) classified by SIC 2007 industries. The series extend as far back as the 19th century for some long-lived assets such as buildings and dwellings. The PIM uses constant price investment estimates.

Estimates of GFCF and its breakdowns by sector and asset are published separately in the quarterly Business investment statistical bulletin.

Price indices (deflators)

The capital stocks system uses, from 1997 onwards, the same deflators used to deflate GFCF; prior to 1997 consistent deflators are used. The GFCF asset deflators are constructed from product-based Producer Price Indices (PPIs), Services Producer Price Indices (SPPIs), construction price indices and some gross domestic product (GDP) implied deflators. The product-based deflators are weighted to assets using estimates from our annual Business Spending on Capital Items Survey (BCIS). BCIS collects detailed data on GFCF by product, which informs the weight of each product in each asset. The same deflator is used for each asset, regardless of the industry it is in.

Life lengths and premature scrapping

Each asset is assumed to have a life length during which it is economically productive. This will differ between assets, with buildings typically having a longer life length than computer software for example.

Bankruptcy series are used in the PIM to model firm closures and it is assumed that half the information and communication technology (ICT) and other machinery and equipment assets of insolvent firms are prematurely scrapped. Bankruptcy data are sourced from UK’s Insolvency Service on an annual basis.

A review on the life lengths of assets is currently under way. We will update you on progress and any changes to estimation when this review has been completed.

Other data

Retirements of assets are assumed to be normally distributed around the mean asset life length. That is, not all of the stocks of an asset which lasts five years, for example, are assumed to leave the PIM after five years – rather, the retirements are spread around this date. To model this, the parameters for the distribution of asset retirements are entered into the PIM. This is called the coefficient of variation for each asset.

International reporting standards

The International Financial Reporting Standards (IFRS) were introduced from 2005 onwards in the UK. IFRS is the legally-required financial reporting framework for the consolidated accounts of EU-listed groups of companies. IFRS differs in some respects from the UK financial reporting standards.

The impact on the capital stocks and consumption of fixed capital estimates is difficult to assess as the impact of the transition to IFRS varies by company. Work by Office for National Statistics (ONS) provided little evidence that material differences would occur as a result of the transition. Furthermore, the Quarterly Capital Expenditure Survey, which is the source for around 50% of GFCF estimates, asks respondents to record their investment data without any allowance for depreciation. On this basis, the transition to IFRS should not prevent time series analysis of the capital stocks and consumption of fixed capital dataset.

Page 9 of 11 Capital services

Capital services are the flow of services into the production of output that are generated by the capital stock, as opposed to the stock of capital itself. Capital services are a measure of capital input that is more suitable for analysing and modelling productivity.

The fundamental difference between capital stocks and capital services is that whereas capital stocks are a wealth-based measure of the total amount of capital within the economy, capital services are a measure of the flow of services derived from net stock. Capital services weight together the different assets by their relative productivity, measured by a derived rent function. The rent function, otherwise known as the user cost, is essentially how much the user is willing to pay to use the asset. As a user is willing to pay up to what an asset will give back, the rent function can be seen as measuring the difference in the additional returns between assets. The rent function is important because assets such as computers and software have become cheaper over the last decade, meaning a wealth measure like capital stocks does not truly reflect the return to those assets.

We have not published an article on the stand-alone capital service also known as VICS (Volume Index of Capital Services) since Appleton and Wallis 2011 (PDF, 200KB). However, capital service estimates have been produced for multi-factor productivity (MFP), the latest article being Field and Franklin 2014. You should note that these estimates are highly experimental. The Volume Index of Capital Services’ latest publication was released in January 2017.

Comparisons with other data sources

These estimates are consistent with the 2017 UK National Accounts: the Blue Book.

National balance sheet (NBS)

There are links between the net capital stocks estimates and the estimates shown for AN.11 Fixed assets in the non-financial section of the NBS. In the NBS, estimates are taken directly from the current price net capital stocks dataset for assets “machinery, equipment and weapons systems” and “intellectual property products” for all sectors.

For all other assets, estimates are made based on a wide range of data sources of asset values in the economy. For this reason, these two data sources will show different values. The biggest difference is the valuation of dwellings. The capital stocks estimates use investment data over time in new dwellings and major improvements to dwellings only and not the land. The NBS is calculated using property market data and also includes the value of land. As a result, the valuation of fixed assets in the NBS is higher than in the net capital stocks dataset.

International comparisons

The UK is legally required to produce the capital stocks and consumption of fixed capital estimates in line with the European System of Accounts (ESA). The PIM used to calculate capital stocks and consumption of fixed capital is utilised across the world and is in line with international guidance. The way in which the PIM and its assumptions are implemented will differ between countries. This will reflect the differing circumstances in different countries. This means that you can compare estimates between countries but should be aware that differences in methods may contribute to differences in estimates.

Both Eurostat and the OECD hold internationally comparable estimates for capital stocks and the consumption of fixed capital. When comparing between countries, you should ensure that you are comparing figures in the same currency and that there are no definitional differences noted.

Page 10 of 11 8 . Other information

Output quality trade-offs

Trade-offs are the extent to which different dimensions of quality are balanced against each other.

A trade-off of cost over potentially better quality data is made by using a perpetual inventory model (PIM) to model capital stocks and capital consumption data instead of conducting a survey to gather this information direct from companies. However, the use of PIM model data is internationally recognised as the preferred method of measuring capital data with the assumption that little accuracy is lost by use of the model, since much of the data companies could provide would not meet national accounts standards and definitions. The OECD Manual “Measuring Capital” supports the use of a PIM over survey data.

9 . Sources for further information or advice

Accessibility and clarity

Accessibility is the ease with which users are able to access the data, also reflecting the format in which the data are available and the availability of supporting information. Clarity refers to the quality and sufficiency of the release details, illustrations and accompanying advice.

Our recommended format for accessible content is a combination of HTML webpages for narrative, charts and graphs, with data being provided in usable formats such as CSV and Excel. The ONS website also offers users the option to download the narrative in PDF format. In some instances other software may be used, or may be available on request. For further information please refer to the contact details at the beginning of this report.

For information regarding conditions of access to data, please refer to the links:

Terms and conditions (for data on the website)

How we publish statistics

Access to microdata via the Virtual Microdata Laboratory

Accessibility

In addition to this Quality and Methodology Information, basic quality information relevant to each release is available in the quality and methodology section of the relevant statistical bulletin.

10 . Useful links

Previous releases

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