National Accounts Advisory Committee
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Overview of Activities 2005
The National Accounts Advisory Committee (NAAC) reviews and gives advice on the concepts, methods, plans, standards as well as results associated with Statistics Canada's System of National Accounts. The Committee meets twice a year. This year the Committee met on 6-7 June and again on 7-8 November. The Committee will meet again in the spring and fall of 2006. The following summarizes key points from our meetings this year.
Meeting of 6-7 June 2005
A range of items were on the meeting agenda, including:
- Statistics Canada's perspective on the capitalization of research and development;
- an update on the history of the Canadian System of National Accounts project;
- an overview of the BOP redesign project;
- a discussion on the IO modernization project;
- issues regarding the valuation of non-traded equity; and
- a presentation of the SNA web module.
Yusuf Siddiqi presented an overview of the Statistics Canada perspective on the capitalization of research and development. Mr. Siddiqi began his presentation by providing an overview of the present treatment of research and development within the System of National Accounts. He highlighted that at present, research and development expenditures are treated as a current expense and that we are considering whether to capitalize R&D expenditures within the SNA. Mr. Siddiqi recommended that rather than capitalize research and development within the core of the national accounts, a satellite account be created. He indicated that a wide range of R&D and innovation data exists (R&D surveys, Balance of Payments data on R&D trade, R&D price indexes for use in calculating volume measures) that could be used to construct a satellite account.
Members were very receptive of this recommendation and adopted the following motion: Given the importance of R&D, Statistics Canada should initially deal with the capitalization of research and development through a satellite account. This account will permit the presentation of alternative measures including the capitalization of all basic research and the use of alternative price deflators and depreciation rates.
Duncan McDowall updated the NAAC on the work he is doing to write the history of the Canadian System of National Accounts. Mr. McDowall indicated that he has completed his archival work and has conducted over 30 interviews. The working title for the book is 'The Sum of Satisfactions' and his desire is that the book highlight the over-arching themes such as how the intellectual vitality of the system keeps it engaged, how the system is continuously being stretched and how the system has always provided useful information to policy makers. Committee members were very appreciative of Mr. McDowall's work and recommended the book should include examples where Statistics Canada has led the world in the development of the System of National Accounts.
Patrick O'Hagan provided the committee with an overview of how non-traded equity is treated within the System of National Accounts. He highlighted the fact that within the CSNA only listed corporate equity included in portfolio investment is valued at market prices. All other equity types, listed inter-company, unlisted corporate equity and unlisted inter-company investment are on a book value basis. One proposed method for valuing the equity of unlisted companies is by applying a discounted aggregate market capitalization ratio. This method involves calculating a ratio of market value to book value for quoted shares and applying this ratio to the book value of unquoted shares. This ratio would be discounted due to the difficulty in liquidating non-traded shares. Committee members questioned the relevance of a fixed discount factor. Patrick indicated that while a discount factor should be applied it should not be fixed over time and its development should have sound methodological underpinnings. The committee also suggested that we investigate the possible use of information supplied by lawyers and accountants who deal with the valuation of non-traded equity of small corporations on a daily basis.
The committee was updated on the project to modernize the input-output tables. The input-output tables serve four basic functions: structural analysis, benchmarking, fiscal arrangements and coherence of Statistics Canada economic statistics. The current IO framework is biased towards the goods producing industries which represent 66% of the total number of industries while only accounting for 34% of GDP. Modernizing the IO framework would involve collapsing the number of manufacturing industries from 115 to around 44 while expanding the number of services industries by between 20 and 25. The priority services industries include business services, recreational services and information, cultural services, telecommunications, retail and wholesale trade. The modernization of the IO framework will occur over the next five years and be implemented in 2010. The committee was supportive of the idea of expanding the number of service industries and commodities but cautioned against reducing the number of manufacturing industries. The committee passed a motion to the effect that in modernizing the IO tables Statistics Canada should attempt to preserve as much detail as possible in the goods sector while expanding services, and additional financing should be sought if needed.
A prototype of an SNA web module was presented to the committee members. The rationale for the web module is to provide users with a portal where they could find a wide range of information and data pertaining to the Canadian System of National Accounts. The web module is being constructed with both the novice and advanced user in mind. It is being developed in consultation with SNA staff, provincial focal points and expert users. Members were very supportive of this initiative and had the following suggestions:
- a link should be provided to relevant international statistical manuals;
- the addition of a 'Did you know' section on the web site as a way to educate users regarding the System of National Accounts;
- that the data be distributed without charge as this would greatly impact the usefulness of the web site; and
- that the amount of data distributed via the web module should go at least as far back as the revision period.
The committee was provided with an overview of the BOP re-design project. Currently the division undertakes three 'trade in services' surveys (7 questionnaires) as well as 13 'financial flows' and 'positions' surveys. The current BOP survey program is highly centralized with all of the survey functions occurring within the division (questionnaire development, capture, collection, editing, estimation and analysis). The re-design project will involve offloading many of these activities to other specialized divisions within Statistics Canada. The benefit of this new approach will be a greater integration with other surveys and programs at Statistics Canada including integration with Statistics Canada's central business register, questionnaire re-design, improvements to the edit and imputation system, sampling and an increase in the use of administrative data and data from other surveys. BOP survey quality should improve substantially as a result. Committee members noted that all the proposed quality improvements are a priority for a country like Canada. They also remarked that data on intra-firm transactions and on prices and volumes in trade in goods should be a priority. The committee noted that within the BOP re-design there was no mention of trade in goods for which the revisions are sometimes sizeable.
Meeting of 7-8 November 2005
Several items were on the agenda for the meeting, including:
- an overview of the work currently under way to develop a labour price index;
- an update on SNA 1993 rev 1;
- Canada-US productivity comparisons;
- a presentation of a national water quality indicator for Canada,
- an outline of a proposed project to functionalize government expenditures and
- an update on the pension satellite account currently being developed by the Income and Expenditure Accounts Division.
The NAAC was given an overview of some proposed changes to SNA 1993 currently being considered by the international Accounts Expert Group (AEG). These changes include a decision to capitalize Research & Development expenditures and broad agreement to extend the definition of water resources to include rivers, lakes and artificial reservoirs in addition to aquifers. The AEG also discussed the treatment of goods exported or imported for processing when there is no transfer of ownership. On a balance of payments basis, this represents a gross flow of goods in which the parts come in as an import of goods and the aircraft go out as an export of goods. The AEG is now considering treating these types of transactions as a form of trade in services. Committee members were appreciative of the update and re-iterated that they were not in favour of capitalizing R&D within the core of the SNA. They also noted that when it comes to valuing water there are many issues to be examined and we should not rush into a decision.
Mr. Richard Dupuy from the Labour Statistics Division updated the committee on work that is currently being undertaken at Statistics Canada to develop a labour price index for Canada. Mr. Dupuy began his presentation by defining a labour price index as a "pure" measure of change in the price of labour which is unaffected by compositional changes in industry and occupation and changes in the quality or quantity of labour. He also noted that the proposed labour price index will include both wage and non-wage compensation components. Committee members were glad to see the project moving forward as they felt it would provide a good measure of wage pressures, something that is currently lacking. The NAAC questioned how quality would be controlled for and what would happen to the index if the quality of work increased. They were informed that efforts would be made to ensure that increases in quality would not increase the index and that education was one factor being considered to control for quality.
The results of a Canada-US productivity level comparison study were presented to the committee. The presentation began by noting that the focus of the core STC productivity program is on growth rates but that many analysts are interested in comparing productivity levels and that Statistics Canada wants to lend its expertise to help ensure an informed debate takes place. The committee was informed that the real difficulty in comparing productivity levels between Canada and the US has to do with how hours worked are computed in the two countries. When hours worked are adjusted to a comparable basis, the Canada/US productivity ratio is estimated to lie between 84% and 94% for the business sector. The committee suggested the results be officially released by Statistics Canada. When the data are released, a reconciliation table between the official estimates and the adjusted estimates should be produced and provided to data users. The committee suggested that instead of creating a range, we should pick our best estimate and alongside the estimate, provide a confidence range. It was also suggested that the range should be based upon the data source (enterprise employment data vs. household survey data) rather than our assumption regarding purchasing power parities.
The NAAC was briefed on the work that is currently being undertaken to develop a national water quality index (WQI). The presentation began by highlighting that the WQI is a function of three different measures: scope – which addresses the question of how many water quality guidelines are exceeded; frequency – which addresses how often observations exceed any particular guideline; and amplitude – which addresses by how much observations exceed the guidelines. The WQI provides a value ranging from 0 (worst) to 100 (best), a value that can be categorized into five classes: poor, marginal, fair, good or excellent. The committee questioned whether there was a client for a national water quality index as most of the important issues are at the local level. The committee also noted that the quantity of water within a nation is an equally important issue that needs to be addressed. The committee also suggested that in the future we might want to weight the index based upon the quality of aquatic life it supports.
The committee was informed that a project has been launched to produce a functionalized breakdown of government expenditures on an SNA basis. Government expenditures by function are currently available on an FMS basis but not on an SNA basis. The proposed project would be undertaken by four divisions: Income and Expenditure Accounts, Industry Accounts, Public Institutions and Investment and Capital Stock. The project contains both a long-term and a short-term component. The committee asked whether or not there was a good chance that funding would be provided and Mr. Smith replied he believed the chances were very good. The committee made the following recommendations:
- The CSNA be expanded to provide sufficient information to allow the comparison of government expenditures in Canada with those in other major countries (e.g., G-7 and OECD)
- The disaggregation should use the international classification system for government functions (COFOG)
- The data should distinguish the level of government and the province of spending, thereby allowing interprovincial comparisons of data
- There should be separate estimates for current expenditures on goods and services, investment spending, and transfer payments to others; sales of good and services should be kept separate and not netted against expenditure
- The rapid development of an experimental set of data should be the initial focus.
Pat O'Hagan provided an update on the work that is being done in the Income and Expenditure Accounts Division to develop a pension satellite account. Mr. O'Hagan informed the committee there is a diverse structure of retirement schemes such as employer sponsored funds, individual savings plans and social security schemes. He noted that many aspects of pensions need to be examined such as wealth change, contributions, investments and withdrawals, and realized and unrealized capital gains and losses. Mr. O'Hagan reminded the committee that while pension flows and stocks are fully accounted for within the SNA, they are not fully articulated. The articulation of the flow and stock of pensions is at the heart of the pension satellite account project. He presented a table outlining the proposed structure of the new account. The NAAC remarked that the PSA is a great initiative and that the results will be helpful. The committee noted that the proposed structure was excellent because it is in line with the language of the industry and will therefore be easy for users to understand. They stated that the development of the PSA will go a long way in helping to understand saving and will be used by the Department of Finance in forecasting tax revenue. It was suggested that a future priority might be to go beyond pensions and track the liquidation of financial assets in general, especially those of retirees.
The National Accounts Advisory Committee
Current members of the Committee are: Professor Tom Wilson (University of Toronto, Chair), Ms. Agathe Coté (Bank of Canada), Mr. John Grant (University of Toronto), Mr. Steven James (Department of Finance), Mr. J. Steven Landefeld (U.S. Bureau of Economic Analysis), Professor Richard G. Lipsey (Simon Fraser University), Professor Doug May (Memorial University), Mr. Mike McCracken (Informetrica Limited), Professor Alice Nakamura (University of Alberta), Professor Nancy Olewiler (Simon Fraser University), Ms. France St-Hilaire (Institute for Research on Public Policy), Professor Anthony Scott (University of British Columbia) and Mr. Stewart Wells.
In October 2005, Nancy Olewiler resigned from the NAAC to take up a position on the National Statistics Council. The committee is very appreciative of the work and support of Nancy during her tenure on the NAAC and wishes her the best as she undertakes this new endeavour.
Membership is by invitation from the Chief Statistician and invitees are selected based on professional qualifications. No committee member is considered representative of any group or institution as such. The committee is independent in its advice and recommendations to the Chief Statistician.
Statistics Canada provides administrative support to the Committee. Mr. Philip Smith, Assistant Chief Statistician for the National Accounts and Analytical Studies Field of Statistics Canada, is an ex officio member of the Committee. Mr. Jim Tebrake of Statistics Canada serves as secretary to the Committee.
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