IV. INSTITUTIONAL UNITS AND SECTORS
E. The general government sector and its sub-sectors
1. Introduction: governments as institutional units
| 4.104. | Government units may be described as unique kinds of legal entities established by political processes which have legislative, judicial or executive authority over other institutional units within a given area. Viewed as institutional units, the principal functions of government are to assume responsibility for the provision of goods and services to the community or to individual households and to finance their provision out of taxation or other incomes; to redistribute income and wealth by means of transfers; and to engage in non-market production. In general terms:
(a) A government unit usually has the authority to raise funds by collecting taxes or compulsory transfers from other institutional units. In order to satisfy the basic requirements of an institutional unit in the System, a government unit - whether at the level of the nation, a region or a locality - must have funds of its own either raised by taxing other units or received as transfers from other government units and the authority to disburse some, or all, of such funds in the pursuit of its policy objectives. It must also be able to borrow funds on its own account;
(b) Government units typically make three different kinds of final outlays:
(i) The first group consists of actual or imputed expenditures on the free provision to the community of collective services such as public administration, defence, law enforcement, public health, etc. which, as a result of market failure, have to be organized collectively by government and financed out of general taxation or other income;
(ii) The second group consists of expenditures on the provision of goods or services free, or at prices that are not economically significant, to individual households. These expenditures are deliberately incurred and financed out of taxation or other income by government in the pursuit of its social or political objectives, even though individuals could be charged according to their usage;
(iii) The third group consists of transfers paid to other institutional units, mostly households, in order to redistribute income or wealth. |
| 4.105. | Within a single country there may be many separate government units when there are different levels of government - central, state or local government. In addition, social security funds also constitute government units. These different kinds of government units are described later when the sub-sectoring of the general government sector is explained. |
Government units as producers
| 4.106. | Government units, like households, may own and operate unincorporated enterprises that are engaged in the production of goods or services. The extent to which government units decide to engage in production themselves rather than purchase the goods or services from market producers is largely a matter of political choice. The fact that governments choose to supply not only collective services but also many goods and individual services free, or at prices that are not economically significant, to households or other units does not require that they produce them themselves. Even in the case of most collective services, or so-called "public goods", for which there is market failure, governments are obliged only to assume responsibility for organizing and financing their production. They are not obliged to produce them. However, government units do usually engage in a wide range of productive activities in practice, covering not only collective services but also many other goods and individual services. Because it is largely a matter of political choice, the range of goods and services produced by government units varies greatly from one country to another. Apart from some collective services such as public administration and defence, it is therefore difficult to categorize certain types of production, such as the production of education or health services, as intrinsically governmental, even though they are often produced by government units. |
| 4.107. | When a government unit wishes to intervene in the sphere of production it has three options:
(a) it may create a public corporation whose corporate policy, including pricing and investment, it is able to control;
(b) it may create a NPI that it controls and mainly, or entirely, finances;
(c) it may produce the goods or services itself in an establishment which it owns and which does not exist as a separate legal entity from the government unit itself.
However, if a government establishment, or group of establishments engaged on the same kind of production under common management,
(a) charges prices for its outputs that are economically significant;
(b) is operated and managed in a similar way to a corporation; and
(c) has a complete set of accounts that enable its operating surpluses, savings, assets and liabilities to be separately identified and measured;
it should be treated as a quasi-corporation. Such quasi-corporations are market producers that are treated as separate institutional units from the government units that own them. They are classified, sectored and sub-sectored in the same way as public corporations. |
| 4.108. | In order to be treated as a quasi-corporation the government must allow the management of the enterprise considerable discretion not only with respect to the management of the production process but also the use of funds. Government quasi-corporations must be able to maintain their own working balances and business credit and be able to finance some or all of their capital formation out of their own savings, depreciation reserves or borrowing. The ability to distinguish flows of income and capital between quasi-corporations and government implies that their operating and financing activities cannot be fully integrated with government revenue or finance statistics in practice, despite the fact that they are not separate legal entities. The net operating surplus of a government quasi-corporation is not a component of government revenue, and the accounts for government record only the actual or imputed flows of income and capital between the quasi-corporation and government. |
| 4.109. | Thus, the producer units that remain integrated with the government units that own them are those that cannot be treated as quasi-corporations. Such units remain within the general government sector. They are likely to consist largely, or entirely, of non-market producers: that is, producers most or all of whose output is supplied to other units free, or at prices that are not economically significant. In addition to providing non-market goods or services to the general public, such units may include government producers supplying non-market goods or services to other government units for purposes of intermediate consumption or gross fixed capital formation: for example, munitions factories, government printing offices, transport agencies, computer or communications agencies, etc. In principle, government units can also be market producers. |
| 4.110. | In contrast to output produced for own consumption or own gross capital formation by market producers, there are usually no suitable markets whose prices can be used to value government non-market output. By convention, therefore, such output is valued by its production costs. |
2. Social security funds
| 4.111. | Social security funds constitute special kinds of institutional units which may be found at any level of government - central, state or local. Before defining social security funds, it is necessary to give a brief description of social insurance schemes in general. Social insurance schemes are intended to provide social benefits to members of the community, or to groups of individuals such as the employees of an enterprise and their dependants, out of funds derived mainly from social contributions. Social security schemes are social insurance schemes covering the community as a whole or large sections of the community that are imposed and controlled by government units. They generally involve compulsory contributions by employees or employers or both, and the terms on which benefits are paid to recipients are determined by government units. The schemes cover a wide variety of programmes, providing benefits in cash or in kind for old age, invalidity or death, survivors, sickness and maternity, work injury, unemployment, family allowance, health care, etc. There is usually no direct link between the amount of the contribution paid by an individual and the risk to which that individual is exposed. Social security schemes have to be distinguished from pension schemes or other social insurance schemes which are determined by mutual agreement between individual employers and their employees, the benefits being linked to contributions. |
| 4.112. | Social security funds may be distinguished by the fact that they are separately organized from the other activities of government units and hold their assets and liabilities separately from the latter. They are separate institutional units because they are autonomous funds, they have their own assets and liabilities and engage in financial transactions on their own account. However, institutional arrangements in respect of social security differ from country to country and in some countries they may become so closely integrated with the other finances of government as to bring into question whether they should be treated as a separate sub-sector. The amounts raised, and paid out, in social security contributions and benefits may be deliberately varied in order to achieve objectives of government policy that have no direct connection with the concept of social security as a scheme to provide social benefits to members of the community. They may be raised or lowered in order to influence the level of aggregate demand in the economy, for example. Nevertheless, so long as they remain separately constituted funds they must be treated as separate institutional units in the System. |
3. The general government sector (S.13)
| 4.113. | The general government sector consists of the following group of resident institutional units:
(a) All units of central, state or local government;
(b) All social security funds at each level of government;
(c) All non-market NPIs that are controlled and mainly financed by government units.
The sector does not include public corporations, even when all the equity of such corporations is owned by government units. It also does not include quasi-corporations that are owned and controlled by government units. However, unincorporated enterprises owned by government units that are not quasi-corporations remain integral parts of those units and, therefore, must be included in the general government sector. |
4. Sub-sectors of the general government sector
| 4.114. | Two alternative methods of sub-sectoring the general government sector are proposed in the System. One method is as follows:
(a) Central government (S.1311);
(b) State government (S.1312);
(c) Local government (S.1313);
(d) Social security funds (S.1314). |
| 4.115. | The alternative method is as follows:
(a) Central government plus social security funds operating at the central government level (S.1321);
(b) State government plus social security funds operating at the state government level (S.1322);
(c) Local government plus social security funds operating at the local government level (S.1323). |
| 4.116. | As explained more fully later, the choice between the two methods of sub-sectoring depends mainly on the size, or importance, of social security funds within a country and on the way in which they are managed. In some countries there may not exist a proper intermediate level of government between central and local government, in which case the sub-sector "state government" is not distinguished. |
Central government (S.1311)
| 4.117. | The central government sub-sector consists of the institutional unit or units making up the central government plus those NPIs that are controlled and mainly financed by central government. |
| 4.118. | The political authority of central government extends over the entire territory of the country. Central government has therefore the authority to impose taxes on all resident and non-resident units engaged in economic activities within the country. Its political responsibilities include national defence and relations with foreign governments and it also seeks to ensure the efficient working of the social and economic system by means of appropriate legislation and regulation and also the maintenance of law and order. It is responsible for providing collective services for the benefit of the community as a whole, and for this purpose incurs expenditures on defence and public administration. In addition it may incur expenditures on the provision of services, such as education or health, primarily for the benefit of individual households. Finally, it may make transfers to other institutional units - households, NPIs, corporations and other levels of government. |
| 4.119. | Central government is a large and complex sub-sector in most countries. It is generally composed of a central group of departments or ministries that make up a single institutional unit plus, in many countries, other institutional units. The departments may be responsible for considerable amounts of expenditure within the framework of the government's overall budget, but they are nevertheless not separate institutional units. Each department is not capable of owning assets, incurring liabilities, engaging in transactions, etc., in its own right, i.e., independently of central government as a whole. It would not be possible to compile meaningful, or analytically useful, income and accumulation accounts or balance sheets for each separate department as if it were a single legal entity. In addition, there may be agencies of central government with separate legal identity and substantial autonomy; they may have discretion over the volume and composition of their expenditures and may have a direct source of revenue such as earmarked taxes. Such agencies are often established to carry out specific functions such as road construction or the non-market production of health or education services. These should be treated as separate institutional units if they maintain full sets of accounts but are part of the central government sub-sector if they meet the criteria described in paragraph 4.104. |
| 4.120. | The departments of central government are often deliberately dispersed geographically and located in different parts of the country, but they nevertheless remain parts of a single institutional unit. Similarly, if the central government maintains branch offices or agencies in different parts of the country to meet local needs, including military bases or installations which serve national defence purposes, these must also be counted as parts of a single institutional unit for central government. However, for purposes of production accounts by type of productive activity, the establishment is used as the statistical unit, and producer units located in different regions are to be treated as different establishments, even though part of a single institutional unit. |
| 4.121. | In some countries, the central government may include units which engage in financial transactions which in other countries would be performed by central banks. In particular, units of central government may be responsible for the issue of currency, the maintenance of international reserves and the operation of exchange stabilization funds, and also transactions with the International Monetary Fund (IMF). When the units in question remain financially integrated with central government and under the direct control and supervision of central government, they cannot be treated as separate institutional units. Moreover, whatever monetary authority functions are carried out by central government are recorded in the government sector and not the corporate financial sector. However, because of the analytical importance which is attached to obtaining accounts covering the monetary authorities as a whole, and in order to provide links with other statistical systems, such as the Balance of Payments Manual, Government Finance Statistics and Money and Banking Statistics of the IMF, it is recommended that the transactions of central government agencies carrying out monetary authority and deposit-taking functions should be separately identified, so that they can be combined with those of the central bank and other depository corporations in special tabulations if desired. |
| 4.122. | Finally, it may be noted that social security funds are treated in the System as separate institutional units at each level of government, even though in some countries their finances may be partially integrated with government. Social security funds are described below. However, treating social security funds as separate institutional units does not, of course, preclude them from being included in the same sub-sector as the government units with which they are associated, and they are so included in the alternative method of sub-sectoring the general government sector. |
State government (S.1312)
| 4.123. | The state government sub-sector consists of state governments which are separate institutional units plus those NPIs that are controlled and mainly financed by state governments. |
| 4.124. | State governments are institutional units exercising some of the functions of government at a level below that of central government and above that of the governmental institutional units existing at a local level. They are institutional units whose fiscal, legislative and executive authority extends only over the individual "states" into which the country as a whole may be divided. Such "states" may be described by different terms in different countries. In some countries, especially small countries, individual states and state governments may not exist. However, in large countries, especially those which have federal constitutions, considerable powers and responsibilities may be assigned to state governments. |
| 4.125. | A state government usually has the fiscal authority to levy taxes on institutional units which are resident in, or engage in economic activities or transactions within, its area of competence (but not other areas). In any case, in order to be recognized as an institutional unit it must be able to own assets, raise funds and incur liabilities on its own account. It must also be entitled to spend or allocate some, or possibly all, of the taxes or other income that it receives according to its own policies, within the general rules of law of the country, although some of the transfers it receives from central government may be tied to certain specified purposes. It should also be able to appoint its own officers, independently of external administrative control. On the other hand, if a regional unit is entirely dependent on funds from central government, and if the central government also dictates the ways in which those funds are to be spent at the regional level, it should be treated as an agency of central government rather than as a separate institutional unit. |
| 4.126. | State governments, when they exist, are distinguished by the fact that their fiscal authority extends over the largest geographical areas into which the country as a whole may be divided for political or administrative purposes. In a few countries more than one level of government exists between the central government and the smallest governmental institutional units at a local level; in such cases, these intermediate levels of government are grouped together with the level of government, either state or local, with which they are most closely associated for purposes of sectoring in the System. |
| 4.127. | State governments may own, or control, corporations in the same way as central government. Similarly, they may have units which engage in market production, in which case the relevant producer units should be treated as quasi-corporations whenever their operations and accounting records justify this. Social security schemes may also exist at a state level and are treated as separate institutional units. |
Local government (S.1313)
| 4.128. | The local government sub-sector consists of local governments that are separate institutional units plus those NPIs which are controlled and mainly financed by local governments. In principle, local government units are institutional units whose fiscal, legislative and executive authority extends over the smallest geographical areas distinguished for administrative and political purposes. The scope of their authority is generally much less than that of central government or regional governments, and they may, or may not, be entitled to levy taxes on institutional units resident in their areas. They are often heavily dependent on grants or transfers from higher levels of government, and they may also act as agents of central or regional governments to some extent. However, in order to be treated as institutional units they must be entitled to own assets, raise funds and incur liabilities by borrowing on their own account; similarly, they must have some discretion over how such funds are spent. They should also be able to appoint their own officers, independently of external administrative control. The fact that they may also act as agents of central or state governments to some extent does not prevent them from being treated as separate institutional units provided they are also able to raise and spend some funds on their own initiative and own responsibility. |
| 4.129. | As they are the government units which are in closest contact with the institutional units resident in their localities, they typically provide a wide range of services to local residents, some of which may be financed out of transfers from higher levels of government. The same rules govern the treatment of the production of goods and services by local government units as are applied to central and state governments. Units such as municipal theatres, museums, swimming pools, etc., which supply goods or services on a market basis should be treated as quasi-corporations whenever appropriate. Units supplying services such as education or health on a non-market basis remain an integral part of the local government unit to which they belong. |
Social security funds (S.1314)
| 4.130. | The social security funds sub-sector consists of the social security funds operating at all levels of government. As explained in paragraph 111 above, social security funds are social insurance schemes covering the community as a whole or large sections of the community that are imposed and controlled by government units. |
5. The alternative method of sub-sectoring
| 4.131. | The alternative method of sub-sectoring the general government sector is to group the social security funds operating at each level of government with the corresponding government units and government controlled and financed NPIs at that level of government. The two alternative methods of sub-sectoring are designed to accommodate different analytical needs. The decision as to which method is more appropriate in a given country cannot be made a priori. It depends on how well organized and important social security funds are and on the extent to which they are managed independently of the government units with which they are associated. If the management of social security funds is so closely integrated with the short- or medium-term requirements of the government's general economic policy that contributions and benefits are deliberately adjusted in the interests of overall economic policy, it becomes difficult, at a conceptual level, to draw any clear distinction between the management of social security and the other economic functions of government. Alternatively, in some countries, social security funds may exist in only a very rudimentary form. In either of these circumstances it is difficult to justify treating social security funds as a separate sub-sector on a par with central, state and local government, and it is more appropriate to use the alternative method of sub-sectoring in which they are grouped with the corresponding government units at each level of government. |
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