IX. THE USE OF INCOME ACCOUNT
A. Introduction
| 9.1. | The purpose of the use of income account is to show how households, government units and non-profit institutions serving households (NPISHs) allocate their disposable income between final consumption and saving. There are two versions of the use of income account that correspond to two concepts of disposable income and consumption. In the first version, shown in table 9.1, attention is focused on disposable income and the expenditure on consumption goods and services that can be met out of that income. In the second version, shown in table 9.2, attention is focused on the consumption goods and services acquired and used by institutional units, especially households, whether acquired by expenditure or by social transfers in kind. | | | Text refers to: table 9.1.  | | | Text refers to: table 9.2. |
| 9.2. | In the first version of the use of income account, final consumption expenditure is subtracted from gross, or net, disposable income to obtain gross, or net, saving as the balancing item. In the second version, actual final consumption is subtracted from gross, or net, adjusted disposable income to obtain the same balancing item. In both accounts, in addition, there is an adjustment item that is needed in order to reconcile saving with the change in net equity of households in pension funds recorded in the financial account. | | | Text refers to: table 9.1. | | | Text refers to: table 9.2. |
| 9.3. | As explained in chapter VIII, the adjusted disposable income of households is derived from their disposable income by adding the value of social transfers in kind receivable, while that for government units and NPISHs is derived by subtracting the value of social transfers in kind payable. Similarly, the actual final consumption of households is derived from their final consumption expenditure by adding the value of social transfers in kind receivable, while the actual final consumption of government units and NPISHs is derived by subtracting the value of social transfers in kind payable. It follows that saving is the same whether it is defined as disposable income less final consumption expenditure or as adjusted disposable income less actual final consumption. Saving, like disposable and adjusted disposable income, may have to be recorded gross of consumption of fixed capital because of the difficulty of measuring the latter. However, consumption of fixed capital is a cost of production and should be excluded, if possible. |
| 9.4. | Corporations do not make final consumption expenditures. They may purchase the same kinds of goods or services as households use for final consumption - e.g., electricity or food - but such goods or services are either used for intermediate consumption or provided to employees as remuneration in kind. It is assumed in the System that corporations do not make transfers of consumption goods or services to households (see chapter XIX for the treatment of expenditures by enterprises on behalf of employees that is recommended for countries in transition to market-oriented economies). As corporations neither make nor receive social transfers in kind, it is also not possible to draw a meaningful distinction between their disposable and adjusted disposable incomes. It follows that both the use of disposable income account and the use of adjusted disposable income account for corporations are only dummy accounts that contain no entries for final consumption expenditure or actual final consumption. Apart from the adjustment item for pension funds referred to below, the gross or net saving of corporations must be equal to their gross or net disposable, or adjusted disposable, incomes. In other contexts, the saving of corporations is often described as the "retained earnings" or "undistributed incomes" of corporations. |
1. The use of disposable income account
| 9.5. | Apart from the balancing item, saving, this account contains only three entries. Disposable income, the balancing item carried forward from the secondary distribution of income account, is recorded on the right-hand side of the account under resources, while final consumption expenditure is recorded on the left-hand side under uses. As just noted, the account is relevant mainly for the three sectors that make final consumption expenditures, namely the general government, NPISHs and household sectors and, of course, for the total economy. | | | Text refers to: table 9.1. |
| 9.6. | The balancing item for the account is saving. Before the balance is struck, however, the adjustment item referred to earlier and explained in more detail in paragraphs 9.14 to 9.16 below is entered in order to reallocate a certain amount of saving between sectors. This item, adjustment for the change in net equity of households in pension funds, is needed because of the way in which pension contributions and benefits are recorded in the secondary distribution of income accounts. The adjustment is shown on the right-hand side under resources for households and on the left-hand side under uses for financial corporations or employers operating non-autonomous funded pension schemes. | | | Text refers to: table 9.1. |
| 9.7. | Final consumption expenditure is shown as a single figure in table 9.1 above, with individual consumption and collective consumption expenditure shown separately to bring out accounting interrelationships described below. However, it is usually desirable to break down final consumption expenditure using a classification of expenditure by purpose or by type of good or service. Disaggregated expenditure data may be needed for various analytical or policy purposes. Most users will expect at least some degree of disaggregation, for example, between expenditures on goods or services or between expenditures on durable and non-durable goods. | | | Text refers to: table 9.1. |
| 9.8. | As explained in later sections of this chapter, expenditures are attributed to the institutional units that bear the costs even if they are not the units to whom the goods or services are delivered. Thus, expenditures that government units or NPISHs make on individual goods and services that they provide to households as social transfers in kind must be recorded as final expenditure incurred by government units or NPISHs. Although they do not physically consume the goods and services provided as social transfers in kind, government units or NPISHs are the units that pay for them and take the decisions about the amounts to be provided. Information about their expenditure on such goods and services must, therefore, be recorded in the accounts of the System in conjunction with their disposable income. However, merely to record the expenditure is not sufficient when the goods and services are consumed by different units from those that control and finance the expenditure. In order to identify the units that benefit from their consumption it is necessary to recognize that the goods and services are in fact transferred to households. Actual final consumption must be recorded as well as final consumption expenditure. | | | Text refers to: table 9.1. |
2. The use of adjusted disposable income account
| 9.9. | Apart from the balancing item, saving, this account also contains only two other entries (and the adjustment item, which hereafter will not be mentioned in order to simplify the discussion). Adjusted disposable income, the balancing item brought forward from the redistribution of income in kind account, is recorded under resources, while actual final consumption is recorded under uses. The account is relevant only to government units, NPISHs and households. | | | Text refers to: table 9.2. |
| 9.10. | As already noted, the actual final consumption of households is obtained by augmenting their final consumption expenditure by the value of social transfers in kind receivable, while that for government units and NPISHs is obtained by subtracting from their final consumption expenditure social transfers in kind payable. Assuming that social transfers in kind take place only between resident units, the total value of the transfers in kind receivable by resident households must equal the total value of those payable by government units and NPISHs, so that the value of actual final consumption for the total economy must be equal to that of total final consumption expenditure. | | | Text refers to: table 9.2. |
| 9.11. | The actual final consumption of households is intended to measure the value of the consumption goods acquired by households, whether by purchase or by transfer from government units or NPISHs, and used by them for the satisfaction of their needs and wants. It is therefore a better indicator of their living standards than their final expenditure alone. In some countries, the value of the individual non-market goods and services provided to households as social transfers in kind may be quite large, depending upon the kinds of economic and social policies pursued by their governments, so that the value of the actual final consumption of households may exceed that of their expenditure by a significant margin. For these reasons, the actual final consumption of households has sometimes been described as their "enlarged" consumption or their "total" consumption, although these terms are not used in the System. The actual final consumption of the general government sector may, of course, be considerably smaller than government final consumption expenditure. | | | Text refers to: table 9.2. |
3. The relationship between the two versions of the use of income account
| 9.12. | The two versions of the use of income account are not sequential or hierarchical. They are parallel accounts that serve different analytical or policy purposes. The values of the goods and services involved in social transfers in kind are recorded in two different ways in the System, both of which represent uses of resources by government units or NPISHs:
(a) As final consumption expenditure, payable by government units or NPISHs; and
(b) As current transfers in kind, payable by government units or NPISHs. | | | Text refers to: table 9.1. | | | Text refers to: table 9.2. |
| 9.13. | Although the difference between disposable and adjusted disposable income is attributable to social transfers in kind, disposable income should not be interpreted as if it were a measure of income available in cash. Its several non-cash elements, such as those associated with production for own consumption or remuneration in kind, were pointed out in paragraphs 8.13 and 8.14 of chapter VIII on the secondary distribution of income account. | | | Text refers to: table 9.1. | | | Text refers to: table 9.2. |
4. Adjustment for the change in the net equity of households in pension funds (D.8)
| 9.14. | The reserves of private funded pension schemes are treated in the System as being collectively owned by the households with claims on the funds. The payments of pension contributions into the funds and the receipts of pensions by pensioners are, therefore, not transfers between different institutional units. They constitute the acquisition and disposal of financial assets. However, this may not accord with the perception of the households concerned, especially pensioners' households, who tend to regard the pensions they receive as income in the form of current transfers. Moreover, pensions received under social security schemes are in fact treated as current transfers in the System. |
| 9.15. | In order to present income information that may be more useful for analysing the behaviour of the households concerned, the payments of pension contributions under private funded and unfunded social insurance schemes and the receipts of pensions by pensioners' households under such schemes are recorded in the secondary distribution of income account as social contributions and social insurance benefits, respectively. They are therefore recorded as determinants of the disposable incomes of households. |
| 9.16. | However, in order to reconcile this treatment with the fact that households are treated in the financial accounts and balance sheets of the System as owning the reserves of private funded pension schemes, both autonomous and non-autonomous, it is necessary to introduce an adjustment item to ensure that the balance of pension contributions over pension receipts (i.e., of "transfers" payable over "transfers" receivable) does not enter into household saving. In order to achieve this, it is necessary to add back pension contributions to, and subtract pension receipts from, the disposable income, or adjusted disposable income, of households recorded in the secondary distribution of income accounts in order to get back to a figure for the saving of households that is the same as what it would have been if pension contributions and pension receipts had not been recorded as current transfers in the secondary distribution of income account. The necessary adjustment item is therefore equal to:
the total value of the actual social contributions payable into private
funded pension schemes
plus
the total value of contribution supplements payable out of the property
income attributed to insurance policy holders (i.e., holders of pension
rights)
minus
the value of the associated service charges
minus
the total value of the pensions paid out as social insurance benefits by
private funded pension schemes.
This adjustment item is equal to the change in the net equity of households in pension funds described in paragraphs 11.93 to 11.96 of chapter XI. It must be added to the disposable income, or adjusted disposable income, of households before calculating saving in order to reconcile the saving of households with the change in their net equity in life insurance reserves and pension funds recorded in the financial account of the System. Opposite adjustments are, of course, needed in the use of income accounts of the insurance enterprises, autonomous pension funds or employers maintaining non-autonomous pension funds. These adjustments can affect non-resident institutional units, both households and pension funds. | | | Text refers to: table 9.1. | | | Text refers to: table 9.2. |
5. Saving (B.8)
| 9.17. | Saving is the balancing item in the two versions of the use of income account. Its value is the same whether it is derived as disposable income less final consumption expenditure or as adjusted disposable income less actual final consumption (in both cases, after adding to income the adjustment item for pension funds just described). | | | Text refers to: table 9.1. | | | Text refers to: table 9.2. |
| 9.18. | As already noted, non-financial and financial corporations have no final consumption expenditure or actual final consumption. Their net saving is equal to their net disposable, or adjusted disposable, income (apart from the adjustment item for pension funds). |
| 9.19. | Saving represents that part of disposable income that is not spent on final consumption goods and services. It may be positive or negative depending on whether disposable income exceeds final consumption expenditure, or vice versa. Assuming that saving is positive, the unspent income must be used to acquire assets or reduce liabilities. In so far as unspent income is not used deliberately to acquire various financial or non-financial assets, or to reduce liabilities, it must materialize as an increase in cash, itself a financial asset. If saving is negative, some financial or non-financial assets must have been liquidated, cash balances run down or some liabilities increased. Thus, saving provides the link between the current accounts of the System and the subsequent accumulation accounts. |
| 9.20. | If saving is zero, i.e., if final consumption expenditure equals disposable income, the institutional unit is not obliged to liquidate any assets or change any of its liabilities. As already indicated in chapter VIII, disposable income can, therefore, be interpreted as the maximum amount that an institutional unit can afford to spend on final consumption goods and services in the accounting period without having to reduce its cash, liquidate other assets or increase its liabilities. |
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