Depreciation in EU Member States Bernd Görzig. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Overview n Introduction n Depreciation in EU countries

Depreciation in EU Member States

Bernd Görzig

Bernd Görzig9.6.2005

EU 6th Framework Programme

Overview

Introduction Depreciation in EU countries Measurement of depreciation Impact of service life assumptions Conclusions



Introduction

CFC ratio: Depreciation / Net domestic product (NDP) at

factor costs CFC ratios in EU member states differ

between 11 % in Greece, and 24 % in Finland



10 15 20 25 Depreciation Ratio in %

Greece

Ireland

UK

Spain

Italy

Sweden

Luxembourg

France

Belgium

Austria

Netherlands

Germany

Denmark

Portugal

Finland

Depreciation in NDP*

* At factor costs

EU15



Economic Theory suggests:

Production Functions Demographic and

geographic factors Mountainous or flat,

shape and borders, population density and composition, institutions, culture, a. o.

Market Structures Monopolised

markets Protected output

markets, Input markets (labour,

capital), institutional settings, a. o.

Economic specialisation Heavy or light industries, small and big countries, intensity of

use, a.o.



Selected Indicators and CFC Ratio

DimensionIndicator

Sources: German Statistical Yearbook for Foreign Countries ; Calculations of DIW. -

except EU 15FinlandGreeceTotal

-0,06-0,080,00km²Area0,04-0,16-0,05million personsPopulation0,270,020,11per km²Population density

-0,320,04-0,18% of EmploymentUnemployment-0,23-0,35-0,09% of GDPShare of manufacturing0,340,290,19% of GDPShare of Services0,380,250,21% of GDPInvestment0,25-0,010,201000 PPP per capitaGDP per head0,12-0,110,051000 PPP / labour forceLabour force productivity

-0,77-0,59-0,73Oper. Surplus / WagesIncome distribution



10

12

14

16

18

20

22

24

CF

C / N

DP

Rati

o %

50 55 60 65 70 75 80 85 Share of Services in GDP - %

Depreciation and Services

EU15

Coefficient of Correlation with CFC ratio: + 0.19Excluding Finland: + 0.34Greece: + 0.29

I

B

FIN

P DK

D

NLA

IRL

L

GR

GB

E

S F



10

12

14

16

18

20

22

24

CF

C / N

DP

Rati

o %

0,2 0,4 0,6 0,8 1 1,2 1,4 1,6 Profit - Wage Ratio

Depreciation and Income Distribution

EU15

Coefficient of Correlation with CFC ratio: - 0.73Excluding Finland: - 0.77Greece: - 0.59

F

D

BNL

FIN

E

A

IRL

S

GR

DK

L

P

GB

I



Possible Impact of Depreciation Differences

GDP CFC is part of value added for non-market

producer Political implications

Operating surplus (incl. mixed income)

Changes with CFC Analytical implications



-6 -4 -2 0 2 4 6 Impact on GDP %

GreeceIreland

UKSpain

ItalySweden

LuxembourgFrance

BelgiumAustria

NetherlandsGermanyDenmarkPortugalFinland

Assessment for non-market activities

Percentage change of GDP with same CFC ratio in all countries



Assessment for market activities

Percentage change of Operating Surplus with same CFC ratio in all countries

-20 -10 0 10 20 30 Deviations of Oper. Surplus %

Greece

Ireland

UK

Spain

Italy

Sweden

Luxembourg

France

Belgium

Austria

Netherlands

Germany

Denmark

Portugal

Finland



Results

Some differences in CFC ratios of EU member states might be explainable

However: Measurement differences cannot be

excluded



Differences in CFC Measurement

Sources Depreciation Capital stock Service lives

Service lives: degree of differentiation Service lives: comparisons Models Depreciation schedule



Sources of Depreciation

Direct observation (only Ireland, some new member states)

Gross or net capital stock (most countries)



Sources of Capital Stock

Direct observation Survey (mainly new member states) Administrative register

Perpetual inventory method Model based

Discard function (most countries) BEA model (2 countries)

Survey based BFA approach (some new member states)



Service Lives: 12 years instead of 10 years, is that important?

In general a 20% increase in service life leads to:

Capital stock: + 20 % Depreciation - 20 %

In Germany total economy 2001: Net operating surplus + 14%, but Rate of return on net stock - 8 %



Service Lives: Sources

Tax register Experts’ advice Survey Other countries estimate



Service Lives: Breakdown of estimates

Asset breakdown for Service Lives ranges from

AN classification (mainly: 4 tangibles, 3 intangibles) to

> 400 types of asset Additional industry breakdown

Applied by many countries for calculating capital stock

Rarely with specific Service Life for the particular industries



Service Lives: Difficulties of comparisons

Role of Service Life in geometric depreciation is different from the linear case

Comparison possible only for specified assets



Comparison of Service Lives

25-60

13-40

³ OECD (1993). -

1avg = weighted average over all assets. - ² UNECE (2004). -

equipmentOther

equipmentTransport

BuildingsOther

DwellingsCountry

15-25 8-25 30-40 60Belgium²13(avg)14(avg)50(avg)-5975Denmark² 5-27 6-25 20-7050Finland² 9-21 7-15France²

5-30 13(avg)

8-25 11(avg)

15-15040-95

74 (avg) Germany²

10-20 4-33 66-100Greece² 18-28 10-15Italy² 5-45 8-25 35-6075Netherlands²

1710 40-6538Spain² 10 - 40 2 - 35 25 - 80 75 Sweden³ 8 - 32 10 - 30 16 -100 100 UK³



What have we learned?

Variety of methods, but Are we able to

Quantify their impact on depreciation? Separate between

Economic and Methodological influences?

Separate between the various components of the applied methods?

Separate the impact of the underlying service life assumptions?



The Inverse PIM Model (InvPIM)

PIM Input:

Investment time series

Estimate for the average service life

Output: Depreciation Capital stock

InvPIM Input

Available depreciation figures

Available investment figures

Output Service life estimate Necessary additional

investment



Results of InvPIM

Good adaptation for most countries Not plausible results need

Additional research Better and more investment data



Service Life Estimates by InvPIM

LifeService

ExpectedAverage

before 1985Growth

Investment

Country

found.Source: DIW Calculations. - "." No solution

years%672Austria242Belgium13.Denmark246Finland579France330Germany296Greece188Ireland323Italy194Luxembourg208Netherlands14-2Portugal254Spain18.Sweden252UK



Best results of InvPIM

50

60

70

80

90

100

euro

1993 1995 1997 1999 2001

Estimated Original

DepreciationSpain

14

16

18

20

22

24

euro

1993 1995 1997 1999 2001

Estimated Original

DepreciationFinland



Worst results of InvPIM

140 150 160 170 180 190 200 210 220

euro

1993 1995 1997 1999 2001

Estimated Original

DepreciationDenmark

200

220

240

260

280

300

320

340

euro

1993 1995 1997 1999 2001

Estimated Original

DepreciationSweden



High Service Lives in InvPIM

150

160

170

180

190

200

210

euro

1993 1995 1997 1999 2001

Estimated Original

DepreciationFrance

22

24

26

28

30

32

euro

1993 1995 1997 1999 2001

Estimated Original

DepreciationAustria



10

12

14

16

18

20

22

24 C

FC

/ N

DP

Rati

o %

10 20 30 40 50 60 70 Estimated Average Sevice Life - Years

Depreciation and Service Lives

EU15

Coefficient of Correlation with CFC ratio: - 0.06

Excluding Finland: - 0.06Greece: - 0.03

NLD

FIN

E

A

IRL

S

GR

DK

FL

UK

I

P

B



Conclusions

CFC ratios in European Economies vary considerably

No unique explanation possible Impact of Service life assumptions seems to be

overestimated More research in the impact of

methodological differences necessary



Questions for the consortium

Can we change national depreciation figures?

How is the movement of assets between industries considered?

Depreciation in EU Member States

Bernd Görzig

Thank you for listening

Documents

Depreciation in EU Member States Bernd Görzig. EU 6 th Framework Programme Bernd Görzig 9.6.2005 Overview n Introduction n Depreciation in EU countries