Depreciation in EU Member States

Depreciation in EU Member StatesBernd Grzig

EU Sixth Framework Programme

EU 6th Framework Programme

OverviewIntroductionDepreciation in EU countriesMeasurement of depreciationImpact of service life assumptionsConclusions



Introduction

CFC ratio:Depreciation / Net domestic product (NDP) at factor costsCFC ratios in EU member states differ between11 % in Greece, and24 % in Finland



Depreciation in NDP*

* At factor costs



Economic Theory suggests: Production FunctionsDemographic and geographic factorsMountainous or flat, shape and borders, population density and composition, institutions, culture, a. o. Market StructuresMonopolised marketsProtected output markets, Input markets (labour, capital), institutional settings, a. o. Economic specialisationHeavy or light industries, small and big countries, intensity of use, a.o.



Selected Indicators and CFC Ratio



Depreciation and ServicesExcluding Finland:+ 0.34Greece: + 0.29



Depreciation and Income DistributionExcluding Finland:- 0.77Greece: - 0.59F



Possible Impact of Depreciation DifferencesGDP CFC is part of value added for non-market producerPolitical implicationsOperating surplus (incl. mixed income)Changes with CFCAnalytical implications



Assessment for non-market activitiesPercentage 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



ResultsSome differences in CFC ratios of EU member states might be explainableHowever: Measurement differences cannot be excluded



Differences in CFC MeasurementSourcesDepreciationCapital stockService livesService lives: degree of differentiationService lives: comparisonsModelsDepreciation schedule



Sources of DepreciationDirect observation (only Ireland, some new member states)Gross or net capital stock (most countries)



Sources of Capital StockDirect observationSurvey (mainly new member states)Administrative registerPerpetual inventory method Model basedDiscard function (most countries)BEA model (2 countries)Survey basedBFA 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%, butRate of return on net stock - 8 %



Service Lives: SourcesTax registerExperts adviceSurveyOther countries estimate



Service Lives: Breakdown of estimatesAsset breakdown for Service Lives ranges fromAN classification (mainly: 4 tangibles, 3 intangibles) to> 400 types of assetAdditional industry breakdownApplied by many countries for calculating capital stockRarely with specific Service Life for the particular industries



Service Lives: Difficulties of comparisonsRole of Service Life in geometric depreciation is different from the linear case Comparison possible only for specified assets



Comparison of Service Lives



What have we learned?Variety of methods, butAre we able to Quantify their impact on depreciation? Separate betweenEconomic andMethodological 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 seriesEstimate for the average service life Output:DepreciationCapital stock InvPIM InputAvailable depreciation figuresAvailable investment figures OutputService life estimateNecessary additional investment



Results of InvPIMGood adaptation for most countriesNot plausible results need Additional researchBetter and more investment data



Service Life Estimates by InvPIM



Best results of InvPIM



Worst results of InvPIM



High Service Lives in InvPIM



Depreciation and Service LivesExcluding Finland:- 0.06Greece: - 0.03



ConclusionsCFC ratios in European Economies vary considerablyNo unique explanation possibleImpact of Service life assumptions seems to be overestimatedMore research in the impact of methodological differences necessary



Questions for the consortiumCan we change national depreciation figures?How is the movement of assets between industries considered?


Depreciation in EU Member StatesBernd GrzigThank you for listening


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Depreciation in EU Member States