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Capitalization of Military Weapons Systems in the U.S. National Accounts

Capitalization of Military Weapons Systems in the U.S. National Accounts

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Capitalization of Military Weapons Systems in the U.S. National Accounts

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  1. Capitalization of Military Weapons Systems in the U.S. National Accounts Brent R. Moulton Working Party on National Accounts, OECD Paris October 25–28, 2011

  2. Why SNA 2008 capitalizes weapons • SNA 2008 recognizes that military personnel are engaged in production and use weapon systems continuously in the production of defense services • Weapon systems have value and can be resold • Consistent with international public sector accounting standards • Service lives and depreciation account for decline in value over time and the need for eventual replacement

  3. Effects of new treatment • SNA 1993 treated purchases of weapons systems as intermediate consumption • SNA 2008 reclassifies weapons purchases as gross fixed capital formation (GFCF) • Lowers final consumption expenditures and raises GFCF by equal and offsetting amounts • SNA 2008 includes weapons systems in consumption of fixed capital (CFC) • Raises final consumption expenditures and GDP

  4. Effects on U.S. national accounts • GDP level - for 2010: • Purchases of weapons systems were about $105 billion (or 0.7 percent of GDP) • Reclassified from consumption expenditures to GFCF • CFC for weapons systems was about $74 billion (or 0.5 percent of GDP) • Raised general government final consumption expenditures and GDP • Modest effects on GDP growth rate, trends

  5. Perpetual inventory method • CFC and net stocks are calculated using the perpetual inventory method (PIM) • Method is described by: • OECD, Measuring Capital: OECD Manual 2009, second edition • Bureau of Economic Analysis, Fixed Assets and Consumer Durable Goods in the United States, 1925–97, (2003), available at www.bea.gov

  6. Outline of PIM • Determine age-price/depreciation profile for each type of asset • May be geometric or straight-line • Determine retirement profile (straight-line) • Apply profiles to net stock (geometric) or to time-series of investment (straight-line) at constant prices • Calculate end-of-period net stock as beginning stock plus investment less other changes in assets less depreciation (at constant prices) • Reflate to current prices

  7. Setting depreciation/service lives • For service lives, BEA staff consulted with staff from the Department of Defense • Declining balance rates were used to convert service-life information to depreciation rates • Geometric depreciation profiles are used for all asset types except missiles, which use straight-line • For more information, see Fixed Assets and Consumer Durable Goods, available at www.bea.gov

  8. BEA depreciation rates/service livesExamples – selected weapons system assets

  9. Other changes in assets • For weapons systems, other changes in assets may represent war losses or the scrapping of equipment after a war. • War losses affect the PIM calculation in the following ways: • The loss itself is subtracted to derive end-of-period net stock. • Depreciation on the loss is computed using a half-year convention. This “depreciation” is subtracted from both beginning-of-period net stocks and CFC.

  10. Implementation in U.S. accounts • Based on advisory expert recommendations, BEA began capitalizing military weapons systems in its national accounts in 1996 • For international comparability, data submitted to OECD apply the SNA 1993 treatment • This is the only NIPA/SNA adjustment that affects GDP • When BEA implements the other major SNA 2008 changes in 2013, it will no longer need to make this adjustment