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Depreciation in EU Member States

Bernd Görzig. Depreciation in EU Member States. 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

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Depreciation in EU Member States

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  1. BerndGörzig Depreciation in EU Member States

  2. Overview • Introduction • Depreciation in EU countries • Measurement of depreciation • Impact of service life assumptions • Conclusions

  3. 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

  4. EU15 Depreciation in NDP* * At factor costs

  5. 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 Theory suggests: • Economic specialisation • Heavy or light industries, small and big countries, intensity of use, a.o.

  6. Selected Indicators and CFC Ratio

  7. Coefficient of Correlation with CFC ratio: + 0.19 FIN P DK D NL A B L S F I E GB EU15 IRL GR Depreciation and Services Excluding Finland: + 0.34 Greece: + 0.29

  8. Coefficient of Correlation with CFC ratio: - 0.73 FIN P DK D NL A B S L I E GB EU15 IRL GR Depreciation and Income Distribution Excluding Finland: - 0.77 Greece: - 0.59 F

  9. 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

  10. Assessment for non-market activities Percentage change of GDP with same CFC ratio in all countries

  11. Assessment for market activities Percentage change of Operating Surplus with same CFC ratio in all countries

  12. Results • Some differences in CFC ratios of EU member states might be explainable • However: • Measurement differences cannot be excluded

  13. Differences in CFC Measurement • Sources • Depreciation • Capital stock • Service lives • Service lives: degree of differentiation • Service lives: comparisons • Models • Depreciation schedule

  14. Sources of Depreciation • Direct observation (only Ireland, some new member states) • Gross or net capital stock (most countries)

  15. 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)

  16. 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 %

  17. Service Lives: Sources • Tax register • Experts’ advice • Survey • Other countries estimate

  18. 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

  19. Service Lives: Difficulties of comparisons • Role of Service Life in geometric depreciation is different from the linear case • Comparison possible only for specified assets

  20. Comparison of Service Lives

  21. 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?

  22. 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 The Inverse PIM Model (InvPIM)

  23. Results of InvPIM • Good adaptation for most countries • Not plausible results need • Additional research • Better and more investment data

  24. Service Life Estimates by InvPIM

  25. Best results of InvPIM

  26. Worst results of InvPIM

  27. High Service Lives in InvPIM

  28. FIN DK P D NL B A L F S I E UK IRL EU15 GR Coefficient of Correlation with CFC ratio: - 0.06 Depreciation and Service Lives Excluding Finland: - 0.06 Greece: - 0.03

  29. 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

  30. Questions for the consortium • Can we change national depreciation figures? • How is the movement of assets between industries considered?

  31. BerndGörzig Depreciation in EU Member States Thank you for listening

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