Special Report No 17/2000 on the Commission's control of the reliability and comparability of the Member States' GNP data together with the Commission's replies
Date: 2000-09-14
Institutions: European Court of Auditors
Subjects: EU Member State, EU control, economic indicator, financing of the EU budget, gross national product, statistics

27.11.2000

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Official Journal of the European Communities

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I

(Information)

COURT OF AUDITORS

SPECIAL REPORT No 17/2000

on the Commission’s control of the reliability and comparability of the Member States’ GNP data
together with the Commission’s replies

(pursuant to Article 248(4), second subparagraph (EC))

(2000/C 336/01)

CONTENTS

Paragraph

Page

EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE USE OF GNP AT COMMUNITY LEVEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Own resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other uses of GDP/GNP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CHECKING GNP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At Community level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At national level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE RELIABILITY AND COMPARABILITY OF THE DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The process of establishing GNP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The control procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reservations concerning GNP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Observations on the reservations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exhaustiveness of GNP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transparency of adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lack of satisfactory justification for certain adjustments. . . . . . . . . . . . . . . . . .

Comparability bias . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Comparability of adjustments between Member States . . . . . . . . . . . . . . . . . . .

Treatment of illegal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outdated sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Procedures for revising adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Taking account of VAT evasion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Equivalence of the methods used by the Member States . . . . . . . . . . . . . . . . . .

Anomalies in the results of the calculation of theoretical VAT . . . . . . . . . . . . .

1-5

6-12

6-9

10-12

13-17

13-16

17

18-79

20-26

27-62

27-30

31-52

32-49

32-34

32-34

35-36

35

36

37-40

39-40

41-47

43-44

45-47

3

3

3

3

4

4

4

5

5

5

6

6

6

6

6

6

7

7

7

7

7

7

8

8

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Paragraph

Page

Business register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Distinction between final uses and intermediate consumption . . . . . . . . . . . . . . . . . .

Balancing procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The limited nature of the checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The role of the GNP Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The possibility of measuring the quality of the data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Comparison on the basis of the approaches to GNP. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Analysing changes in revisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Comparability between Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

An aggregate that is widely used in the Community context . . . . . . . . . . . . . . . . . . . . . . . . .

Guaranteeing legitimacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Completing harmonisation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Effective controls at Community level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48-49

50-52

51-52

53-62

60-62

63-79

69-74

75

76-79

80-92

80

81-84

85-86

87-92

ANNEXES I AND II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s replies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

8

9

9

9

10

10

10

11

11

11

11

11

11

13

17

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EXECUTIVE SUMMARY

GNP, which is considered to be representative of the Member
States’ ability to contribute to the Community budget, plays a
much more important role than that of merely financing the bud-
get. This aggregate is used as a reference indicator in the field of
structural measures as well as in the context of economic and
monetary union. Community control procedures are the only
control procedures capable of guaranteeing the reliability and
comparability of GNP data established by the Member States using
their own statistical procedures. On the Commission’s initiative,
extensive harmonisation work has been carried out since 1989,
resulting in substantial changes in the national GNPs. The Com-
mission should, however, improve and extend the controls, pro-
vide better monitoring and introduce an adequate documentary
framework. The Court recommends that the efforts to improve
data quality continue, so that GNP can validly perform the role
assigned to it.

INTRODUCTION

1. Gross national product (GNP) (1) gives a measurement of a
quantity of production, the real value of which is and remains
unknown. It is calculated on the basis of estimates, information
from various sources, economic models and expert estimates.

2. At Community level, GNP is considered to be the indicator
which best represents the Member States’ ability to contribute to
the budget. That is why, particularly since 1988, it has come to
play a growing and decisive role in the funding of the Community
budget. In March 1999 the Berlin European Council decided to
increase the weight of the GNP resource in the funding of the
budget, with effect from 2002 (2).

3. Considerable work on harmonising national statistical sys-
tems has been carried out since 1989 under the aegis of the Com-
mission. The Court of Auditors has examined the extent to which
the Member States’ calculations of GNP can now be considered
comparable and reliable for use at Community level (3).

4. The audit, which was carried out at the Commission, aimed
to establish the level of assurance of the system, at Community
level, as regards the reliability and comparability of the statistical
data in question. It considered the Commission’s procedures in
respect of Member States’ compliance with the rules for establish-
ing GNP and examined the underlying statistical data.

5. The comparability of GNP between Member States largely
depends on taking proper account of two particular aspects of the
national accounts, namely their exhaustiveness and the distinc-
tion between intermediate consumption and final uses (4). The
Court analysed information and data for four Member States (5),
whose share of Community GNP is about 70 %. In addition, in
order to consider more fully the reasons for certain anomalies
that had been discovered during previous Court audits, the spe-
cific question of how VAT evasion is included in the national
accounts was also examined in two other Member States (6).

THE USE OF GNP AT COMMUNITY LEVEL

Own resources

6. The ceiling for the own resources contribution to the Com-
munity budget is 1,27 % of total national GNP (7).

(1)

In accordance with Council Directive 89/130/EEC, Euratom of 13 Feb-
ruary 1989 on the harmonisation of the compilation of GNP at mar-
ket prices (OJ L 49, 21.2.1989, p. 26), GNP, of which the version at
market prices is applicable for calculating own resources, is calculated
on the basis of gross domestic product (GDP). GNP equals GDP plus
compensation of employees and the property and entrepreneurial
income received from the rest of the world minus the corresponding
flows paid to the rest of the world. For a given period, GDP measures,
in monetary and gross value terms (that is to say, without deducting
consumption of fixed capital), the final result (goods and services) of
the production activity by resident producer units in an economic ter-
ritory. GDP may be presented from three different points of view (the
output of resident producer units, the final uses of goods and services
by these units or the income generated by these units). The market
prices applied to evaluate, in monetary terms, the goods and services
produced include all the taxes linked to the production or importa-
tion of these goods and services net of subsidies. The GNP and GDP
aggregates form part of the definitions in the European system of
integrated economic accounts (ESA), the last version of which (ESA
95) was adopted by Council Regulation (EC) No 2223/96 of 25 June
1996 (OJ L 310, 30.11.1996). In ESA 95, the concept of GNP that
existed in the previous ESA (ESA 79) was replaced for most practical
purposes by gross national income (GNI).

(2) European Council meeting in Berlin, 24 and 25 March 1999, Presi-
dency conclusions, III. Own resources and budgetary imbalances,
paragraphs 67 to 76. This agreement, which was reached by the Heads
of State or Government, called for the adoption of a new decision on
the system of own resources. The entry into force of such a decision
is subject to national ratification procedures. A proposal for a new
decision was presented by the Commission in July 1999 (COM(1999)

333 final of 8.7.1999). The Court has delivered an opinion on the
proposed decision (see Opinion No 8/99 (OJ C 310, 28.10.1999,
p. 1)).

(3) The Court reported on its work on GNP in its Annual Reports con-
cerning the financial years 1991 (paragraphs 1.119 to 1.131), 1992
(paragraphs 1.80 to 1.104), 1993 (paragraphs 1.68 to 1.101), 1994
(paragraphs 1.112 to 1.131) and 1995 (paragraphs 1.104 to 1.128).
(4) For a fuller definition of the concepts of exhaustiveness, intermediate

consumption and final consumption, see Annex I.

(5) Germany, France, Italy, United Kingdom.
(6)
(7)

Ireland, Luxembourg.
In 1999, own resources amounted to EUR 85 555 million in total, of
which 37 % was provided by the VAT resource and 44 % by the GNP
resource.

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7. Contributions to the budget via the GNP resource are calcu-
lated as a percentage of each national GNP. This resource forms
part of the budget funding and is used to make up the difference
between planned expenditure and the other resources available
(customs duties and agricultural duties and the VAT resource).

CHECKING GNP

At Community level

8. Calculation of the VAT resource is affected by statistical data
in several respects. The basis of assessment for this resource is
limited to the equivalent of 50 % of GNP where necessary.

13. The Commission is responsible for validating data which are
initially drawn up at national level, but may subsequently become
Community statistics (3).

9. The statistical data on which GNP is based also have a signifi-
cant influence on the actual calculation of this assessment base (1).
This is the base that is used to establish the weighted average rate.
It also applies for several compensations or corrections that are
designed to take account of national characteristics that affect the
application of VAT legislation.

14. Directive 89/130/EEC, Euratom provided for the setting up
of a committee (4) to assist the Commission in reviewing the cal-
culation of GNP, notably with regard to:

— compliance with the European system of integrated economic

accounts (ESA) (5),

Other uses of GDP/GNP

10.
In the Community context, the role of GDP/GNP (2) is not
restricted to the financing of the budget. This aggregate is also
taken into account in decisions on structural aid policies for
regions whose development is lagging behind. It is also consid-
ered in setting the maximum amount of expenditure for the
EAGGF Guarantee Section, when allocating the European Central
Bank’s capital between the Member States and in determining the
financial participation of non-member States which are members
of the European Economic Area.

11. This aggregate is also used in the context of the Stability Pact
provided for in the context of economic and monetary union,
particularly for monitoring government deficits and public indebt-
edness ratios. On a more general level, GDP/GNP is used as a
benchmark for the coordination of national economic policies
and for the policies concerned with the completion of the single
market.

12. The correct establishment of GDP/GNP is, therefore, not just
about determining own resources and ensuring equality of treat-
ment for the Member States in the funding of the budget. It is a
requirement that has much wider repercussions.

(1) Subject to any specific adjustments that may be necessary for calcula-
tions to be comparable between the Member States, the assessment
base for a Member State’s VAT resource is obtained by dividing the
revenue collected during a financial year by the weighted average rate.
This rate is supposed to represent the weighting of the various rates
of VAT applied to the various taxable operations, reconstituted sta-
tistically.

(2) The difference between GDP and GNP is described in footnote 1,

page 3.

— examining data forwarded by the Member States, statistical

sources and calculation procedures,

— verifying and assessing the practical comparability and exhaus-

tiveness of GNP.

15. The provisions on the determination of the GNP resource lay
down that every year the Commission, together with the Member
State concerned, is to check that the aggregates sent to it have
been correctly taken into account, especially in the context of
cases notified by the GNP management committee. In individual
cases, the Commission may ‘examine calculations and basic sta-
tistics (...), where no proper assessment would otherwise be pos-
sible’ (6).

16. When checking the GNP calculations, the Commission is
empowered under Article 6 of Directive 89/130/EC, Euratom to
take the measures it judges necessary (7). In order to safeguard the
Community’s financial interests, the Member State concerned is

these statistics

(3) At the Commission, Eurostat is responsible for carrying out work on
the production of
(Commission Decision No
97/281/EC of 21 April 1997 (OJ L 112, 29.4.1997, p. 56)). For the
purposes of the GNP resource, Eurostat approves the data used for the
assessment base and communicates them to the authorising depart-
ment for own resources. Apart from specific provisions applicable to
the calculation of GNP, Council Regulation (EC) No 322/97 of 17 Feb-
ruary 1997 on Community statistics provided a definition of the basic
principles with which Community statistics are to comply (OJ L 52,
22.2.1997, p. 1). These include the principles of impartiality, reliabil-
ity, relevance, cost-effectiveness, statistical confidentiality and trans-
parency. These same principles have also been introduced into the EC
Treaty recently (Article 285). Under that provision the Commission
may propose to the Council measures for the production of statistics
where necessary for the performance of the activities of the Commu-
nity.

(4) The GNP Committee is composed of representatives of the Member

States and is chaired by the Commission.

(5) The function of the ESA is described at paragraph 20.
(6) Article 19 of Council Regulation (EEC, Euratom) No 1552/89 of

29 May 1989, (OJ L 155, 7.6.1989).

(7) See also footnote 3, page 4. regarding the fundamental principles gov-
erning Community statistics and the production of statistics needed
for the performance of the activities of the Community in the light of
Article 285 of the EC Treaty.

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sent notice of a reservation. Under the provisions on own
resources (1), this notification makes it possible to require the
Member State concerned to make the appropriate adjustments.
As long as the reservations have not been lifted, the Commission
does not consider that the GNP for a given financial year is defini-
tive.

At national level

17.
In the Member States, own resources based on GNP are
entered in the accounts as national expenditure paid over to the
Community budget. They may therefore be audited by the national
authorities according to their own rules. In practice, the payments
to the Community budget in connection with the GNP resource
are not audited until the statistical data underlying the assessment
base have been obtained. The only control procedures that apply
to the establishment of these statistics and to the working meth-
ods and concepts used are those that exist within the national sta-
tistical offices. Mainly because of their independent status, it is the
latter that compile the data, on their own responsibility.

THE RELIABILITY AND COMPARABILITY OF THE DATA

18. The legitimacy of GNP as a benchmark aggregate at Com-
munity level is closely dependent on the possibility of checking
that the data in question fulfil the quality conditions. This con-
cept, which is based on the two criteria of the reliability and the
comparability of the data, is summarised in the following fig-
ure (2).

GNP quality

Comparability
between Member States

Reliability
(accuracy of data)

19. The Court’s checks focused on the factors that may make
compliance with these criteria difficult, namely:

(a) the process of establishing GNP (paragraphs 20 to 26);

(b) the control procedures (paragraphs 27 to 62);

(c) the possibility of measuring the quality of the data (para-

graphs 63 to 79).

The process of establishing GNP

20. The components of GNP are defined by the European sys-
tem of integrated economic accounts (ESA), which provides a
framework of statistical standards, concepts, definitions and
rules (3). It is obligatory for the Member States to use the ESA.
Under the provisions applicable, and Directive 89/130/EEC, Eura-
tom in particular, they must provide statistics of GNP.

21. Although, by means of the ESA, Directive 89/130/EEC, Eura-
tom established standard principles for the definition of the aggre-
gates, it did not impose a common method of calculation on the
Member States. This is due to different national circumstances
with regard to the availability and timeliness of the data sources,
the calculation and assessment methods used and the organisa-
tion of the statistical systems.

22.
In general, the Member States use at least two approaches to
calculating GNP, but sometimes the estimates involved are not
entirely independent of each other. In most cases, it is the output
and expenditure approaches that are used, the former being the
dominant one (4).

Conceptual
(equivalence of
ESA standards)

Practice
(equivalence
of methods and of
sources)

exhaustiveness or
degree of coverage

23. Before GNP is established, the results of these different
approaches are integrated. The breakdown level at which integra-
tion takes place varies from one Member State to another. For
most of them, this is done at product level, but some make adjust-
ments at aggregate level (5).

(1)

In particular, Article 10(8) of Council Regulation (EEC, Euratom)
No 1552/89 of 29 May 1989.

(2) Directive 89/130/EC, Euratom uses numerous terms and concepts
which contribute to the quality of GNP, but without defining or rank-
ing them. It mentions the need to ‘reinforce comparability and reli-
ability’ (first recital) and specifies that ‘GNPmp data must be compa-
rable in concept and in practice and representative of the Member
States’ economies’ (third recital). These same concepts are found in
Article 7, which defines the role of the GNP Committee (see para-
graph 14).

(3) The ESA is an accounting framework adapted to the structures of the
Member States’ economies. The fact that it is compatible with the
United Nations system of national accounts (SNA) means that it can
be used to draw international comparisons. The ESA provides a
detailed and systematic description of a ‘total economy’ (a region, a
country or a group of countries), its components, its structure, its
relations with other economies and the way it changes over time.
(4) The approaches to establishing GDP, from which GNP is derived, are
discussed in footnote 1, page 1. An indication of the variety of
approaches used is given in Annex II, which summarises the way in
which each Member State calculates its GNP.

(5) The main characteristics of the integration methods are described in

Annex II.

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24. Notwithstanding the national characteristics that lie behind
the differences in sources and methods of producing GNP, the
Court, like the Commission, considers that the real question is
whether, above and beyond the purely formal harmonisation
resulting from the ESA, Member States’ GNP figures are compa-
rable on both the conceptual and the practical level (1).

Technically, the points in question concerned the methodologies
and sources used in drawing up the national accounts, where the
Commission felt that one or other of the Member States had not
respected the Community’s conceptual framework. One reserva-
tion that applied to all the Member States concerned the exhaus-
tiveness of their national accounts.

25. Furthermore, as the Court has already pointed out in previ-
ous observations (2), the principle of the impartiality of Commu-
nity statistics (3) dictates that the accounting framework used
should be the most powerful one available. A new version of the
ESA (ESA 95) took effect in April 1999. However, the Regulation
setting up the system (4) provided that the old ESA (ESA 79),
which is considered less reliable, remains in force, for own resources
purposes only, as long as the current financing system has not
been changed.

26. As a consequence of retaining ESA 79 the accounts, which
are currently drawn up according to ESA 95, are subject to a
backwards conversion, purely for own resources purposes. This
operation not only duplicates work that has already been done, it
also presents a real risk of additional error. Even if the new Deci-
sion on own resources that is in the process of being adopted by
the Council provides for ESA 95 to be applied as from 2002, the
effects of this double system will nevertheless be felt beyond that
date (5).

The control procedures

Reservations concerning GNP

In order for these reservations to be lifted, Member States
29.
were expected, by improving their statistical tools, to provide evi-
dence of the ‘comparability, reliability and exhaustiveness’ of
GNP (7). After several deferrals, the deadline for aligning the sta-
tistical systems was set at 1 October 1998. Austria, Finland and
Sweden were given an extra year.

30. At the end of 1998, there were 85 reservations on the GNPs
of the 12 ‘old’ Member States. One year later, only 20 were still
outstanding, concerning three in particular (8). It is clear, there-
fore, that the Commission has lifted most of these reservations.

Observations on the reservations

31. For the national GNPs referred to in paragraph 5, the Court’s
examination focused on two reservations out of those mentioned
above, namely, the exhaustiveness of GNP and the distinction
between final uses and intermediate consumption (9). Examina-
tion of these reservations, since lifted by the Commission, revealed
several problems, which are discussed below.

27. Following the entry into force of Directive 89/130/EEC, Eura-
tom the Commission set itself the objective of harmonising meth-
ods of calculating Member States’ GNP. To do this, it applied itself
to examining with the GNP Committee inventories of the proce-
dures and statistical bases used by the Member States for calculat-
ing GNP and its components.

EXHAUSTIVENESS OF GNP

Transparency of adjustments

28. Following this analysis, the Commission notified the Mem-
ber States of a certain number of reservations, mainly in 1992 (6).

Lack of satisfactor y justif ication for cer t ain
adjustments

(1) Annual report of the Court of Auditors concerning the financial year

1991, Commission’s reply to paragraph 1.129.

(2) Special Report No 6/98 concerning the assessment of the systems of
own resources based on VAT and GNP, paragraphs 3.17 to 3.22.

(3) See footnote 3, page 4.
(4) Council Regulation (EC) No 2223/96 of 25 June 1996 on the Euro-
pean system of national and regional accounts in the Community
(OJ L 310, 30.11.1996, p. 243).

(5) Due, in particular, to the fact that the assessment base for any given
financial year gives rise to adjustments in subsequent budget years.
(6) See paragraph 16. These points, of which there were 157, are listed in
Commission Decision 97/619/EC, Euratom of 3 September 1997
(OJ L 252, 16.9.1997, p. 33). Some Member States have also used the
right to notify reservations in order to provide better quality data on
specific points at a later date.

32. The number of adjustments for exhaustiveness was high. It
was not possible for the Court to judge the validity of some of the
adjustments, for want of relevant explanations, or explanation of
any kind, or, even, because of lack of data.

(7) Decision 97/619/EC, Euratom, first recital.
(8) At the end of 1999 the total number of reservations outstanding was
69. To the 20 reservations mentioned must be added a further 34
concerning Austria, Finland and Sweden, as well as one reservation
for each Member State concerning the transition between ESA 95 and
ESA 79.

(9) See Annex I for a detailed definition.

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33. This was particularly the case when exhaustiveness adjust-
ments were justified by means of a technical coefficient or the
term ‘best estimate’, without any further information. On occa-
sion, the major part of the exhaustiveness adjustment was based
on residual items (other, miscellaneous), without further explana-
tion. Up to 80 % of the correction relating to final consumption
may be justified by an item of this type. In another case inconsis-
tencies were revealed by comparing changes in an adjustment for
exhaustiveness and VAT evasion. It was not possible to clarify this
question, because there are no figures for some of the exhaustive-
ness adjustments, especially those that are implicit in the national
accounts.

34. For example, in one case where the Commission did not feel
able to verify the accuracy of a classification, it chose not to fol-
low up the matter. In another, the Commission accepted an
exhaustiveness adjustment which was admitted to have no reli-
able statistical base. This last question now appears to have been
resolved.

Comparability bias

Compar ability of adjustments between Member
St ates

35. The Court took note of a study which sought to compare a
Member State’s own estimate of the income under-declared by
taxpayers with the estimate obtained for the same Member State
by means of a method used by another Member State. The exer-
cise produced very different results, which could not be explained.
It thus raises the question of whether it is really possible to be sure
that exhaustiveness adjustments are comparable.

Treatment of illegal activities

36.
Illegal activities are included in the GNP field (1). However,
because of practical difficulties associated with the measurement

(1) National accounts are, by definition, concerned with economic flows,
not with their legality. Accordingly, illegal activities are entered in the
accounts as output, provided that the transaction is undertaken by
agreement. This principle is found in the 1993 United Nations’ system
of national accounts (SNA) (paragraphs 3.54 to 3.56 and 6.30 to
6.33) and in ESA 95 (paragraphs 1.13 and 1.42). ESA 79 does not
refer explicitly to these activities but, in the absence of any statement
to the contrary, it may be interpreted as including them. SNA 1993
(paragraph 6.35) states that the demarcation between the under-
ground economy (that is, the economy that is not observed directly)
and illegal activities cannot be precisely determined.

of them, Decision 94/168/EC, Euratom excluded them from the
scope of exhaustiveness adjustments. The Court considers that in
consequence their inclusion by Member States is not homoge-
neous and there is still no standard definition of what constitutes
an illegal activity.

Outdated sources

37. The exhaustiveness adjustments are often based on technical
coefficients calculated in terms of a base year, or on surveys or ad
hoc estimates which, in turn, are sometimes outdated. This raises
the question of how up to date the sources are, especially where
the dynamics of the unobserved economy differ from those
recorded directly by the statistical offices. In that case, the esti-
mated adjustments will be equally biased.

38. For example, there is no guarantee that bases that are 20
years old are still relevant or that the structural changes that have
affected fraud since then (volume, sectors of activity and type)
have been taken into consideration.

Procedures for revising adjustments

39. Some Member States prefer to make substantial adjust-
ments (2) for the base years only, in order to have series that are
homogeneous over time. This meets national requirements, which
aim to have series that are homogeneous in terms of growth rates.
The inherent risks are, among other things, the absence of com-
parability between Member States’ adjustment figures, for example
between Member States which frequently update their adjust-
ments and those which do so only when the base is altered.

40. Evaluation of these problems is difficult, because Decision
94/168/EC, Euratom only provides for a ‘description (referring to)
a recent year for which final estimates are available’ (3), and does
not require a description of the procedures for revising exhaus-
tiveness adjustments .

Taking account of VAT evasion

41. The concept of GNP at market prices is such that the value
of purchases of goods and services includes the taxes paid, par-
ticularly VAT. In case of fraud or tax evasion (4), the GNP calcula-
tion takes these purchases into account at the price actually paid,

(2) For example, changes in concepts, the substantial improvement or,

possibly, creation of a source.

(3) Article 3 of Decision 94/168/EC, Euratom.
(4)

In this case, the supplier, with the agreement of the purchaser of a
good or service, does not declare a taxable transaction to the tax
authorities. The price paid is therefore, by definition, net of tax. In
such cases there is no need to adjust the GNP for VAT. This form of
evasion is classed as tax evasion with complicity.

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i.e. excluding VAT. Where the purchaser has paid the tax and it
has not subsequently been paid to the tax authorities by the sup-
plier, Member States are, however, required to make adjustments
under the heading of tax evasion ‘without complicity’.

theoretically due. This finding may be symptomatic of an under-
estimation in the national accounts. This problem has already
been highlighted by the Commission, following work carried out
in 1980.

42. Decision 98/527/EC, Euratom provides an ad hoc method
for calculating tax evasion ‘without complicity’ (1). However, it
allows Member States the possibility of reaching the same result
by other means.

47.
In 1991 the Commission did actually establish, in the case of
one Member State, that this anomaly in the difference between
actual and theoretical VAT revenue was due to underestimation of
the final consumption by households. Whilst the Court does not
have a complete set of evidence, it notes that in the Commission’s
view the problem mentioned has now been resolved.

Equivalence of t he met hods used by t he Member
St ates

Business register

43. Although the Decision lays down precise rules, it was not
always possible to assess the extent to which the method recom-
mended by the Commission had been applied or to establish the
equivalence with other methods used by the Member States. In
some cases the supporting documentation was missing, while in
others the definitions laid down had not been applied.

44. For some of the national GNP examined it therefore remains
to be established whether VAT evasion has been correctly taken
into account.

Anomalies in t he results of t he calculation of
t heoretical VAT

45. The calculation of theoretical VAT through the national
accounts includes the factors that may explain a VAT underpay-
ment (2). For that reason theoretical VAT can be expected to be
higher than the VAT actually collected. In the GNP Committee’s
view, this is the only way of ensuring that the national accounts
have at least taken account of some of the transactions that are
not visible to the tax authorities.

In order to ensure that the national accounts are exhaustive
48.
it is essential to have the most detailed knowledge possible of the
units whose output is to be taken into account when the statistics
are compiled. The purpose of such a tool, processing information
from several sources, is to avoid omission or double-counting of
producer units. In 1992, the Commission stated that the potential
impact of the business register on GNP measurement could be as
great as taking the underground economy into account.

49. Member States are required to establish such a register (3).
The Court’s audit nevertheless revealed that the reservation con-
cerning exhaustiveness in respect of one Member State had been
withdrawn, even though the latter still had no such register. In
such cases the Commission should state the reasons that enabled
it to obtain assurance that this deficiency does not affect the
exhaustiveness of the national accounts.

DISTINCTION BETWEEN FINAL USES AND INTERMEDIATE
CONSUMPTION

46. However, the Court detected cases where, contrary to the
above principle, the VAT collected was higher than the amount

(1) OJ L 234, 21.8.1998, p. 39. According to this Decision, tax evasion
‘without complicity’ is calculated by subtracting from the theoretical
VAT revenue (the amount that would be collected if units subject to
VAT paid it as required by law) the following factors:
— actual VAT revenue,
— time differences between treasury data and the national accounts,
— insolvency-related cancellations of claims,
— missing revenue (evasion ‘with complicity’).

(2) These include, inter alia, time differences in treasury data and can-

celled claims (see footnote 1, page 8).

50. Unlike the question of GNP exhaustiveness, there are detailed
definitions at Community level of the difference between final
uses and intermediate consumption. The Court’s audit revealed
several cases where the definitions specified in the ESA had not
been respected. In some cases the Commission itself had estab-
lished a lack of compliance, in some instances for all the Member
States. In the Commission’s view these cases did not have a sig-
nificant impact on the calculation of GNP.

(3) Council Regulation (EEC) No 2186/93 of 22 July 1993 on Commu-
nity coordination in drawing up business registers for statistical pur-
poses (OJ L 196, 5.8.1993, p. 1).

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Balancing procedures

51. When confronted with lack of compliance with the ESA
conventions some statistical offices say that balancing-out the
accounts provides a solution to the problems. The Court’s checks
did not provide any assurance that balancing out the uses and
resources for a product automatically prevents an implicit bias in
the data.

52.
In order to validate such an assumption, proof of indepen-
dence, in relation to the problem of non-compliance with the
ESA, needs to be provided for least one of the sources used in the
procedure. It is also important to evaluate the efficiency of the
procedure itself.

The limited nature of the checks

53. With regard to the exhaustiveness of the national accounts,
the Commission stated in July 1999 that the matter had been sub-
ject to in-depth checks and that the underground economy was
taken into account in the national accounts. As of May 2000,
however, there was still a reservation concerning this point in the
case of five Member States (1).

54. The Commission said that the lifting of this reservation was
the result of a global assessment of all the explicit and implicit
adjustments made. The assessment was based on the study of
sources and statistical methods which the Commission defines as
being its primary source for auditing purposes (2).

55. The Commission admits that this source alone is not suffi-
cient to guarantee the quality of the data and that, since the level
of detail in the inventories is not sufficient, it is sometimes neces-
sary to obtain additional information from the Member States.

56. As regards the two reservations covered by the inquiry, the
documents supplied by the Commission reported specific checks.
The Commission did not carry out any tests that could provide
global quality assurance, for example examining Member States’
statistical organisation, the conditions under which the basic data
were produced, the compatibility of the various data sources used,
the balancing procedures and the methods used to establish the
level of assurance.

57. The checks made are not sufficiently well-documented for it
to be possible to ascertain their extent or to determine their cover-
age of the various GNP components. As regards the reservation
concerning the exhaustiveness of the national accounts in par-

(1)

Including Austria, Finland and Sweden. For these Member States, a
deadline of 1 October 1999 had been set for transmission of the sup-
porting documents.

(2) See paragraph 27.

ticular, a detailed programme of checks based on the criteria of
reliability and comparability of data should have been drawn
up (3).

58. Moreover, the Commission judges the accuracy of the data,
not on the basis of a strict application of the concepts or exhaus-
tive practical measurement, but on whether a procedure is unaf-
fected by substantial errors. The Court is aware that in the very
nature of GNP the quality of the estimates is also subject to cost-
benefit considerations. The fact that such a principle applies pre-
supposes that criteria exist and that justification is adequate.
However, the reply that was given in several cases merely described
the problems raised as negligible, without providing any informa-
tion that could be used to assess the reasons underlying this opin-
ion.

59. There are also grounds for wondering how the Commission,
in certain cases, arrived at the view that the effects of several types
of non-compliant treatment cancel each other out and therefore
have no impact on the GNP calculation, or, even, that the use of
different definitions by the statistical offices produces congruent
and comparable results.

THE ROLE OF THE GNP COMMITTEE

60. The GNP Committee delivers an annual opinion on the basis
of information supplied by the Member States and the Commis-
sion. Every year since 1990 the GNP Committee has asserted in
this document that ‘considerable improvements have been made’
and ‘notes with satisfaction the progress made and being made in
the Member States in harmonising GNP data’. As regards compli-
ance with quality concepts such as those mentioned in para-
graph 18, the Committee’s opinion offers no benchmark against
which the levels achieved in each Member State and the progress
yet to be made may be registered.

61.
In 1992, in its report on the application of Directive 89/130/
EEC, Euratom, the Commission asserted that as far as examina-
tion of the data was concerned, the Committee had confined itself
to establishing their availability. The results of the analysis of the
detailed inventories and the findings that might result were unavail-
able.

62. This argument is no longer valid today. The Committee,
comprising experts in this field, is supplied with information by
its members, on the one hand, and obtains data from the Com-
mission’s analyses, on the other. In principle, it has all the infor-
mation it needs to form an overall opinion concerning the com-
parability and reliability of the data.

(3) See, for example, the figure illustrating paragraph 18.

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The possibility of measuring the quality of the data

63. The production of the national accounts may be divided into
three main stages. The first uses a complex information system,
made up of sources which are purely statistical, fiscal, administra-
tive, exhaustive or the result of sampling and which make it pos-
sible to approach GDP, and then GNP, from three angles (demand,
output and income) (1) as well. During this phase every source,
and its processing, gives rise to errors. Quality measurement
involves modelling the error of each of the basic components and
then deriving from it an indicator of the quality of the overall
aggregate.

of the aggregates at the various stages of comparison. However,
this is not the case in all the Member States. The Commission and
the Member States should, therefore, make specific provision to
this effect.

70.
It is difficult to assess the quality of derived aggregates when
account balancing is also used to evaluate certain variables, such
as, for example, variations in inventories. A country which com-
pares two approaches in order to estimate variations in invento-
ries will, in fact, automatically record fewer balancing errors than
a country which estimates inventories more directly and, para-
doxically, collects more information.

64. At the second stage information obtained on the basis of dif-
ferent approaches or independent sources is compared and bal-
anced. Comparative differences are another indicator of quality, in
addition to those mentioned above (comparisons based on the
various approaches).

71. At branches of activity level, the refinement of the calcula-
tion exercise depends on a basic choice by the national accounts
authorities; it therefore differs markedly from one country to
another and produces, ex hypothesi, a lack of comparability.

65. Lastly, as information gradually becomes available, the eco-
nomic aggregates produced undergo some revision. The final
stage of the quality measurement approach is to study the profiles
of the revisions, more specifically to measure any bias in the early
version by reference to the final version (analysis of changes in the
revisions).

72. Similarly, a country which uses only one approach for its
calculation cannot, therefore, take advantage of the possibility of
comparisons between approaches and will not be troubled by
comparative differences. It will inevitably record less variation,
but the quality of the data will not necessarily be any better.

66. Given the heterogeneous nature of the systems for produc-
ing GNP figures, it is essential that the level reached by each Mem-
ber State is evaluated and compared with a quality concept such
as that described in paragraph 18.

73. Furthermore, as the approaches used in the GNP calculation
are never totally independent, balancing two approaches with the
same shortcomings would not show up those shortcomings and
might have an adverse effect on the quality of the derived aggre-
gate.

67.
In the past (2) the Court has recommended the introduction
of a means of measuring the comparability (on the basis of indi-
cators) and the reliability (by means of confidence intervals) of
GNP data.

74.
In the case of sampling errors, there is some consensus on
the statistical techniques. For other types of error (3), on the other
hand, information is either unavailable or subjective. However,
subjectivity in error measurement also has an impact on the valid-
ity of indicators of comparability between Member States.

68. The Commission entrusted the examination of this matter to
two national statistical institutes, which have just completed their
work. It showed that progress in this area cannot be achieved
unless a satisfactory solution to the problems described below is
found.

Analysing changes in revisions

Comparison on the basis of the approaches to GNP

69.
In order to improve the quality of the GNP calculated from
the various approaches, use is occasionally made of ‘account bal-
ancing’. In some cases quality cannot be measured unless there is
a trail through the intermediate stages of construction, especially

75. The bias in the early versions of GNP is measured against the
final version. In order to draw conclusions from such an exercise,
the quality of the final version must therefore be evaluated before
the revision changes are analysed. In effect, a rudimentary final
account that does not use much supplementary information rela-
tive to the early versions would indicate a lack of bias in the early
versions. Excessive automatic use of indicators based on changes
in revisions would lead to underevaluation of the quality of the
GNP of a Member State with an information system which is
complex and therefore slow to mobilise.

(1) See footnote 1, page 3.
(2) Annual report of the Court of Auditors concerning the financial year

1995, paragraph 1.126.

(3) For example errors concerning the parent population or the base,
measuring errors, errors in methods, errors in the treatment of fail-
ures to reply, errors due to the modelling of economic phenomena.

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Comparability between Member States

76. National experiments on measuring the quality of economic
aggregates are currently pursuing the Member States’ own objec-
tives. The primary aim of the latter is to ensure that the aggregates
are good indicators of economic trends (growth or recession) and
that these indicators provide relevant information on any diver-
gence between growth and a long-term trend or an indication of
the economy’s position within a cycle.

77. The first obstacle that must be overcome before the quality
of GNP can be measured comparatively is the diversity of the sta-
tistical systems themselves. It is a question of reaching a consen-
sus on how various types of error are to be evaluated and aggre-
gated in order to give the overall error.

78. The Commission’s work on defining the quality of the mac-
roeconomic aggregates and the classification of errors is helping
to establish a common basis on which all the Member States can
begin to measure quality.

79. However, the work done so far has not succeeded in making
it possible for quality measurement to be considered from the
viewpoint of its comparability between Member States, even
though that is a prerequisite for using GNP as a reference aggre-
gate in the Community context. A certain amount of work there-
fore needs to be devoted to both this aspect and the problems
mentioned in paragraphs 69 to 75, for example in the context of
the quality-measurement task-force which the Commission has
decided to create.

CONCLUSION

An aggregate that is widely used in the Community context

80. GNP is considered to be the best indicator of a Member
State’s ability to contribute (see paragraph 2). To a large extent it
determines the Member States’ contributions to the financing of
the Community budget and directly affects certain items of expen-
diture (paragraphs 6 to 10). At the same time GNP is the basis for
important decisions, such as those taken in the context of eco-
nomic and monetary union (see paragraph 11).

Guaranteeing legitimacy

gate is the fact that each Member State applies its own procedures
for producing statistics. It is therefore necessary to ensure that this
aggregate is estimated with the requisite precision (see para-
graphs 20 to 24).

82.
In order to guarantee the legitimacy of GNP as a reference
aggregate, it is important in the first instance for it to be estab-
lished transparently on the basis of explicit, well-documented
methods. There must be adequate control procedures, to ensure
that the data are reliable and comparable at Member State level
(see paragraphs 53 to 62).

83. The Commission’s role in this context is not just important,
it is also unique: at the national level, the only existing controls
on the procedures for producing statistics are those set up within
the statistical offices. The Commission is thus the only authority
that has both an overview of the situation and the necessary ana-
lytical and legislative resources (see paragraphs 13 to 17).

84. Any advance in measuring the quality of GNP must, inevi-
tably, enhance its legitimacy (see paragraphs 63 to 79).

Completing harmonisation

85. Harmonisation of GNP has been a main objective since the
adoption of Directive 89/130/EEC, Euratom in 1989. In 1996 the
Commission acknowledged, however, that complete harmonisa-
tion of GNP had not been achieved and that much work remained
to be done.

86. For example, at the beginning of 1999 several members of
the GNP Committee still considered that the work of improving
GNP data was unfinished. Most of the reservations have neverthe-
less been lifted since then (paragraph 30). The scope and volume
of the work that is still necessary should be examined in relation
to the present and future role of GNP.

Effective controls at Community level

87. The existence of a European system of economic accounts
and of several other legislative provisions cannot, in itself, guar-
antee that data are reliable and comparable (see paragraph 50).

81. Essentially GNP measures by estimation a value of produc-
tion that is, and remains, unknown (see paragraph 1). Added to
the uncertainty associated with the statistical nature of this aggre-

88. Tests on the chosen data must cover the intrinsic reliability
of each statistical system, the conceptual comparability (compli-
ance with the ESA) and the practical comparability (sources and
methods used). This entails examining the statistical organisation

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of the Member States, the conditions under which the basic data
are produced, the compatibility and independence of the various
sources, balancing procedures and confidence limits.

should be better defined and documented (see paragraphs 53 to
59).

89. The Court’s checks revealed the existence of several prob-
lems that affect the procedures for checking and validating GNP.
The shortcomings noted in terms of compliance with the ESA,
transparency of the adjustments, bias of comparability and out-
dated sources could affect the quality of the data relative to the
applicable provisions (see paragraphs 32 to 52).

It appears essential for the Commission to quantify the
91.
impact of its reservations on GNP. This factor should be one of
the criteria for exercising its prerogatives and referring matters to
the Court of Justice where necessary, as provided in Articles 226
and 228 of the EC Treaty.

90. Despite certain improvements that have been made in recent
years, the Commission has not yet adopted sufficiently transpar-
ent analytical procedures for validating the data used in calculat-
ing GNP. The objectives and content of its inspection activities

92. Finally, provided that the best available data are used, the
application of ESA 95 to own resources could improve and ratio-
nalise the system for drawing up the national accounts (see para-
graphs 25 to 26).

This report was adopted by the Court of Auditors in Luxembourg, at the Court meeting of 14 September 2000.

For the Court of Auditors

Jan O. KARLSSON

President

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ANNEX I

The exhaustiveness of GNP

The conceptual framework

1. Exhaustiveness reflects the need to include in the calculation of GNP all activities which produce goods or services. It is
one of the factors that have considerable influence on practical comparability.

2. A proportion of economic activity escapes direct observation by means of methods such as questionnaires, periodic
censuses and sampling. The fact that this part of the economy is not directly observed is essentially a consequence of an
intrinsic weakness in the measuring capacity of the statistical apparatus (1). Alternatively, it may be attributable to economic
activities that are carried out in breach of the law, in particular for the purpose of tax evasion or social-security fraud (2).
The term ‘underground economy’ is often used in this context (3).

3. For all these reasons, the statistical offices must make appropriate adjustments to the various components of GDP/GNP.
The part of the economy that is not directly observed varies from one Member State to another. It is linked to the nature
and quality of the national statistical apparatus.

Exhaustiveness: the necessity of compromise

4. By enhancing methods and sources it is possible to improve the coverage, i.e. exhaustiveness of GNP. Shortcomings in
this area lead to bias in GNP measurement and, in practice, to poor comparability between Member States’ GNPs, thereby
reducing the validity of GNP as a reference aggregate.

5. The search for exhaustiveness does, however, encourage the use of non-statistical sources which are not primarily
designed for national accounts purposes (4). The result is, firstly, difficulty in reconciling these external sources with the exist-
ing statistical system and, secondly, inaccuracy, which is all the greater because the populations studied are unusual and hid-
den and hence the information is biased (5).

(1)

For example, small producer units are sometimes exempt from the obligation to supply information to the tax and social security authori-
ties, or the information in question is not sent to the statistical offices automatically. In this case, the statistical offices’ information on
registered and economically-active units may be incomplete or obsolete. It may be noted in this connection that the proportion of enter-
prises with fewer than 10 employees and, at the same time, the parallel risk of not being taken into account by the statistical offices, may
vary considerably from one country to another.

(2) This is true of clandestine production units, or registered taxpayers who declare to the tax authorities only part of the taxable added

value.

(3) The concept of the underground economy is defined in many ways. At international level, one definition is given by the United Nations’
system of national accounts (paragraphs 6.34 to 6.36). The ESA has not defined the term. The methods used by the various countries
rely on both the statistical data available and the degree of exhaustiveness of the measurement under investigation. Several Member States
have opted for an approach based on differences in recording error between sources (consumption or production data/fiscal data), but
they have added a plethora of ad hoc corrections by means of specific enquiries that are subject to statistical secrecy, the use of tax-
adjustment statistics and model-based estimates of production (e.g. by using yields in the agricultural sector).
For example fiscal sources, periodic enquiries, police enquiries and administrative sources.

(4)
(5) By way of illustration, the accounts which followed the earlier standards of the United Nations’ system of national accounts concentrated
on the recorded economy. Although not exhaustive, they were reliable. If various sources are used, reconciliation becomes necessary,
resulting in additional use of models, which in turn leads to loss of precision, inadequately controlled reduction of bias and, ultimately,
lower quality.

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6. There are thus limits to the possibility of making GNP exhaustive. The process entails a compromise between reducing
bias (considering a more comprehensive field of domestic production) and increasing imprecision (using sources and meth-
ods which are necessarily imperfect). From the Community point of view, the success of this compromise also depends on
the comparability of Member States’ statistics.

Decision 94/168/EC, Euratom

7. When Directive 89/130/EEC, Euratom was adopted, the Council and the Commission highlighted the question of
increasing the coverage of the ’parallel economy’ within the national accounts framework. The Commission noted that, in
this respect, the situation differed from one Member State to another, ‘even for countries which have comparable levels of
statistical development’ (1).

8. The aim of Commission Decision 94/168/EC, Euratom of 22 February 1994 (2) was to improve the exhaustiveness of
GNP. The terms of reference, which are to be taken into consideration by the Member States (3), are shown in the following
figure.

Exhaustiveness of the GNP according to Decision 94/168/EC, Euratom

Production, primary income and expenditure

Lack of units recorded and economically
 active in statistical files

Directly observed in  statistical
enquiries or administrative files

not directly observed

Tax or social security fraud

Exemption from the requirement to submit
information to the tax or social security
authorities

EXHAUSTIVENESS

9. This decision simultaneously aims to make the calculation of GNP more transparent while providing audit trails which
make it possible to appraise the plausibility of certain components of GNP (4).

(1)

First report on the implementation of Directive 89/130/EEC, Euratom, SEC(92) 588 final of 31.3.1992, p. 3. Commission report on the
follow-up to the comments accompanying the Council’s recommendation concerning the discharge to be granted to the Commission in
respect of the implementation of the general budget of the European Communities for the financial year 1992, 23.1.1995, Annex I, pp. 1
and 3.

(2) OJ L 77, 19.3.1994, p. 51.
(3)

See Article 2 of this Decision. ‘Primary income’, ESA 95 (paragraph 8.22) ‘is the income which resident units receive by virtue of their
direct participation in the production process, and the income receivable by the owner of a financial asset or a tangible non-produced
asset in return for providing funds to, or putting the tangible non-produced asset at the disposal of, another institutional unit’.

(4) The Member States were required to produce a description of all calculations and adjustments deemed necessary in order to take account,
depending on the approach used in calculating GNP, of factors that cannot be directly observed. They were also to perform a validation
test by means of employment data, carrying out a survey of the components of income in kind and of tips or gratuities, and a report on
the feasibility of using information from fiscal audits to improve the exhaustiveness of the national accounts. A fifth factor, specifically
linked to the treatment of VAT fraud in the national accounts, was provided for by Commission Decision 98/527/EC, Euratom of 24 July
1998 (OJ L 234, 21.8.1998, p. 39).

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The distinction between final use and intermediate consumption

10. The added value of an economy, from which GDP is derived, is equal to the value of goods and services produced,
minus intermediate consumption. It is therefore necessary to distinguish the final use of goods and services from uses
included in the production process.

11. This distinction is a basic operation in the production of national accounts. Incorrectly allocating the value of goods
and services has a direct effect on the value of GDP. For example, depending on whether intermediate consumption is under-
or over-valued, GDP will be over- or under-valued.

12. The concepts of intermediate consumption and final use are defined by the ESA (1). Where it thought it necessary, the
GNP Committee (2) introduced supplementary classification criteria.

(1)
(2)

ESA 79, paragraphs 320 to 335. ESA 95, paragraphs 3.69 to 3.99.
See paragraph 14 in the text of the report.

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Principal characteristics of the calculation of GNP by the Member States

ANNEX II

Member State

Approach(es) applied in full

Dominant approach

Incorporation method

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

Output/expenditure/income

Average of the three approaches Aggregate level

Output/expenditure

Output/expenditure

Output/expenditure

Output/expenditure

Output

None

Output

Output

Output/expenditure/income

Income

Income /expenditure

Output/expenditure

Output/expenditure

Income

Output

Output

Output/expenditure/income

Output

By product

Aggregate level

By product

By product

By product

Aggregate level

By product

By product

By product

Output/expenditure

Output

Aggregate level

Output/expenditure/income

Output/expenditure

By product

Output/expenditure

Output

Output/expenditure/income

Expenditure

Aggregate level

By product

Output/expenditure/income

Average of the three approaches

By product

27.11.2000

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THE COMMISSION’S REPLIES

EXECUTIVE SUMMARY

The Commission is fully aware of the need to guarantee the qual-
ity of the Member States’ gross national product (GNP) data, bear-
ing in mind the vital role assigned to this aggregate in the Com-
munity context. It is for this reason that, under the auspices of
Eurostat (Statistical Office of the European Communities) and in
conjunction with the representatives of the Member States in the
GNP Committee, it has made strenuous efforts for more than 10
years to improve the reliability, comparability and exhaustiveness
of GNP data.

The main stages of this action were as follows:

— preparation of the GNP Directive as the legal framework for
GNP harmonisation, involving the setting up of the GNP
Committee of the Member States’ most experienced national
accountants and statisticians under the chairmanship of Euro-
stat,

— preparation by the Member States, with financial backing
from the Commission, of an inventory of their GNP sources
and calculation procedures,

— examination of these inventories by Eurostat and the GNP
Committee. In conjunction with Eurostat evaluation missions,
this examination led the Commission, with the Committee’s
approval, to seek to clarify the relevant European system of
integrated economic accounts (ESA 79) and ensure the
improvement of the GNP data. It also prompted the Commis-
sion to inform the Member States of the problems to be
resolved in order to guarantee the reliability, comparability
and exhaustiveness of their GNP data (GNP reservations).
These reservations are designed to protect Community inter-
ests and ensure impartiality among the Member States,

— Commission financial support for, and Eurostat/GNP Com-
mittee monitoring of, the improvements made to GNP data
by the Member States in response to the reservations. In an
attempt to make this follow-up even more transparent, rep-
resentatives of certain Member States participated in the infor-
mation missions conducted in most of the others on the
finalisation of the principal reservations, particularly that
concerning the exhaustiveness of GNP data.

The Commission thinks that the regular checks conducted by its
departments and the aforementioned activities have made it pos-
sible to improve the quality and achieve a sufficient degree of
comparability of the GNP data of the Member States.

Whilst significant progress has already been made, improving the
quality of national statistics and accounts is, by its very nature, an
ongoing process. Adequate resources must be made available to
enable the relevant activities and research to continue.

The Commission recognises that further efforts will be required
to improve both the description of the checks conducted and the
documentation of the corresponding dossiers.

Nevertheless, it feels that the specific comments of the Court of
Auditors on the Member States investigated do not call into ques-
tion the validity of the GNP data and their evaluation by the Com-
mission. The following detailed responses reflect the importance
of these comments.

THE USE OF GNP AT COMMUNITY LEVEL

6 to 12. The Commission is aware of the importance of the reli-
ability of GNP and GDP data for different Community policies. It
was for this reason that it initiated the introduction of machinery
which would allow it to monitor these aggregates. The Member
States verify the efficiency and transparency of this machinery
through their participation in the GNP Committee.

THE RELIABILITY AND COMPARABILITY OF THE DATA

The control procedures

Observations on the reservations

Exhaustiveness of GNP

Tr ansparency of adjustments

32 and 33. Most of the economy is covered by reliable statisti-
cal or administrative sources. In addition, the Member States carry
out numerous adjustments, which take account of the under-
ground economy, in an effort to ensure the exhaustiveness of
their GNP data. It is also true that the explanations given for these
adjustments are sometimes short on detail. This is primarily
because, by definition, statistical sources in respect of the hidden
economy are not directly accessible. As a result, expert assess-
ments are sometimes the only source available to the different
national statistics institutes in making adjustments. It must, how-
ever, be stressed that only a very limited proportion of the GNP is
subject to this approach.

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The Commission will continue to urge the national statistics insti-
tutes both to replace expert assessments by improved statistical
sources wherever possible (especially where statistical informa-
tion is not used on grounds of unreliability or inconsistency) and
to provide better information on adjustments.

Failure to follow up a classification problem and acceptance of an adjustment
to ensure exhaustiveness lacking a reliable statistical basis

34. The enquiry and discussions conducted by Eurostat revealed
that the four Member States investigated (Germany, France, Italy
and the United Kingdom) apply procedures or adjustments which
make possible the satisfactory resolution of the classification
problem raised by the Court.

In 1988, i.e. prior to the Decision on exhaustiveness, Germany in
fact conducted an adjustment for which there was no reliable sta-
tistical basis. Such a situation inevitably led the Commission to
enter a reservation with regard to exhaustiveness. Since Germany
took the action required by the Decision on exhaustiveness and
extrapolated the results back to 1988, the adjustment in question
no longer plays any part in GNP assessment.

Comparability bias

Compar ability of adjustments between Member
St ates

35. The individual Member States have always adopted their own
procedures for including the underground economy in the calcu-
lation of GNP. This is because of differences in their statistical
sources and political and administrative systems, which mean that
certain approaches can be adopted in some countries but not in
others.

In this context, the Commission sees dangers in comparing the
result produced by a particular national method with its putative
impact in another country. In accordance with the Decision on
exhaustiveness, the Commission checks the comparability of rec-
ognition of the underground economy in the different Member
States from various standpoints including, in particular, applica-
tion of the common methodology provided for by the Decision.

Treatment of illegal activities

States instructed their GNP Committee representatives to point
out that they lacked the statistical and methodological resources
required for the assessment of such activities. Furthermore, the
limited experience available in this area proved to be very piece-
meal and to vary greatly from one country to another. The Com-
mittee therefore decided to focus its efforts on the definition and
implementation of national procedures designed to ensure the
exhaustiveness of the GNP data by including activities which,
whilst in themselves legal, were neither declared nor directly
observed (e.g. undeclared employment).

The essential problem from the standpoint of the GNP is that the
principal activities customarily referred to as ‘illegal’ are extremely
difficult to quantify in practice, regardless of their actual legal sta-
tus in any one country.

With a view to promoting the development of reliable methods
of evaluating these activities, the Commission co-financed certain
activities of the United Kingdom Office for National Statistics
(ONS) in 1998 together with a seminar on this topic for the Mem-
ber States, which was held in the Netherlands in September 1999.
The initial results of the ONS activities were presented at the
seminar.

The conclusions of the seminar, which were announced at the
meeting of the Working Group on national accounts (1) in Decem-
ber 1999, represent the first contribution of Eurostat and the
Member States to the manual on the underground economy which
is being prepared by the OECD. Once this manual and the results
of current research in certain Member States become available,
Eurostat will submit proposals for the evaluation of illegal activi-
ties.

Outdated sources

37 to 40. Some of the coefficients used to calculate the adjust-
ments to ensure exhaustiveness are undoubtedly based on out-
dated sources.

Eurostat is conscious of the problem which this state of affairs
creates for the goal of achieving exhaustiveness. That is why, dur-
ing its evaluation visits, it has stressed the need to use the most
up-to-date sources.

Taking account of VAT evasion

Absence of proof of taking account of VAT fraud or of the equivalence of the
methods used by the Member States

41 to 44. VAT fraud in the targeted Member States can be
implicitly taken into account through the use and cross-checking
of expenditure data.

36.
Illegal activities were excluded from the scope of adjustments
to ensure exhaustiveness and the GNP calculations because, dur-
ing the discussion of Decision 94/168/EC, Euratom, the Member

(1) The Working Group on national accounts is made up of experts from

Eurostat and the Member States.

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C 336/19

Anomalies in t he results of t he calculation of
t heoretical VAT

Furthermore, in cases where both sources are simultaneously sub-
ject to bias, Eurostat asks the national accountants to investigate
alternative approaches, such as the comparison of employment
data, which often provide a satisfactory solution.

45 to 47. The Court notes that, in Luxembourg, theoretical VAT
(i.e. the product of VAT rates and taxable transactions) fell short
of VAT revenue, suggesting that certain transactions had not been
taken into account in the national accounts.

The limited nature of the checks

The Commission believes that the auditing of the Luxembourg
national accounts has resolved the problem of negative VAT dis-
crepancies. Indeed, the VAT discrepancies calculated on the basis
of the national accounts transmitted in October 1999 were posi-
tive.

54 to 56. For more than 10 years, all the work carried out by the
Commission in conjunction with the Member States in this field
has been aimed at ensuring the quality of GNP data.

Business register

The inventories first transmitted by the Member States in 1991,
on which the Commission and the GNP Committee base their
activities, describe the national statistical systems and the statisti-
cal sources and accounting procedures used in each country. In
the course of its checks, Eurostat assesses the extent to which
these elements contribute to the reliability of the GNP estimates.

48 and 49.
In Germany, the reservation in respect of exhaustive-
ness has been lifted, even though this country still has no inte-
grated business register, which is a particularly important instru-
ment from the standpoint of exhaustiveness.

Whilst these inventories are extremely detailed in certain respects,
they have been found to be insufficiently detailed in others.

A reliable register is clearly an extremely valuable tool in the con-
text of measures to improve exhaustiveness. Germany is now
compiling such a register pursuant to the deadline laid down in
the derogation granted by the Statistical Programme Committee.

The exhaustiveness exercise conducted in Germany was essen-
tially based on a comparison of employment data. This exercise
is specifically designed to offset any shortcomings in exhaustive-
ness arising from the lack of a reliable register, since the demo-
graphic data used to validate the GNP assessments are not derived
from existing registers.

Distinction between final uses and intermediate consumption

Balancing procedures

51 and 52. Eurostat accepts the Court’s argument that balanc-
ing a product’s uses and resources does not, in itself, allow the
automatic correction of a bias affecting the two data sources
simultaneously. Nevertheless, Eurostat believes that, if sufficiently
detailed and based on reliable reference sources, such a balancing
exercise would provide an excellent foundation for the formula-
tion of valid estimates. It is for this reason that Eurostat stresses,
and will continue to stress, these two factors in the context of its
evaluation missions.

For example, they were drawn up before the adoption of the Deci-
sion on exhaustiveness and the recommendations of the GNP
Committee on the distinction between intermediate consumption
and final use. As a result,
investigation of these two factors
revealed a need for the Member States to take further action and
provide additional information. The information requested was
transmitted with the national reports on exhaustiveness and in
documents and explanations provided by the national statistics
institutes during and after the Eurostat evaluation missions, par-
ticularly from 1995.

By its very nature, the evaluation of national accounts and the
GNP involves continuous contacts with the national statistics
institutes, which implies a need for prior analysis of the available
documentation followed by requests for, and consideration of,
additional information on specific points.

In this connection (paragraph 56 also), reference should be made
to Eurostat’s comments on the ‘Measurement of the quality of
national GNP data’ (paragraphs 63 to 79).

57. Pursuant to the GNP Directive, Eurostat conducts its GNP
assessments with reference to the reliability of the available sta-
tistical sources, the comparability of the rules applied (based on
ESA compliance) and the results obtained and exhaustiveness
(cross-checking of different sources, existence of a set of adjust-
ments considered satisfactory).

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27.11.2000

These factors are analysed in Eurostat’s reports to the GNP Com-
mittee, with reservations being notified and followed up if Euro-
stat considers that any of the three criteria have not been satis-
fied. Thereafter, in the light of the action taken and corrections
made to their GNP data by the Member States, Eurostat decides
whether one or more reservations may be lifted. At its request,
the reports on these activities and corrections supplied by the
Member States in October 1998 were sent to the Court of Audi-
tors. Eurostat’s analysis of the possibility of lifting or maintaining
the reservations applicable to the four target Member States was
also transmitted to the Court.

Nevertheless, the Commission agrees with the Court that further
efforts will be required to improve both the description of the
type of checks conducted and the documentation of the evalua-
tion dossiers.

58 and 59. As regards the significance or irrelevance of any fac-
tor used in the calculation of GNP, Eurostat did not think it real-
istic to issue an a priori definition of what should be considered
significant, for example by specifying a percentage GNP figure. It
adopts its position on a case-by-case basis by making a profes-
sional assessment of the relative importance for statistical calcula-
tion of the economic phenomena in question.

From the cost-effectiveness standpoint, Eurostat thinks that an a
priori definition of what should be regarded as significant for the
GNP evaluation would require the calculation of every small item
involved, thereby necessitating the commitment of dispropor-
tionate resources. It believes that, in this particular case, such
action would infringe the cost-effectiveness principle.

The role of the GNP Committee

60 to 62. The Commission notes the Court’s observation that
the GNP Committee is now in possession of all the necessary
information (supplied by the Member States and Eurostat) to make
an overall assessment of the comparability and reliability of the
GNP data in its opinion on the GNP.

State’s GNP data. Nevertheless, the Commission intends to pro-
pose that the Committee re-examine this question in the near
future.

The possibility of measuring the quality of the data

63 to 79. The Commission believes that, in conjunction with the
activities of the GNP Committee, the regular checks of compli-
ance with accounting rules and the improvement of statistical
sources conducted by its departments are sufficient to ensure the
correct and satisfactory application of the GNP Directive.

The Commission is open to proposals regarding new methods of
checking the quality of GNP data. Nevertheless, both the Com-
mission and the GNP Committee have already expressed reserva-
tions with regard to certain conceptual aspects and the viability
of mathematical comparability indicators.

The Commission is aware of the theoretical importance of the
measurement of reliability by confidence intervals, even though
this approach might have no impact on budgetary practice. After
reporting to the GNP Committee in July 1999 on the results of
the studies it had assigned to Istat and the ONS (CPNB/272), the
Commission set up a quality-assessment task force comprising
representatives of six Member States. A notable feature of this
task force is the presence of highly experienced national experts
responsible for evaluating the relevance and feasibility of the pro-
posed approaches.

The Commission recognises the importance of some of the issues
raised by the Court, especially the difficulties associated with error
measurement and the comparability of the solutions examined.
The task force will consider these questions.

The Commission will put forward proposals in the light of the
task force report, which is due in the first half of 2001.

In its earlier opinions, the GNP Committee confined itself to not-
ing the availability of these data. In its current annual GNP opin-
ion, it expresses the view that considerable progress has been
made in harmonising GNP data, that is in implementing the GNP
Directive.

CONCLUSION

In reality, the GNP Committee receives and analyses documenta-
tion from the Member States together with Eurostat reports and
the latter’s proposals for the improvement of GNP data.

Guaranteeing legitimacy

An aggregate that is widely used in the Community context

The GNP Committee has discussed the type of opinion it should
deliver on several occasions. So far, it has taken the view that it is
for the Commission to comment on the quality of each Member

80 and 81. The Commission is fully aware of the need to guar-
antee the quality of the Member States’ national accounts and

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GNPs given the crucial role assigned to the GDP and GNP in the
Community context. To this end, the Commission, working in
close collaboration with the Member States, has made strenuous
efforts for more than 10 years to improve the reliability, compa-
rability and exhaustiveness of this aggregate.

82 to 84. The transparency of the GNP evaluation machinery is
ensured through the activities of the GNP Committee, which is
made up of representatives of the Member States under the chair-
manship of Eurostat. Inventories of national statistical sources
and procedures, Eurostat reports (on the inventories and on mis-
sions analysing the reliability, comparability and exhaustiveness
of individual national accounts) and the results of Member States’
action on GNP reservations are transmitted to the GNP Commit-
tee for discussion.

Completing harmonisation

Effective controls at Community level

accounts (cross-checking of different sources, existence of a set of
adjustments considered satisfactory) are sufficient to guarantee
the correct and satisfactory application of the GNP Directive.

The improvements made to their GNP data by the Member States
in the wake of these checks and activities have justified the lifting
of GNP reservations. The document referred to by the Court in
paragraph 86 (CPNB/267, ‘Minutes of the meeting of the GNP
Committee held in February 1999’, point 11.2) sets out the
response of the GNP Committee to a draft statement by the Sta-
tistical Programme Committee concerning the quality of national
accounting data. The GNP Committee was anxious to emphasise
the ongoing nature of the process of improving the quality of
national statistics and accounts. To this end, it stressed the need
to employ measured language so as not to create the impression
that action to improve GNP data had been completed. On the
other hand, the Committee did not question the validity of the
GNP data on which the lifting of the reservations was based.

The Commission acknowledges that further efforts will be required
to improve both the description of the checks conducted and the
documentation of the corresponding dossiers.

85 to 91. The Commission considers that, in conjunction with
the activities of the GNP Committee, the regular checks conducted
by its departments into the reliability and suitability of statistical
sources, the comparability of definitions, rules (based on ESA
compatibility) and results and the exhaustiveness of national

92. The Commission can only endorse the Court’s call for own
resources to be based on ESA 95, particularly as it proposed this
solution at the time of the adoption of ESA 95 in 1996.