Part of the role of the Office for National Statistics is to assess whether various organisations should be considered part of the public or private sector for statistical purposes. These important decisions affect how many people appear in public sector employment figures, for example, as well as how much debt is counted as on the government’s books. But when would an organisation be classified to the public sector? Ryan Oliver explains how the ONS makes its decisions.
Many people would consider organisations such as the NHS or the police and fire services to be part of the public sector. While that is clearly right, there are other less obvious examples. For example, Channel Four Television Corporation Ltd is included in the public sector, even though it’s funded by advertising revenue. Defining which organisations are part of the public sector is an important task. The ONS makes its decisions using an internationally agreed framework so our decisions are robust and internationally comparable.
These decisions can often be closely watched, as when a body is classified into or out of the public sector, this can impact a range of economic indicators. These might include public sector net debt, an indicator closely watched by the markets. Classification changes also affect other measures, such as public sector employment.
The public sector is really a combination of several subsectors, namely central government, local government, and public corporations (both financial and non-financial). But when would an entity be classified to the public sector? Well, if the public sector has the ability to control the general policy or programme of an economic entity, then that entity would be classified to the public sector.
Indicators of control
We go into these terms in greater detail in a recent article, but these are the main indicators of control we consider when determining whether an entity should be classified to the public sector or the private sector:
- Can the public sector appoint, veto or remove a majority of the officers or directors of the entity’s governing body?
- Can the public sector appoint, veto or remove a majority of the appointments to an entity’s key committees?
- Does the public sector own a majority of the voting interest in an entity?
- Does the public sector have the right to appoint, veto, approve or remove key personnel in an entity?
- Does the public sector have any rights or powers from special or golden shares?
- Do contractual arrangements prevent an entity from engaging with non-public sector customers?
- Does the public sector control an entity through agreements or permissions to borrow?
- Is the level of government regulation at a level which indicates control over an entity?
This list illustrates the types of factors that are considered in our decision-making process.
To put these questions into context, let’s look at a real classification example. During the period 2008 to 2009, the UK government acquired a 43% stake in Lloyds Banking Group (LBG) as part of its intervention during the financial crisis. This large minority shareholding, coupled with the other requirements imposed by the UK government, indicated that LBG was under public sector control. As a result, we reclassified LBG from the private financial corporations subsector to the public financial corporations subsector from that point onward. Later, in 2014, the government significantly reduced its shareholding in the group, and removed all other imposed requirements. We therefore reclassified LBG back to the private financial corporations subsector, as the entity was no longer subject to public sector control from that time.
The impact of our decisions
It is very important to note that decisions we take such as these are purely for the purpose of compiling economic statistics. Classification decisions do not affect the legal status or ownership of an entity. However, often the decisions we take are used in the rest of government to help manage the public finances and direct government policy. For these reasons, it is crucial that the classification decisions which define the public sector boundary are made carefully, using the agreed international statistical framework.
It is also very important to note that classification to the public sector does not mean that an entity is not fully independent. There are many entities which are classified to the public sector but that operate independently from it. One example is the ONS itself which, as the executive office of the UK Statistics Authority, has been classified to the public sector. However, we produce our statistics independently of the government, and this independence is an important way in which we maintain impartiality and objectivity in our work.
Classifying public bodies is an important job, but here at the ONS we work hard to ensure an accurate picture of which bodies count as part of the public sector for economic statistics purposes, and which don’t.
Ryan Oliver is a Senior Analyst at the Office for National Statistics.