Capitalization of Software in the National Accounts

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2.0 The effects of capitalizing software on GDP

The new treatment of software as investment affects a number of series in the Income and Expenditure Accounts. The net effect on GDP is to raise it by the amount of business investment in software (net of the reduction to business hardware investment) plus the software capital consumption of government (net of the reduction to government hardware capital consumption).⁸

On the expenditure-side, government current expenditure on goods and services is reduced by the amount of government software expensed, while government gross fixed capital formation is raised by the same amount. Government current expenditure on goods and services is raised by capital consumption of software formerly treated as expensed. Business gross fixed capital formation is raised by the amount of software expensed by businesses.⁹

On the income-side, corporation profits before taxes, government business enterprise profits before taxes and the net income of unincorporated businesses are each raised by the amount of software expensed, and reduced by capital consumption on software formerly treated as expensed. Capital consumption allowances are raised by both business and government capital consumption of software formerly treated as expensed.

In terms of value-added, for the business sector, gross output is raised by the cost of own-account software development and intermediate use is reduced by the amount of purchased software formerly treated as expensed. For government, costs are raised by capital consumption of software formerly treated as expensed.

The Table over shows the actual revisions to GDP, its components, and GDP growth stemming from the new accounting treatment of software. Revisions to GDP over 1981-1996 are entirely attributable to the capitalization of software. For 1997-2000, however, the revisions are due both to software and the usual sources of annual revision in the national accounts (i.e., the incorporation of more complete and up-to-date data). Only the former are shown in the Table. The new accounting treatment for software raises GDP by $0.9 billion in 1981 and $10.2 billion in 2000. While these revisions are small, in relative terms they increase steadily over time, going from 0.3% of GDP (revised) in 1981 to 1.0% in 2000. Because some software had already been included in GDP, the revision due to software capitalization is considerably less than the estimate of software investment, about one-fifth less for 1981 and one-third less for 2000.¹⁰

Revisions due to software capitalization are more significant for the affected components of GDP. On the expenditure-side, government current expenditure on goods and services is reduced by $789 million in 2000, reflecting the net effect of moving government current spending on software to investment and adding in the software capital consumption. In relative terms, this adjustment is small, ranging from 0.1% of government current expenditure (revised) in 1981 to 0.4% in 2000. The revision to government gross fixed capital formation, on the other hand, is relatively large, raising the total by $263 million for software in 1981 (2.4% of the revised total) and by $2.4 billion in 2000 (9.7% of the revised total). Business investment in machinery and equipment is raised by $8.6 billion for software in 2000, 10.1% of the revised total (versus 2.4% for 1981).

On the income-side, most of the software adjustment is recorded as an increase in capital consumption allowances and, to a lesser degree, an increase in corporation profits before taxes, with smaller adjustments (both in absolute and relative terms) recorded for government business enterprise profits and net income of non-farm unincorporated business. Capital consumption allowances (CCA) are raised by $7.3 billion for software in 2000. The revision here grows steadily against total CCA, from 1.3% of the revised total in 1981 to 5.4% in 2000. Corporation profits before taxes are raised $2.8 billion for software in 2000, reflecting the net effect of removing software expenses (which raises profit) and adding a charge for software depreciation (which reduces profit). This revision fluctuates against corporation profits ranging from 0.8% of the revised total in 1981 to 2.2% in 2000, with its largest impact in 1993, at 2.7% of the revised total.

The effect on GDP growth of capitalizing software is minimal, raising it by approximately 0.01 percentage points per quarter on average over 1981-2000.¹¹ Cumulated over the eighty quarters during this period, this translates into a 1.2 percentage point increase of GDP.

Tables:
May 2001 revisions to GDP, its components, and GDP growth due to the capitalization of software, 1981-1990 May 2001 revisions to GDP, its components, and GDP growth due to the capitalization of software, 1990-2000

 

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