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The Treatment of Interest on the Public Debt in the National AccountsAuthor(s): R. B. CrozierSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 25, No. 4 (Nov., 1959), pp. 501-503Published by: Blackwell Publishing on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/138989

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Notes and Memorandaotes and Memorandaject-matter who are involved in sampling operations in their respectivedivisions. The first half of the programme was devoted to the basic principlesof sampling and the second half to problems of application as they arose inthe Bureau's operations.

ELECTRONIC OMPUTERSAn electronic centre for processing data is being established in the DominionBureau of Statistics to serve the many and varied computational needs of theBureau and to act as a service centre for the work of other departments ofgovernment. An IBM 705 Model III Electronic Data Processing System, in-cluding a document reader, will be in operation at the beginning of 1961.Initially, the main emphasis will fall on the 1961 Census but the computer is

also to be used from the beginning for suitable non-census work. Seasonaladjustment, employment and pay rolls, imports and exports, the labour forcesurveys, and the consumer price index are among the series which appear tobe most suited for programming.

THE TREATMENT OF INTEREST ON THE PUBLIC DEBT IN THENATIONAL ACCOUNTSR. B. CROZIEROttawa

PROFESSORUCKLEY'Secent review of National Accounts, Income and Ex-penditure, 1926-1956 comments on the treatment of interest on the public debtadopted in the new reference document of the Dominion Bureau of Statistics.'He disagrees with the decision to define all interest on the public debt as atransfer payment because he feels that "the income generated by government-owned productive assets" should be included in the national income. However,Professor Buckley has apparently overlooked the fact that in the revised treat-ment, interest has been replaced by the imputation of a rent on government-owned buildings.2 Indeed, this change, which is in line with recommendedinternational practice,3 has been made precisely because it is felt that thenew procedure provides a better estimate of the "income generated by govern-

1This JOURNAL, XV, no. 2, May, 1959, 214-20.2Although the imputation of a rent on government-owned buildings is mentioned byProfessorBuckley as one of the changes in the new National Accounts series, he fails toconnect this with the problem of measuring the income generated by government-ownedproductiveassets.3See the report prepared by a group of experts on national income appointed by theSecretary General of the United Nations: System of National Accounts and SupportingTables (New York, 1953), 32. Some authorities have argued that all interest should beviewed as a transferpayment whether paid by government or business. See, e.g., IngvarOhlsson, On National Accounting (Stockholm, 1953), 162. In this view, interest paymentsare simply a redistributionof income and should not be regarded as a remuneration forfactor services. The application of this line of reasoning would alter the present definitionof profitsin the business sector but would have no effect on the level of national income.Vol. XXV, no. 4, Nov., 1959

ject-matter who are involved in sampling operations in their respectivedivisions. The first half of the programme was devoted to the basic principlesof sampling and the second half to problems of application as they arose inthe Bureau's operations.ELECTRONIC OMPUTERS

An electronic centre for processing data is being established in the DominionBureau of Statistics to serve the many and varied computational needs of theBureau and to act as a service centre for the work of other departments ofgovernment. An IBM 705 Model III Electronic Data Processing System, in-cluding a document reader, will be in operation at the beginning of 1961.Initially, the main emphasis will fall on the 1961 Census but the computer isalso to be used from the beginning for suitable non-census work. Seasonaladjustment, employment and pay rolls, imports and exports, the labour forcesurveys, and the consumer price index are among the series which appear tobe most suited for programming.

THE TREATMENT OF INTEREST ON THE PUBLIC DEBT IN THENATIONAL ACCOUNTSR. B. CROZIEROttawa

PROFESSORUCKLEY'Secent review of National Accounts, Income and Ex-penditure, 1926-1956 comments on the treatment of interest on the public debtadopted in the new reference document of the Dominion Bureau of Statistics.'He disagrees with the decision to define all interest on the public debt as atransfer payment because he feels that "the income generated by government-owned productive assets" should be included in the national income. However,Professor Buckley has apparently overlooked the fact that in the revised treat-ment, interest has been replaced by the imputation of a rent on government-owned buildings.2 Indeed, this change, which is in line with recommendedinternational practice,3 has been made precisely because it is felt that thenew procedure provides a better estimate of the "income generated by govern-

1This JOURNAL, XV, no. 2, May, 1959, 214-20.2Although the imputation of a rent on government-owned buildings is mentioned byProfessorBuckley as one of the changes in the new National Accounts series, he fails toconnect this with the problem of measuring the income generated by government-ownedproductiveassets.3See the report prepared by a group of experts on national income appointed by theSecretary General of the United Nations: System of National Accounts and SupportingTables (New York, 1953), 32. Some authorities have argued that all interest should beviewed as a transferpayment whether paid by government or business. See, e.g., IngvarOhlsson, On National Accounting (Stockholm, 1953), 162. In this view, interest paymentsare simply a redistributionof income and should not be regarded as a remuneration forfactor services. The application of this line of reasoning would alter the present definitionof profitsin the business sector but would have no effect on the level of national income.Vol. XXV, no. 4, Nov., 1959

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CanadianJournalof Economicsand Political Sciencement-owned productive assets" than the old method of applying an interestrate to a portion of the public debt. For statistical reasons, the imputation hasbeen confined to buildings, although a broader base would admittedly be pre-ferable in theory.The problem of interest on the public debt has always been controversialin national income accounting. In the literature on the subject, the issue hasusually been associated with the question of how to measure the income pro-duced by government assets. The presumption appears to have existed thatinterest payments on funds borrowed by the government have an exact counter-part in the flow of services generated by the stock of government physicalassets. This identification has led to a good deal of confusion, and it mightbe useful to summarize here briefly the objections to the former D.B.S. treat-ment of the matter.

1. Interest rates vary in response to various sets of conditions, but thereis not, necessarily, a corresponding type of fluctuation in the value of servicesrendered by physical assets in the real world. Space rents, for example, haverisen steadily since the end of the Second World War, but interest rates havefluctuated widely in response to conditions in financial markets. There is noone-to-one relation to be found between interest rates and the services renderedby physical assets.2. The former D.B.S. treatment took no account of services rendered ongovernment-owned assets which had been financed out of general revenues asopposed to the creation of debt. Furthermore, the debt itself is subject to acontinual process of retirement, renewal, and conversion which does not haveany necessary relation to the quantity or quality of physical assets. Duringthe post-war years of large surpluses, the national income statistician was inthe anomalous position of watching the stock of government physical assetsincreasing at a time when debt was being retired and interest payments cor-respondingly reduced.S. National income should be invariant to techniques of government financing.Whether a government buys assets with borrowed funds or out of generaltax revenues should have no bearing on the level of the national income, otherthings being equal. In the case of a business firm, this invariance is retainedthrough the calculation of profits; if a firm finances through borrowing, interestpayments are higher but profits are lower, so that the national income is notaffected. In the case of government, no such profit is calculated and to includegovernment interest payments in the national income, even if supported byidentifiable existing assets, would cause the national income to vary simplyby virtue of the fact of borrowing; conversely, national income would remainunaffected if these assets were financed out of general revenues.The decision was therefore taken to define all interest on the public debtas a transfer payment, and to make a separate calculation for purposes ofbringing into the national income the value of services rendered by govern-ment-owned assets. At the present time, the latter calculation is confined tothe imputation of a rental income on government-owned buildings, based onowned floor space and an average rent per square foot paid for rented

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Notes and Memorandaotes and Memorandagovernment premises. A theoretical case for extending imputations across abroader range of government assets can, of course, be made. However, realisticmarket-based criteria become increasingly difficult to find as we move frombuildings to other government properties such as highways, and a line, ad-mittedly arbitrary, has accordingly been drawn to include buildings only.The purpose of this note is simply to correct an impression left by ProfessorBuckley's review that no attempt was made to account for the services renderedby government assets in the revised National Accounts. Discussions of theconcepts and techniques of estimation in National Accounts by the academicprofession and other users are most welcome.

THE FIRST AUSTRALIAN DEPARTMENT OF EXTERNAL AFFAIRS,1901-16K. A. MACKIRDY

University of WashingtonJAMESEAYRS'Saluable article on "The Origins of Canada's Department ofExternal Affairs"' contains references to the prior creation of a departmentbearing this name in Australia. Accessible descriptions of this pioneer depart-ment of external affairs are so few that many observers and commentators havemade the misleading assumption that it performed functions similar to thoseof its modern namesakes in the various countries of the Commonwealth ofNations. One of the seven original departments created on the establishmentof the Commonwealth of Australia in 1901, its affairs were wound up onNovember 14, 1916, when most of its business and personnel were dividedbetween the Prime Minister's Department and a newly created Department ofHome and Territories.2 The present Australian Department of External Affairshad its beginnings in 1921 when Prime Minister W. M. Hughes (who hadcarried out the reorganization of 1916) assumed the additional title of Ministerfor External Affairs and assigned a portion of the staff of his department todeal with matters arising from Australia's membership in the League ofNations. Not until 1934 was an assistant secretary (in the Australian civilservice the equivalent of a Canadian assistant deputy minister) appointed tohead this section of the Prime Minister's Department. On October 12, 1984, asenior member of the cabinet, Sir George Pearce, was named Minister forExternal Affairs with no other departmental responsibilities3 and early in 1935,

1This JOURNAL,XV, no. 2, May, 1959, 109-28 (hereafter cited as Eayrs).2Another f the originaldepartments,HomeAffairs,was also suppressed t that time.Its dutieswere dividedbetweenHomeand Territoriesnd a secondnew creation,Worksand Railways,which also took overthe north-southranscontinentalailwayproject romtheDepartmentf ExternalAffairs.3S. M. Bruceand J. H. ScullinfollowedHughes'sprecedent n holdingthe portfolioin conjunctionwith the prime ministership.When J. A. LyonsbecamePrimeMinister n1932he allotted he portfolio o his chief lieutenant,he AttorneyGeneral,J. G. Latham.Pearceassumed he portfolioon Latham's etirement rompolitics.

government premises. A theoretical case for extending imputations across abroader range of government assets can, of course, be made. However, realisticmarket-based criteria become increasingly difficult to find as we move frombuildings to other government properties such as highways, and a line, ad-mittedly arbitrary, has accordingly been drawn to include buildings only.The purpose of this note is simply to correct an impression left by ProfessorBuckley's review that no attempt was made to account for the services renderedby government assets in the revised National Accounts. Discussions of theconcepts and techniques of estimation in National Accounts by the academicprofession and other users are most welcome.

THE FIRST AUSTRALIAN DEPARTMENT OF EXTERNAL AFFAIRS,1901-16K. A. MACKIRDY

University of WashingtonJAMESEAYRS'Saluable article on "The Origins of Canada's Department ofExternal Affairs"' contains references to the prior creation of a departmentbearing this name in Australia. Accessible descriptions of this pioneer depart-ment of external affairs are so few that many observers and commentators havemade the misleading assumption that it performed functions similar to thoseof its modern namesakes in the various countries of the Commonwealth ofNations. One of the seven original departments created on the establishmentof the Commonwealth of Australia in 1901, its affairs were wound up onNovember 14, 1916, when most of its business and personnel were dividedbetween the Prime Minister's Department and a newly created Department ofHome and Territories.2 The present Australian Department of External Affairshad its beginnings in 1921 when Prime Minister W. M. Hughes (who hadcarried out the reorganization of 1916) assumed the additional title of Ministerfor External Affairs and assigned a portion of the staff of his department todeal with matters arising from Australia's membership in the League ofNations. Not until 1934 was an assistant secretary (in the Australian civilservice the equivalent of a Canadian assistant deputy minister) appointed tohead this section of the Prime Minister's Department. On October 12, 1984, asenior member of the cabinet, Sir George Pearce, was named Minister forExternal Affairs with no other departmental responsibilities3 and early in 1935,

1This JOURNAL,XV, no. 2, May, 1959, 109-28 (hereafter cited as Eayrs).2Another f the originaldepartments,HomeAffairs,was also suppressed t that time.Its dutieswere dividedbetweenHomeand Territoriesnd a secondnew creation,Worksand Railways,which also took overthe north-southranscontinentalailwayproject romtheDepartmentf ExternalAffairs.3S. M. Bruceand J. H. ScullinfollowedHughes'sprecedent n holdingthe portfolioin conjunctionwith the prime ministership.When J. A. LyonsbecamePrimeMinister n1932he allotted he portfolio o his chief lieutenant,he AttorneyGeneral,J. G. Latham.Pearceassumed he portfolioon Latham's etirement rompolitics.Vol. XXV, no. 4, Nov., 1959ol. XXV, no. 4, Nov., 1959

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