GDP Quarterly National Accounts: Quality and Methodology Information

The Income Approach

The income approach to GDP, shortened to GDP(I), is defined as the sum of all incomes generated by factors of the production. In its broadest sense, this consists of earned personal incomes, known as compensation of employment (COE), businesses’ profits and other incomes on produced output, known as Gross Operating Surplus (GOS) and the taxes less subsidies on production processes (TLS) such as business rates. These components add up to the Gross Value Added (GVA) of each industry and of the economy as a whole. The taxes less subsidies raised by the government on products, such as VAT and various duties, is added to GVA to give GDP.

In the same way that quarterly balancing adjustments are required to ensure that supply and use of each product are equal, and that the components of the expenditure approach are constrained to GDP estimated by the output approach, balancing adjustments are also required in the income approach. These are generally applied to the GOS component and ensure that for each industry GVA is the same whether derived as the sum of COE, GOS and TLS or as output minus intermediate consumption. 

The data sources and methodology used for the components of income are summarised in the following sections.

Compensation of employment (COE)

Compensation of employment consists of wages and salaries earned by employees, as well as actual and imputed social contributions made as part of overall remuneration, such as pension and national insurance contributions. Short-term estimates in the quarterly national accounts are based on a bottom up methodology which estimates wages and salaries, split by industry, and benchmarked to the annual supply and use tables. The data source for this is the real time information from HMRC PAYE data on aggregate earnings, published by the ONS. This data is sourced at SIC section level, and is disaggregated to more detailed industries in the quarterly supply and use system based on the proportions in the latest supply and use tables.

Taxes less subsidies on production and products (TLS)

Estimates of taxes and subsidies on production and products are all based on data consistent with the annual Government Expenditure and Revenue Scotland (GERS) statistics. Total values for each quarter are split between industries (TLS on production) or products (TLS on products) based on shares in the latest supply and use tables, and benchmarked to those tables.

Gross Operating Surplus (GOS) and Mixed Income (MI)

Businesses, government and non-profit institutions all generate a gross operating surplus, which is analogous to profits for businesses and, by convention, equal to the capital consumption (depreciation of capital assets) of government and non-profit institutions. Mixed income is the earnings generated by unincorporated self-employed people, which cannot be distinguished between wages and profits, and is included within overall measures of GOS.

Mixed Income as a subcomponent of GOS is published in the ONS regional accounts. Estimates of this are produced in the quarterly national accounts using a top down share of UK mixed income based on self employment, by industry, from the ONS workforce jobs statistics.

Overall GOS for most industries is determined as the balancing item between GVA from the output approach and the sum of COE and TLS on production from the income approach. The exception to this is the industries which are dominated by government, namely public administration, education and health. For these industries, which largely produce non-market output, GOS is estimated using a bottom up approach based on growth since the base year in the non-market capital consumption of the government parts of these sectors. This data is drawn from the GERS system, and is then benchmarked to the latest supply and use table to ensure that the value is representative of the GOS of the entire industry, including private sector health and education providers. The level of output is then adjusted to ensure that GVA is balanced between the output and income approaches.