Summary of Quarterly Bulletin
November 1998

This article continues the annual series in the Quarterly Bulletin analysing the debt position of the UK public sector. It looks at developments in net and gross debt in the financial year to end March 1998, and examines some of the domestic and European issues that have influenced these measures. It also analyses the composition and distribution of the national debt.

The Office for National Statistics published the UK National Accounts in line with the updated European System of Accounts (ESA95) for the first time in September. This has had a number of implications for how debt levels are compiled. To ensure consistency with the previous articles in this series during the transition period, the data presented here are based on the previous accounting system. However, details of the changes and estimates of how they affect public sector debt are explored in the box on pages 334­35.

• In March 1998, the nominal value of the public sector's net debt stood at £352 billion, virtually unchanged from the March 1997 level of £350 billion. As a percentage of GDP, this was a fall of almost 2 percentage points. Total central government gross debt increased by £2 billion in 1997/98, to £403 billion.
  
• The ratio of general government consolidated gross debt to GDP on a Maastricht basis fell during 1997/98 to 51.7%, remaining comfortably within the 60% reference level in the Maastricht Treaty. The general government financial deficit has fallen below its reference value of 3% for the first time since 1991, to 0.7% of GDP for the year to March 1998.
  
• The responsibility for gilt issuance and sterling debt management was transferred from the Bank of England to the UK Debt Management Office, an executive agency of HM Treasury, on 1 April 1998. The transfer of cash management is not expected before the end of the year at the earliest.

Research work published by the Bank is intended to contribute to debate, and is not necessarily a statement of Bank policy.

Inflation and growth in a service economy (99k)
(by DeAnne Julius, member of the Bank's Monetary Policy Committee and John Butler of the Bank's Conjunctural Assessment and Projections Division).
This article sets out the initial findings of a project team set up by the Bank to examine the behaviour of the service sector, in the light of the increasingly important role that services play in the UK economy, and so in achieving the Government's inflation target.

The project has drawn on work by others, both from this country and abroad. It tries to reach comprehensive and aggregate conclusions where possible, while still recognising the critical diversity within the huge UK service sector. Through the Bank's network of regional Agents, the project team has also benefited from discussions with many service businesses. Their initial findings are primarily descriptive and backward-looking, typically covering the period 1970­97, or as much of it as the relevant data series allow. They quantify the growing role of services in the UK economy, and identify the key differences revealed by the data between the behaviour of services and the rest of the economy.

With the growing significance of the service sector in the UK economy, it becomes increasingly important to understand how the sector behaves, not least because of its potential impact on inflation, and in achieving the inflation target set by the Government. But less is still known about services than about the manufacturing sector. The initial findings of the Bank's project team, described in this article, give rise to a number of issues that might be followed up in further work, by either the Bank or others.

The foreign exchange and over-the-counter derivatives markets in the United Kingdom (83k)
(by Jamie Thom of the Bank's Foreign Exchange Division and Jill Paterson and Louise Boustani of the Bank's Markets and Trading Systems Division).
In April this year, the Bank of England conducted its regular survey of turnover in the United Kingdom foreign exchange and over-the-counter (OTC) derivatives markets, as part of the latest worldwide survey organised by the Bank for International Settlements (BIS). The foreign exchange market survey has been conducted triennially since 1986, and a parallel survey of the OTC derivatives markets was first conducted in 1995. The article sets out the results for the 1998 survey (in US$ billion), and compares them with the 1995 survey and results for other major centres.

The survey shows that:

• Average daily spot and forward foreign exchange turnover for April 1998 was $637 billion, 37% higher than the $464 billion per day recorded three years earlier (an annualised growth rate of 11%).
  
• Average daily turnover in the United Kingdom for OTC currency and interest rate derivatives was $171 billion, 131% higher than the $74 billion per day recorded three years earlier (an annualised growth rate of 32%).
  
• The United Kingdom has consolidated its position as the world's largest centre for foreign exchange and OTC derivatives business, accounting for 32% and 36% of the global foreign exchange and OTC derivatives markets respectively.
  
• The forward foreign exchange market continued to grow more rapidly than the spot market, which now represents only 35% of total foreign exchange turnover.
  
• US dollar/Deutsche Mark retained its position as the most widely traded currency pair (22% of all spot and forward foreign exchange transactions). The share of sterling trading rose, and sterling/US dollar regained its position as the second most actively traded currency pair (14% of turnover). Cross-trading of ERM currencies generally declined.
  
• The proportion of interest rate OTC derivatives turnover accounted for by swaps increased from 32% to 56%; the proportion accounted for by forward rate agreements (FRAs) fell from 59% to 35%.
  
• ERM currencies dominated the UK interest rate derivatives market, making up 56% of all trades. The Deutsche Mark almost doubled its share of the market, growing from 18% to 32%; all other major currencies lost market share.

Recent changes to the national accounts, balance of payments and monetary statistics (50k)
(by Anna Brueton of the Office for National Statistics and John Thorp of the Bank's Monetary and Financial Statistics Division).
In September 1998, the Office for National Statistics made major changes to the presentation of the UK National Accounts. This article summarises these changes and complementary changes to the balance of payments statistics and to the banking and monetary statistics produced by the Bank. The November Inflation Report contains a description of the impact of the changes on the National Accounts, and an assessment of the UK economy based on the new data.

The changes introduced by the ONS in September 1998 were the most extensive changes to the UK National Accounts since the first publication of the national income and expenditure 'Blue Book' in 1952. These changes followed revisions to international standards, and harmonised the statistics that the ONS publishes for international and domestic purposes. Previously, these were produced on the basis of different accounting standards, which could be confusing for those who wished to make inter-country comparisons. GNP and its components were reported using the European standard, ESA 1979, but statistics for domestic purposes were based on a version of the United Nations' System of National Accounts (SNA) 1968, adapted as economic circumstances required. The changes include the adoption of a new, internationally agreed, system of national accounts and balance of payments. Parallel changes have been made in the banking and monetary statistics produced by the Bank.

In addition, a number of other significant changes are implemented in this year's Blue Book. Price and volume series have been rebased to 1995 = 100; survey data grossed from a more comprehensive register of businesses are included in the National Accounts for the first time; and there are extensive methodological changes and data revisions, including a new approach to measuring the output of the public sector.