Government Expenditure & Revenue Scotland 2012-13

ANNEX B EXPENDITURE METHODOLOGY

This annex outlines the methodologies used to estimate public sector expenditure for Scotland and highlights where these methodologies differ from those used in previous editions of GERS.

Methodology

Figures for UK and Scottish public sector expenditure are taken directly from official UK Government sources.

The primary data source used to estimate Scottish public sector expenditure is the Country and Regional Analysis (CRA) database, published by HM Treasury.^[31] Within this, UK Government departments and devolved administrations have allocated expenditure programmes to Scotland, Wales, Northern Ireland and the English regions.

GERS separates total public spending into two components:

• Identifiable expenditure: that is expenditure that can be clearly allocated to a country or region in terms of having been spent for the benefit of that country or region; and
• Non-identifiable expenditure: that is expenditure that cannot be identified as benefiting a particular country or region of the UK but is instead incurred on behalf of the UK as a whole.

Methodologies for Apportioning Non-identifiable Expenditure

In GERS, the methodology to apportion non-identifiable expenditure and identifiable expenditure which occurs outside the UK to Scotland varies according to the particular expenditure estimated.

The methodologies used are listed in Table B.1. Each reflects the approach that is thought to capture most appropriately the 'who benefits' principle. Further discussion of the method used to apportion the UK Government's financial sector interventions to Scotland is provided in Box B.1 below.

Table B.1: Apportionment Methodologies for Non-Identifiable Expenditure: Scotland 2008-09 to 2012-13^{1, 2}

	Non-Identifiable Expenditure	Outside the UK
General public services
Public and common services	Population	Population
International services	Population	Population
Public sector debt interest	Population	n/a
Defence	Population	n/a
Public order and safety	Population	n/a
Economic affairs
Enterprise and econ development	Population	Population
Science and technology	GVA	Population
Employment policies	n/a	Population
Agriculture, forestry and fisheries	Population	Population
Transport	GVA	Population
Environment protection3	GVA & Population	Population
Housing and community amenities	Population	n/a
Health	Population	Population
Recreation, culture and religion	Population	Population
Education and training	n/a	Population
Social protection	Population	Population
Accounting adjustments	Various (see section below)	Various (see section below)

1: Where there is no UK non-identifiable expenditure this is entered as not applicable (n/a).

2: Identifiable expenditure outside the UK, except EU transactions, is primarily apportioned on a per capita basis.

3: All environment protection expenditure is apportioned on a GVA basis, except UK Atomic Energy Authority and British Nuclear Fuels expenditure on nuclear decommissioning, which is apportioned on a per capita basis.

Box B.1 - The UK Government's Financial Sector Interventions

The most significant change in the UK Public Sector Finances in recent years has been the inclusion of the UK Government's interventions to support the banking sector at the height of the global financial crisis.

In the CRA the net outlays associated with the UK Government's financial sector interventions are recorded as a capital expenditure, whilst the fees received from the various schemes are recorded as a negative current expenditure (i.e. revenue received).^[32] The CRA classifies the permanent effects of the UK Government's financial sector interventions as UK non-identifiable expenditure - that is HM Treasury has deemed that the cost of such interventions cannot be assigned to particular countries or regions.

There are various methods that can be applied to apportion a share of such non-identifiable expenditure to Scotland. The method used in this edition of GERS assigns a population share to Scotland of the total UK expenditure, on the basis that all areas of the UK have benefited equally from the resulting stabilisation of the UK financial system. The expenditure assigned to Scotland under this apportionment methodology is summarised in the table below.

Scotland: Estimated Share of UK Government's Financial Stability Expenditure
	(£ millions)
	2008-09	2009-10	2010-11	2011-12	2012-13
Current	-88	-30	-155	-82	-5
Capital	788	380	0	0	0
Total	699	350	-155	-82	-5

A discussion paper providing further information on the treatment of the financial sector interventions in GERS is provided on the GERS website.^[33]

Methodology for Estimating the Accounting Adjustment

Table B.2 provides estimates of the two aspects of expenditure which form the accounting adjustment category reported in Chapter 5. It is important to note that the expenditure reported in the 'EU Transaction' line in Table B.2 is a balancing item. It does not report Scotland's total EU receipts or notional contribution. Users interested in the public sector income and expenditure flows between Scotland and the EU should refer to Box 5.3 in Chapter 5.

Table B.2: Total Accounting Adjustment: Scotland and UK 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Scotland
Public Sector Finances accounting adjustment	3,148	3,023	3,653	3,618	2,681
EU transactions	-488	-241	-190	-332	-100
Total Scottish accounting adjustment	2,661	2,781	3,463	3,284	2,581
UK
Public Sector Finances accounting adjustment	33,421	32,758	34,496	34,993	27,686
EU transactions	-2,932	-27	2,651	1,151	3,702
Total UK accounting adjustment	30,489	32,731	37,147	36,144	31,388

Further information on how the accounting adjustment line in Table B.2 is estimated is provided in the section below.

Public Sector Finances Accounting Adjustment

The primary data source used to estimate Scottish public sector expenditure is the CRA database, published by HM Treasury. The estimates of public spending published in the CRA are calculated on the basis of Total Expenditure on Services (TES).

TES is produced on a different basis to Total Managed Expenditure (TME), which is the primary measure of total public spending reported in the ONS National Accounts and the UK Public Sector Finances. The main difference between TES and TME is that TES does not include general government capital consumption and does not reverse the deduction of certain VAT refunds in the budget-based expenditure data. It also contains a number of items that are in budgets but not in TME, for example the grant equivalent element of student loans. An accounting adjustment is therefore introduced into GERS to ensure that the estimates of total public spending for Scotland and the UK are reported on the basis on TME.

UK Accounting Adjustment

The accounting adjustments required to reconcile UK TME and TES are set out in Table B.3.

The largest component of the UK accounting adjustment is general government capital consumption (central and local government combined). It is a measure of the amount of fixed capital resources used up in the process of the provision of public services. In 2012-13, UK general government capital consumption of £17.3 billion represented 62.5% of the total UK accounting adjustment. Table B.3 shows the component disaggregation of the UK accounting adjustment. The total UK accounting adjustment was estimated at £27.7 billion in 2012-13.

Table B.3: Public Sector Finances Accounting Adjustment: UK 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
UK total managed expenditure (TME)	635,626	673,402	694,705	694,315	701,681
UK total expenditure on services (TES)	602,205	640,644	660,209	659,322	673,995
UK accounting adjustment	33,421	32,758	34,496	34,993	27,686
Of which current expenditure:
Central government capital consumption	6,985	7,331	7,662	7,978	8,304
Local government capital consumption	7,164	7,550	8,037	8,524	9,008
Current VAT refunds	9,918	9,378	11,129	11,720	11,480
Student loans subsidy1	-788	-1,401	-4,317	-2,300	-3,685
Imputed subsidy from Local Authorities to the Housing Revenue Account2	1,638	1,357	1,525	894	228
Imputed flows for Renewable Obligation Certificates 3	472	470	472	472	472
Current expenditure residual4	4,622	4,803	5,689	3,324	2,142
Of which capital expenditure:
Capital VAT refunds	1,980	1,821	2,051	2,184	2,216
Capital expenditure residual4	1,430	1,448	2,249	2,197	-2,478

1 TES includes the subsidy implied in student loans being issued at lower than market rate. This is not included in TME - the National Accounts measures (in the current balance) the difference between interest received from students and the amount of interest paid by the government on the debt incurred to make the loans.

2 The Housing Revenue Account (HRA) is classified as a Public Corporation by the ONS, which means that they pay dividends on their profits to local authorities. To ensure that these dividends are non-negative, the ONS impute a subsidy from local authorities to HRAs to cover any shortfall (offset in Public Corporation gross operating surplus, which scores on the revenue side of the account).

3 Renewable Obligation Certificates are bought and sold by energy companies. The ONS have decided that these flows should be channelled through central government and so impute offsetting amounts of spending and income.

4 The residual for the UK in 2012-13 includes a timing adjustment. The TES figure used in GERS is consistent with the latest CRA analysis, which is from November 2012. The TME figure in GERS is consistent with the public sector finances statistical bulletin published in February 2013. In addition, the residual includes changes to TES not reflected in TME and to TME not reflected in TES in the years prior to 2012-13.

Scottish Accounting Adjustment

The accounting adjustment required to reconcile TES and TME for Scotland is set out in Table B.4. The total Scottish public sector accounting adjustment was estimated at £2.7 billion in 2012-13, or 9.7% of the total UK accounting adjustment.

The estimate of an accounting adjustment for Scotland is calculated using a variety of apportionment methodologies. Firstly, estimates of capital consumption from the ONS Regional Accounts, together with data from UK local government returns, have been used to estimate capital consumption for Scotland. In 2012-13, capital consumption for Scotland was estimated at £1.7 billion (9.7% of the UK total). This calculation is identical to that underpinning the estimates of general government gross operating surplus on the revenue side. These two elements cancel out when calculating Scotland's net fiscal aggregates.

VAT refunds have been allocated to Scotland using the apportionments derived in the revenue calculations (see Annex A), and therefore cancel out in the calculation of the net fiscal aggregates. The figures for Scottish student loan subsidies were provided by HM Treasury. The imputed subsidy from local authorities to HRA adopt the same apportionment allocation as in the gross operating surplus calculations on the revenue side, and the imputed flows for Renewable Obligation Certificates adopts the same methodology used in 'other taxes, royalties and adjustments'. These items cancel in the net borrowing calculations. The current and capital residuals are allocated to Scotland on a per capita basis.

Table B.4: Public Sector Finances Accounting Adjustment: Scotland 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Scottish total managed expenditure (TME)	59,440	62,087	64,095	64,869	65,205
Scottish total expenditure on services (TES)	56,292	59,064	60,442	61,251	62,524
Scottish accounting adjustment	3,148	3,023	3,653	3,618	2,681
Percentage of UK accounting adjustment	9.4%	9.2%	10.6%	10.3%	9.7%
Of which current expenditure:
Central government capital consumption1	666	699	728	763	793
Local government capital consumption	698	734	788	849	895
Current VAT refunds	847	767	917	975	969
Student loans subsidy1	31	-45	76	85	-124
Imputed subsidy from Local Authorities to the Housing Revenue Account1	140	99	112	65	21
Imputed flows for Renewable Obligation Certificates1	56	55	56	56	56
Current expenditure residual	426	439	516	303	193
Of which capital expenditure:
Capital VAT refunds	169	149	169	182	187
Capital expenditure residual	115	124	291	340	-309

1 See notes to Table B.3

The tables in Chapter 5 split expenditure into identifiable and non-identifiable expenditure. When reporting accounting adjustments, the current residual, the capital residual, and EU transactions are classified as non-identifiable. All other aspects of the accounting adjustment are classified as identifiable expenditure for both Scotland and the UK.

Amendments to CRA Data

A number of significant improvements have been made to the CRA database in recent years to apportion expenditure more accurately to countries and regions. While many anomalies in previous editions of the CRA have been addressed and are now reflected in both CRA 2013 and this GERS report, a small number of supplementary amendments to the CRA 2013 dataset were made in producing GERS. The aim of these refinements was to ensure that the public sector expenditure figure for Scotland captures as accurately as possible expenditure for the benefit of Scotland.

The total amendment made to the CRA in producing this edition of GERS is shown in Table B.5 below. In the financial year 2012-13, the figure of total expenditure on services attributed to Scotland in GERS is £534 million lower than the corresponding CRA figure (using default apportionments for non-identifiable expenditure without further consideration). Table B.6 sets out in detail the sources of these revisions.

Table B.5: Summary of Amendments to Estimates of Total Public Sector Expenditure on Services from CRA 2013: Scotland 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Total Expenditure in Scotland (CRA)	56,564	59,463	60,891	61,723	63,059
Total Expenditure in Scotland (GERS)	56,292	59,064	60,442	61,253	62,525
Total revision to expenditure in Scotland	-272	-398	-449	-471	-534

Table B.6: Amendments to Estimates of Total Public Sector Expenditure on Services from CRA 2013: 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Nuclear-related expenditure	-49	-112	-125	-126	-161
Railways expenditure	-121	-109	-104	-104	-127
London Olympics	-47	-55	-57	-57	-46
Pensions revisions	-25	-27	-35	-42	-43
Public sector debt interest	64	4	13	0	-11
Other minor revisions	-94	-100	-141	-140	-147
Total	-272	-398	-449	-471	-534

Nuclear Decommissioning and Related Expenditures

In CRA 2013, expenditure on nuclear decommissioning is classified as identifiable to the region where nuclear facilities are located. However, as discussed in previous editions of GERS, it is believed that this expenditure is best captured as a non-identifiable expenditure. This has been amended and nuclear decommissioning expenditure has been apportioned on a per capita basis. Other associated nuclear expenditure, such as security at nuclear facilities, has also been reapportioned on a per capita basis.

Railways Expenditures

As discussed in previous editions of GERS,^[36] railways expenditure, alongside expenditure on roads, is apportioned to Scotland on an 'in' basis. This means that expenditure 'in' Scotland on railways is apportioned to Scottish public sector expenditure while, where possible, a zero share is allocated to Scotland for all expenditure on rail across the rest of the UK. This required a number of modifications to the underlying CRA data which affected the expenditure by London and Continental Railways, the Channel Tunnel Rail link, and Network Rail.

2012 Olympics

Although some Olympics expenditures were assigned to London in the latest CRA not all were identified in that way. Consequently, as discussed in previous editions of GERS,^[37] all capital expenditure associated with the Olympics has been assigned to the rest of the UK, primarily London and surrounding area, on the basis that Scotland will not receive a lasting benefit from the infrastructure and regeneration associated with the games. Current expenditure on the Olympics has been assigned across the countries and regions of the UK using the estimated regional distribution of the associated increase in tourism expenditure.

Public Sector Pensions

In CRA 2013, expenditure for the Scottish Office Pension Agency, NHS and Teacher pensions was allocated only to Scotland. In contrast, expenditure by comparable pension agencies across the rest of the UK was allocated to the countries and regions of the UK based on the residence of the recipient of the pension. To correct this asymmetry, information from the Scottish Office Pension Agency was used to re-apportion these pension expenditures across the UK according to residence. As some elements of the pension expenditure were negative this change has resulted in a slight increase in expenditure assigned to Scotland in one of the years.

Public Sector Debt Interest

As GERS is consistent with the Public Sector Finances published in February 2014, the public sector debt interest payments in the CRA have been updated to be consistent with those in the most recent Public Sector Finances publication.

Other Amendments

A number of other minor amendments have been made to the CRA to correct asymmetries in the regional attribution of expenditures related to consumer protection, civil aviation, tourism and libraries amongst others. These are discussed further in previous editions of GERS.

Cross-Border Policing

Previous editions of GERS included an adjustment to remove the double counting of expenditure associated with the Serious and Organised Crime Agency (SOCA) and the Assets Recovery Agency (ARA) where the Scottish Government was making a transfer to these organisations to pay for their activities in Scotland. The CRA database has now removed this double counting so this adjustment has been removed.