Government Expenditure & Revenue Scotland 2012-13

2 SCOTLAND'S PUBLIC SECTOR ACCOUNTS

Introduction

This chapter provides a summary of Scotland's public sector accounts for the years 2008-09 to 2012-13 under the current constitutional arrangements. It outlines the latest estimates of public sector revenue in Scotland and expenditure for Scotland, and includes:

• Headline estimates of total public sector revenue in Scotland and of expenditure for Scotland, the key aggregates for assessing the strength of public finances in Scotland;
• Five-year estimates of current and capital expenditure for Scotland and key elements of public sector revenue in Scotland; and
• Estimates of the current budget balance and net fiscal balance of the public sector in Scotland.

As discussed in the preface, within the present constitutional arrangements there is no formal requirement for a comprehensive compilation of UK country and regional budgetary accounts. Therefore, the results presented in this section are statistical estimates of public sector revenue raised in Scotland and of public sector expenditure for Scotland.

Current and Capital Budgets

The following tables set out estimates of public sector revenue and expenditure for Scotland for the financial years 2008-09 to 2012-13. The figures for revenue and expenditure correspond to the estimates contained in Chapters 3, 4 and 5.^[6]

Current revenue, as defined in the UK National Accounts, is the sum of all revenue raised in a particular year by the entire public sector.^[7] In Scotland, this consists of the Scottish Government, the UK Government, Local Authorities and public corporations. The main component is tax revenues.

Public sector current expenditure is the sum of the current expenditure of general government for Scotland and public corporations. Current expenditure includes items such as wages and salaries, social security payments and day to day health expenditure.

Public sector capital expenditure includes capital formation and the net acquisition of land. Net investment is public sector capital expenditure, net of capital consumption (i.e. depreciation).

The current budget balance illustrates the difference between current revenue and current expenditure. It measures the degree to which current taxpayers meet the cost of paying for the public services they use, excluding capital investment by the public sector. It is therefore an important indicator of intergenerational fairness and indicates the sustainability of current policies.

The net fiscal balance measures the difference between total public sector expenditure (including capital expenditure) and revenue. In Scotland, the gap between public sector revenue and expenditure is not directly reflected in borrowing (or saving) and instead, is part of the overall fiscal stance of the UK public sector.

In GERS, three estimates of Scotland's public sector accounts are presented, (i) an estimate excluding North Sea revenue, (ii) an estimate including a per capita share of North Sea revenue and (iii) an estimate including an illustrative geographical share of North Sea revenue. Chapter 4 contains a discussion of North Sea revenue and the precise definitions used here. Estimates of Scotland's current and capital budgets under each of these assumptions are provided in Tables 2.1 and 2.2. Comparable estimates of the UK's current and capital budgets are provided in Box 2.1.

The underlying estimates of the UK public sector finances published by the Office for Budget Responsibility (OBR) exclude a number of temporary and one-off transfers associated with the UK Government's financial sector interventions in 2008-09, the Royal Mail pension scheme transfer and the Bank of England Asset Purchase Facility. To ensure consistency, the same approach is adopted in GERS. Estimates of Scotland's public finances including these factors are provided in Box 2.4.

Table 2.1: Current and Capital Budgets: Scotland 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Current Budget
Current revenue
Excluding North Sea revenue	43,772	42,054	44,318	46,315	47,566
Including North Sea revenue (per capita share)	44,820	42,557	45,023	47,264	48,118
Including North Sea revenue (geographical share)	55,349	47,733	51,773	56,315	53,147
Current expenditure	52,681	55,406	58,127	58,909	59,627
Capital consumption	1,786	1,884	1,945	2,039	2,119
Balance on current budget (surplus is positive, deficit is negative)
Excluding North Sea revenue	-10,695	-15,235	-15,753	-14,632	-14,180
Including North Sea revenue (per capita share)	-9,647	-14,732	-15,049	-13,684	-13,628
Including North Sea revenue (geographical share)	883	-9,556	-8,299	-4,632	-8,599
Capital Budget
Capital expenditure	6,760	6,681	5,968	5,960	5,579
Capital consumption	-1,786	-1,884	-1,945	-2,039	-2,119
Net Investment	4,974	4,798	4,023	3,921	3,459
Net Fiscal Balance (surplus is positive, deficit is negative)
Excluding North Sea revenue	-15,668	-20,033	-19,777	-18,553	-17,639
Including North Sea revenue (per capita share)	-14,620	-19,530	-19,072	-17,605	-17,087
Including North Sea revenue (geographical share)	-4,091	-14,354	-12,322	-8,554	-12,058

Tables 2.2a - 2.2c present the estimates of Scotland's public sector accounts as a percentage of Gross Domestic Product (GDP). Box 2.2 discusses the process used to estimate Scotland's GDP under the three sets of estimates for North Sea revenue.

Table 2.2a: Current and Capital Budgets (Excluding North Sea Revenue) % GDP: Scotland 2008-09 to 2012-13

	(per cent of GDP)
	2008-09	2009-10	2010-11	2011-12	2012-13
Current Budget
Current revenue (Excluding North Sea revenue)	36.9%	36.2%	36.2%	36.8%	37.7%
Current expenditure	44.4%	47.7%	47.4%	46.8%	47.2%
Capital consumption	1.5%	1.6%	1.6%	1.6%	1.7%
Balance on current budget (surplus is positive, deficit is negative)
Excluding North Sea revenue	-9.0%	-13.1%	-12.9%	-11.6%	-11.2%
Capital Budget
Capital expenditure	5.7%	5.8%	4.9%	4.7%	4.4%
Capital consumption	-1.5%	-1.6%	-1.6%	-1.6%	-1.7%
Net Investment	4.2%	4.1%	3.3%	3.1%	2.7%
Net Fiscal Balance (surplus is positive, deficit is negative)
Excluding North Sea revenue	-13.2%	-17.2%	-16.1%	-14.7%	-14.0%

Table 2.2b: Current and Capital Budgets (Per Capita Share North Sea Revenue) % GDP: Scotland 2008-09 to 2012-13

	(per cent of GDP)
	2008-09	2009-10	2010-11	2011-12	2012-13
Current Budget
Current revenue (Including per capita share of North Sea revenue)	37.0%	36.0%	36.1%	36.9%	37.5%
Current expenditure	43.5%	46.9%	46.5%	46.0%	46.5%
Capital consumption	1.5%	1.6%	1.6%	1.6%	1.7%
Balance on current budget (surplus is positive, deficit is negative)
Including North Sea revenue (per capita share)	-8.0%	-12.5%	-12.1%	-10.7%	-10.6%
Capital Budget
Capital expenditure	5.6%	5.7%	4.8%	4.7%	4.3%
Capital consumption	-1.5%	-1.6%	-1.6%	-1.6%	-1.7%
Net Investment	4.1%	4.1%	3.2%	3.1%	2.7%
Net Fiscal Balance (surplus is positive, deficit is negative)
Including North Sea revenue (per capita share)	-12.1%	-16.5%	-15.3%	-13.7%	-13.3%

Table 2.2c: Current and Capital Budgets (Geographical Share North Sea Revenue) % GDP: Scotland 2008-09 to 2012-13

	(per cent of GDP)
	2008-09	2009-10	2010-11	2011-12	2012-13
Current Budget
Current revenue (Including geographical share of North Sea revenue)	38.8%	35.5%	35.7%	38.3%	36.7%
Current expenditure	36.9%	41.3%	40.0%	40.0%	41.2%
Capital consumption	1.3%	1.4%	1.3%	1.4%	1.5%
Balance on current budget (surplus is positive, deficit is negative)
Including North Sea revenue (geographical share)	0.6%	-7.1%	-5.7%	-3.1%	-5.9%
Capital Budget
Capital expenditure	4.7%	5.0%	4.1%	4.1%	3.9%
Capital consumption	-1.3%	-1.4%	-1.3%	-1.4%	-1.5%
Net Investment	3.5%	3.6%	2.8%	2.7%	2.4%
Net Fiscal Balance (surplus is positive, deficit is negative)
Including North Sea revenue (geographical share)	-2.9%	-10.7%	-8.5%	-5.8%	-8.3%

Box 2.1 - UK Public Sector Accounts

The tables below provide estimates of the UK's Public Sector Accounts over the period 2008-09 to 2012-13, as set out in the ONS Public Sector Finances Statistical Bulletin published in February 2014. They are prepared on a consistent basis with the estimates in Tables 2.1 and 2.2. The figures show that, in 2012-13, the estimated current budget balance for the UK public sector was a deficit of £91.9 billion (5.8% of GDP). For the same year, the estimated UK public sector net fiscal balance, referred to in the UK Public Sector Accounts as 'net borrowing', was a deficit of £114.8 billion (7.3% of GDP).

Current and Capital Budgets: UK 2008-09 to 2012-13 (£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Current Budget
Current revenue	536,271	516,109	555,506	576,933	586,925
Current expenditure	567,933	605,010	635,268	643,980	656,345
Capital consumption	19,146	19,999	20,784	21,616	22,510
Balance on current budget	-50,808	-108,900	-100,546	-88,663	-91,930
Capital Budget
Capital expenditure	67,693	68,392	59,437	50,335	45,336
Capital consumption	-19,146	-19,999	-20,784	-21,616	-22,510
Net Investment	48,547	48,393	38,653	28,719	22,826
Net Fiscal Balance	-99,355	-157,293	-139,199	-117,382	-114,756
Current and Capital Budgets: UK 2008-09 to 2012-13 (% of GDP)
	2008-09	2009-10	2010-11	2011-12	2012-13
Current Budget
Current revenue	37.2%	36.0%	37.0%	37.2%	37.3%
Current expenditure	39.4%	42.2%	42.3%	41.6%	41.7%
Capital consumption	1.3%	1.4%	1.4%	1.4%	1.4%
Balance on current budget	-3.5%	-7.6%	-6.7%	-5.7%	-5.8%
Capital Budget
Capital expenditure	4.7%	4.8%	4.0%	3.2%	2.9%
Capital consumption	-1.3%	-1.4%	-1.4%	-1.4%	-1.4%
Net Investment	3.4%	3.4%	2.6%	1.9%	1.5%
Net Fiscal Balance	-6.9%	-11.0%	-9.3%	-7.6%	-7.3%

Current Budget Balance

In 2012-13, excluding North Sea revenue, current expenditure exceeded current revenue in Scotland leading to a current budget deficit of £14.2 billion, or 11.2% of GDP as presented in Table 2.2a. With a per capita share of North Sea revenue, current expenditure exceeded current revenue in Scotland by £13.6 billion (or 10.6% of GDP), as illustrated in Table 2.2b.

In 2012-13, including an illustrative geographical share of North Sea revenue, total current expenditure for Scotland exceeded current revenue to yield a current budget deficit of £8.6 billion (or 5.9% of GDP) as illustrated in Table 2.2c. In 2012-13, the equivalent UK current budget position, including 100% of all North Sea revenue, was a deficit of £91.9 billion (or 5.8% of GDP), as illustrated in Box 2.1.

As Tables 2.1 and 2.2 highlight, any estimate of Scotland's current balance varies according to the allocation of North Sea revenue. Over the period 2008-09 to 2012-13, the estimated cumulative current budget balance in Scotland when North Sea revenue is excluded was a deficit of £70.5 billion. When an illustrative geographical share of North Sea revenue is assigned to Scotland, the estimated cumulative current budget balance over the same period was a deficit of £30.2 billion. The cumulative current budget balance for the UK over this period, including 100% of North Sea revenue, was a deficit of £440.8 billion.

Net Fiscal Balance

The net fiscal balance is equal to the difference between total public sector revenue and total public sector expenditure. A positive figure, i.e. a surplus, in any given year is obtained if total public sector revenue in Scotland is greater than total public sector expenditure.

In 2012-13, excluding North Sea revenue, total revenue was less than total expenditure yielding a net fiscal deficit of £17.6 billion (or 14.0% of GDP). With a per capita share of North Sea revenue the estimated net fiscal deficit for Scotland was £17.1 billion (or 13.3% of GDP). Including an illustrative geographical share of North Sea revenue, Scotland's net fiscal deficit was £12.1 billion (or 8.3% of GDP). In 2012-13, the equivalent UK position including 100% of all North Sea revenue, referred to in the UK Public Sector Accounts as 'net borrowing', was a deficit of £114.8 billion (or 7.3% of GDP).

Over the past five years, the largest net fiscal deficit in Scotland under all three assumptions about North Sea revenue occurred in 2009-10. This reflects the effect of the global financial crisis and subsequent recession, which resulted in a significant deterioration in the strength of the public finances across many countries. For example, the UK's net fiscal deficit in 2009-10 represented the largest annual deficit, as a proportion of GDP, since 1945.

In 2012-13, the net fiscal balance for Scotland excluding the North Sea improved from a deficit of 14.7% of GDP to a deficit of 14.0% of GDP. Including a per capita share of North Sea revenue, Scotland's net fiscal balance improved from a deficit of 13.7% to 13.3%. This reflects two factors. Firstly, onshore tax receipts grew by 2.7% in 2012-13, with national insurance contributions and VAT seeing the largest growth in cash terms. Secondly, total public spending for Scotland grew by 0.5% in cash terms between 2011-12 and 2012-13. This is slower than the growth in public spending observed in recent years.

Scotland's net fiscal deficit, including an illustrative geographical share of North Sea revenue increased from 5.8% of GDP in 2011-12 to 8.3% of GDP in 2012-13. The increase in Scotland's deficit under this scenario reflects the fact that Scotland's illustrative geographical share of North Sea oil and gas revenues is estimated to have fallen from £10.0 billion in 2011-12 to £5.6 billion in 2012-13.

North Sea tax receipts are driven by a number of factors, including the oil price, the sterling dollar exchange rate, production, operating expenditure and capital investment. The drivers of the decline in 2012-13 were primarily production and capital investment. Production in the North Sea fell by 15% between 2011-12 and 2012-13.^[8] This above trend fall in production reflects a combination of unplanned production stoppages at several large gas fields and higher levels of maintenance activity in the North Sea. Secondly, capital investment in the North Sea has risen in recent years, which has reduced companies' tax liabilities.

Box 2.2: Scotland's GDP with and without North Sea GDP

When calculating Scotland's capital and current budgets as a percentage of GDP, the measure of GDP used should adopt the same assumptions made in the corresponding budget calculations.

When Scotland's public sector accounts are presented excluding North Sea revenue, they are expressed as a percentage of Scotland's GDP excluding the amount of GDP arising from offshore North Sea activities.

When a proportion of North Sea revenue is included in the Scottish public sector revenue estimates, a related share is included in Scottish GDP. For example, if 100% of North Sea revenue were to be included in the Scottish estimate, then 100% of North Sea GDP would be included in Scotland's corresponding GDP figure. Scotland's GDP figures under the three sets of assumptions presented above are reflected in the following table.

Scottish GDP Including and Excluding North Sea GDP: 2008-09 to 2012-13
	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Scottish GDP
Excluding North Sea GDP	118,669	116,190	122,551	125,841	126,313
Including per capita share of North Sea GDP	121,154	118,070	124,879	128,080	128,275
Including geographical share of North Sea GDP	142,616	134,272	145,161	147,120	144,672

Source: Scottish Quarterly National Accounts, http://www.scotland.gov.uk/snap

Comparable estimates of UK GDP, including 100% of North Sea GDP are provided in the table below.

UK GDP: 2008-09 to 2012-13
	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
UK GDP	1,442,253	1,432,213	1,502,176	1,549,085	1,573,541

Source: ONS

Current Revenue

Table 2.3 provides estimates of Scottish public sector current revenue by economic category for the years 2008-09 to 2012-13. A more detailed discussion and breakdown of revenue is provided in Chapters 3 and 4 and in Annex A.

Table 2.3: Summary of Current Revenue by Economic Category: Scotland 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Taxes on income and wealth	14,180	13,186	13,808	14,076	14,299
National insurance contributions	7,987	7,912	7,967	8,284	8,521
Taxes on production and imports	14,539	14,769	16,238	17,366	17,636
Other current taxes	2,690	2,744	2,738	2,847	2,868
Taxes on capital	245	206	175	229	243
Gross operating surplus	3,416	2,897	2,936	3,012	3,247
Rent and other current transfers	81	64	46	47	128
Interest and dividends from private sector and abroad	634	276	410	454	623
Total current non-North Sea revenue	43,772	42,054	44,318	46,315	47,566
North Sea revenue
Per capita share	1,048	503	705	948	552
Geographical share	11,577	5,679	7,454	10,000	5,581
Total current revenue (including North Sea revenue)
Per capita share	44,820	42,557	45,023	47,264	48,118
Geographical share	55,349	47,733	51,773	56,315	53,147

In 2012-13, total current revenue, excluding revenue from the North Sea was estimated to be approximately £47.6 billion. This represented a nominal increase of 2.7% on the previous year.

As Table 2.3 highlights, Scotland's illustrative geographical share of North Sea revenue increased in both 2010-11 and 2011-12. However, in 2012-13, this share of North Sea revenue fell by 44.2% to £5.6 billion as discussed earlier in this chapter.

Public Sector Expenditure

This section presents summary estimates of total public sector expenditure for Scotland for the years 2008-09 to 2012-13. The estimates of total public sector expenditure provided in GERS are based on the National Accounts aggregate Total Managed Expenditure (TME), which is equal to the sum of total current and capital expenditure. This ensures that the estimates in this report are produced on the same basis as the estimates of total public expenditure for the UK in the National Accounts.

In 2012-13 total public sector expenditure for Scotland was £65.2 billion. As outlined in Table 2.4, Scotland accounted for 9.3% of total UK public spending in 2012-13.

Table 2.4: Total Managed Expenditure: Scotland and UK 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Total Managed Expenditure for Scotland	59,440	62,087	64,095	64,869	65,205
Total Managed Expenditure for the UK	635,625	673,403	694,705	694,315	701,681
Total Managed Expenditure for Scotland as share of UK (%)	9.4%	9.2%	9.2%	9.3%	9.3%

Table 2.5 provides estimates for the six largest functions of public sector expenditure. Over the five year period since 2008-09, total public sector expenditure grew by 9.7% in nominal terms. However, growth has slowed in more recent years, with public spending increasing by 0.5% in cash terms between 2011-12 and 2012-13.

Social protection expenditure, which includes social transfers through the benefit system, and health are the two largest categories of spending in Scotland. They grew by 21.1% and 10.0% respectively between 2008-09 and 2012-13.

Table 2.5: Summary of Public Sector Expenditure: Scotland 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Social protection	18,543	20,076	20,692	21,159	22,458
Health	10,255	10,679	10,938	11,046	11,284
Education and training	7,528	7,729	7,651	7,490	7,651
General public services	4,867	4,780	6,124	6,387	6,068
Defence	3,096	3,167	3,292	3,237	3,027
Public order and safety	2,619	2,694	2,804	2,860	2,529
Other	12,532	12,962	12,594	12,690	12,188
Total Managed Expenditure	59,440	62,087	64,095	64,869	65,205

For a more detailed breakdown of expenditure, refer to Chapter 5 and Annex B.

Box 2.3: Total Public Sector Expenditure as a Share of GDP

The table below presents the estimates of Scottish and UK total public sector expenditure as a share of GDP.

In 2012-13, the ratio of TME for Scotland to GDP was 51.6% excluding North Sea GDP and 50.8% including a per capita share. This ratio falls to 45.1% when an illustrative geographical share of North Sea GDP is included. In comparison, UK TME was equivalent to 44.6% of GDP in 2012-13, including 100% of North Sea GDP.

Such statistics provide a useful illustration of the relative size of public spending between countries and over time by controlling for the size of the economy. They should not, however, be viewed as an estimate of the relative contribution of public spending (or the public sector) to the economy as a significant proportion of such spending is on transfers from government to individuals and businesses.

Total Managed Expenditure as a Share of GDP: 2008-09 to 2012-13-11
	(per cent of GDP)
	2008-09	2009-10	2010-11	2011-12	2012-13
Scottish TME as a Share of GDP:
Excluding North Sea GDP	50.1%	53.4%	52.3%	51.5%	51.6%
Including per capita share of North Sea GDP	49.1%	52.6%	51.3%	50.6%	50.8%
Including geographical share of North Sea GDP	41.7%	46.2%	44.2%	44.1%	45.1%
UK TME as a share of GDP:
Including 100% of North Sea GDP	44.1%	47.0%	46.2%	44.8%	44.6%

Box 2.4 Additional Measures of Scotland's Public Sector Finances

The headline measures of the UK public sector finances have been affected by a number of one-off or temporary factors in recent years. The primary change is that the majority of the UK Government's financial sector interventions in 2007-08 and 2008-09 were classified as having a temporary impact on the UK public finances and as such are excluded from headline measures of the UK public sector finances. A similar presentation is adopted in GERS.

In addition to this, there have been further temporary factors which are included in the headline measures of the UK public finances from 2012-13 onwards. These changes are:

• Transfers of the excess cash held in the Bank of England's Asset Purchase Facility (APF) to the Exchequer. These reduced UK public sector net borrowing in 2012-13 by £6.4 billion. Scotland is allocated a per capita share of these revenues in GERS (£535 million).
• The transfer of the Royal Mail's historic pension deficit and associated assets to the public sector in 2012-13 reduced UK net investment, and therefore public sector net borrowing, by £28.0 billion in 2012-13. Scotland is allocated a per capita share (£2.3 billion) of this transfer.

The Office for Budget Responsibility (OBR) focuses on underlying public sector net borrowing in its assessments of the UK public finances. This excludes the temporary effects of the UK Government's financial sector interventions, the transfers from the Bank of England's APF and the transfer of the Royal Mail's historic pension deficit and associated assets. The ONS also publish estimates of the UK public finances on this basis. These effects are excluded as doing provides an assessment of the longer term trends in the public finances. The OBR also present a headline figure which excludes only the temporary effects of the UK Government's financial sector interventions.

Following a consultation of users from October to December 2013,^[9] GERS presents estimates on a similar basis. The main tables in GERS are on the underlying basis excluding all the temporary measures described above, and are therefore directly comparable to the measures of underlying UK public sector finances reported by the ONS and OBR.

The table below demonstrates the impact that including the transfers from the Bank of England's APF and the transfer of the Royal Mail's historic pension deficit and associated assets would have on the estimates of Scotland's net fiscal balance and current budget balance in 2012-13, earlier years are not affected by these changes. The corresponding UK totals published by the ONS are also provided for reference.

Overall Fiscal Position - Including Temporary Effects 2012-13
	Excluding North Sea	Per Capita Share of North Sea	Geographic Share of North Sea	UK
Current Budget Balance - £ million	-13,645	-13,093	-8,064	-85,502
Current Budget Balance - % of GDP	-10.8%	-10.2%	-5.6%	-5.4%
Net Fiscal Balance - £ million	-14,768	-14,215	-9,186	-80,328
Net Fiscal balance - % of GDP	-11.7%	-11.1%	-6.3%	-5.1%

As part of a consultation on their UK Public Sector Finances publication, the ONS has announced plans to change the reporting of UK figures later this year.^[10] This will also reflect changes to international guidance on National Accounts which are contained in the European System of Accounts 2010. These changes are expected to result in a simplification of the reporting of public sector finances in future.