Government Expenditure & Revenue Scotland 2013-14

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.^[32] Within this, UK Government departments and devolved administrations have allocated expenditure programmes to Scotland, Wales, Northern Ireland and the English regions.

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). 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)
	2009-10	2010-11	2011-12	2012-13	2013-14
Current	-30	-154	-82	-41	0
Capital	380	0	0	0	0
Total	350	-154	-82	-41	0

Methodology for Estimating the Accounting Adjustment

Table B.1 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.1 is a balancing item. It does not report Scotland's total EU receipts or notional contribution.

Table B.1: Total Accounting Adjustment: Scotland and UK 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Scotland
Public Sector Finances accounting adjustment	4,611	5,312	5,432	5,884	4,495
EU transactions	-359	-600	-796	-432	-710
Total Scottish accounting adjustment	4,252	4,712	4,636	5,452	3,785
UK
Public Sector Finances accounting adjustment	48,534	51,239	53,450	61,021	44,679
EU transactions	904	3,628	2,035	4,307	5,048
Total UK accounting adjustment	49,438	54,867	55,485	65,328	49,727

The EU transaction line is estimated for Scotland using data from the Scottish Government Consolidated Accounts. This provides information on spending by the Scottish Government financed by the EU, such as the Common Agricultural Policy and European Structural Funds.

As discussed in Annex E of HM Treasury's Public Expenditure and Statistical Analyses,^[33] under National Accounts classifications, these expenditures are reported as direct payments from the EU to enterprises and households, rather than being included within departmental budgets. In the transition to total managed expenditure, these spending lines are therefore included as negative spending, to remove them from departmental spending. As Scotland receives a relatively high share of this spending, particularly relating to the Common Agricultural Policy, these negative spending lines outweigh the estimated Scottish contribution to the EU, and so the overall EU transactions line for Scotland is negative.

Further information on how the public sector finances accounting adjustment line in Table B.1 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 of TME.

UK Accounting Adjustment

The accounting adjustments required to reconcile UK TME and TES are set out in Table B.2.

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. Table B.2 shows the component disaggregation of the UK accounting adjustment.

Table B.2: Public Sector Finances Accounting Adjustment: UK 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
UK total managed expenditure (TME)	686,295	706,520	706,190	720,836	721,489
UK total expenditure on services (TES)	637,761	655,282	652,740	659,816	676,810
UK accounting adjustment	48,534	51,239	53,450	61,021	44,679
of which current expenditure:
Central government capital consumption	14,895	15,790	16,607	17,126	17,440
Local government capital consumption	7,550	8,037	8,524	9,008	9,494
Current VAT refunds	9,374	11,095	11,672	11,553	11,607
VAT receipts paid to the EU	1,120	2,267	2,276	1,370	2,163
Student loans subsidy1	-1,401	-4,317	-2,300	-3,685	-6,302
Imputed subsidy from Local Authorities to the Housing Revenue Account2	-1,357	-1,525	-894	-228	-228
Imputed flows for Renewable Obligation Certificates3	1,119	1,283	1,471	2,170	2,529
Bank of England Asset Purchase Facility flows	-5,616	-7,720	-8,750	-12,058	-12,565
Royal Mail Pension Plan	0	0	0	9,460	0
Local authority pensions	1,611	1,826	1,881	1,966	1,862
Network Rail	4,240	4,537	4,378	4,679	4,574
Tax credits	5,600	5,540	4,714	2,982	2,744
Current expenditure residual	1,380	3,304	1,335	5,015	4,288
of which capital expenditure:
Capital VAT refunds	1,820	2,064	2,223	2,143	2,098
Network Rail	-1,039	-1,114	-647	-406	1,627
Capital expenditure residual	9,238	10,172	10,960	9,927	3,348

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 2013-14 includes a timing adjustment. The TES figure used in GERS is consistent with the latest CRA analysis, which is from November 2014. The TME figure in GERS is consistent with the public sector finances statistical bulletin published in January 2015. In addition, the residual includes changes to TES not reflected in TME and to TME not reflected in TES in the years prior to 2013-14.

Scottish Accounting Adjustment

The accounting adjustment required to reconcile TES and TME for Scotland is set out in Table B.3.

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 have been used to estimate capital consumption for Scotland. This is identical to the estimates of general government gross operating surplus on the revenue side. These two elements cancel out when calculating Scotland's net fiscal aggregates. The same is true for VAT refunds, Renewable Obligation Certificates, and the Housing Revenue Account. The figures for Scottish student loan subsidies are provided by HM Treasury. The current and capital residuals are allocated to Scotland on a spending share basis.

Table B.3: Public Sector Finances Accounting Adjustment: Scotland 2009-10 to 2013-14

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Scottish total managed expenditure (TME)	63,533	65,112	65,768	67,848	66,388
Scottish total expenditure on services (TES)	58,922	59,800	60,335	61,963	61,894
Scottish accounting adjustment	4,611	5,312	5,432	5,884	4,495
Percentage of UK accounting adjustment	9.5%	10.4%	10.2%	9.6%	10.1%
Of which current expenditure:1
Central government capital consumption	1,281	1,336	1,398	1,393	1,433
Local government capital consumption	716	770	828	877	925
Current VAT refunds	831	964	1,010	1,001	1,012
VAT receipts paid to the EU	96	190	190	199	180
Student loans subsidy2	-45	76	85	-124	-8
Imputed subsidy from Local Authorities to the Housing Revenue Account3	-99	-112	-65	-21	-21
Imputed flows for Renewable Obligation Certificates4	131	152	175	257	300
Bank of England Asset Purchase Facility flows	-472	-647	-732	-1,005	-1,044
Royal Mail Pension Plan	0	0	0	789	0
Local authority pensions	148	168	172	174	168
Network Rail	445	496	420	367	346
Tax credits	434	423	351	219	201
Current expenditure residual	125	295	126	363	382
Of which capital expenditure:
Capital VAT refunds	161	179	192	186	183
Network Rail	-58	-42	-114	-51	84
Capital expenditure residual	913	1,064	1,396	1,259	354

¹ See notes to Table B.2

The elements of the accounting adjustment are also assigned to Scottish or other UK Government institutions. Local government capital consumption, the student loans subsidy, the housing revenue account subsidy, and local authority pensions adjustment are assigned to Scottish institutions. VAT receipts paid to the EU, Renewable Obligation Certificates, Bank of England Asset Purchase Facility flows, the Royal Mail Pension Plan, and tax credits are assigned to other UK Government institutions.

As the majority of VAT refunds are due to Local Government and as the majority of central government expenditure in Scotland (other than benefit expenditure by the Department for Work and Pensions, which will not attract VAT), is undertaken by the Scottish Government, all VAT refunds have been assigned to Scottish institutions. Similarly, the majority of capital expenditure in Scotland is undertaken by the Scottish Government, so all central government capital consumption has been assigned to Scottish institutions. Similar reasoning has been applied to the current and capital expenditure residuals. As some VAT refunds, current expenditure, and capital spending in Scotland is attributable to other UK Government institutions, this will likely overstate the accounting adjustment assigned to Scottish institutions.

For Network Rail, all expenditure has been assigned to other UK Government institutions. As Network Rail expenditure in Scotland is in part financed by grants from the Scottish Government, this may underestimate the accounting adjustment assigned to Scotland.

Further work will be undertaken in future editions of GERS to refine the assignment of the accounting adjustment to Scottish and other UK Government institutions.

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 2014 and this GERS report, a small number of supplementary amendments to the CRA 2014 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.4 below. Table B.5 sets out in detail the sources of these revisions.

Table B.4: Summary of Amendments to Estimates of Total Public Sector Expenditure on Services from CRA 2014: Scotland 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Total Expenditure in Scotland (GERS)	63,533	65,112	65,768	67,848	66,388
PSF accounting adjustment	4,611	5,312	5,432	5,884	4,495
Total expenditure on services for Scotland (GERS)	58,922	59,800	60,336	61,964	61,893
Total expenditure for Scotland (CRA)1	59,206	60,115	60,711	62,381	62,327
Total revision to expenditure in Scotland	-284	-315	-375	-418	-435

¹ In this analysis, an estimate of total expenditure from the CRA has been calculated as the sum of all Scottish expenditure plus a proportion of non-identifiable expenditure and outside UK expenditures using the default apportionments set out in the detailed expenditure methodology paper on the GERS website.^[34] This figure therefore excludes all amendments documented in this annex.

Table B.5: Amendments to Estimates of Total Public Sector Expenditure on Services from CRA 2014: 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Nuclear-related expenditure	-112	-126	-131	-160	-164
Railways expenditure	0	-1	-2	-12	-13
London Olympics	-55	-38	-61	-61	-48
Pensions revisions	-4	-10	-14	-20	-32
Public sector debt interest	-10	2	3	1	-14
Other minor revisions	-103	-141	-171	-165	-164
Total	-284	-315	-375	-418	-435

Nuclear Decommissioning and Related Expenditures

In CRA 2014, expenditure on nuclear decommissioning is classified as identifiable to the region where nuclear facilities are located. However, as discussed in previous editions of GERS,^[35] it is believed that this expenditure is best captured as a non-identifiable expenditure, so nuclear decommissioning and associated expenditure is apportioned on a population basis.

Railways Expenditures

As discussed in previous editions of GERS,^[36] railways expenditure is apportioned to Scotland on an in basis. This requires a number of modifications to the underlying CRA data which affected the expenditure by London and Continental Railways, and the Channel Tunnel Rail link. Previous adjustments made to Network Rail grants are no longer required following the incorporation of Network Rail into central government expenditure, as discussed in Boxes 3.2 and 5.1.

In this edition of GERS, a new adjustment has been introduced for expenditure relating to High Speed 2. Within the CRA this expenditure, which accounts for over £340 million in 2013-14, is classified as non-identifiable, meaning its benefits cannot be attributed to a particular region. Within GERS, the expenditure has been apportioned to Scotland in line with the regional breakdown of the benefits of High Speed 2 reported within The Economic Case for HS2, published by the Department for Transport.^[37] This assigns Scotland 2% of the total expenditure.

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,^[38] 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 2014, improvements were made to ensure that expenditure for the Scottish Office Pension Agency, NHS and Teacher pensions was allocated across the UK in line with recipients residency. This removes the need for the majority of previous adjustments to pensions within GERS. However, in keeping with the methodology from previous GERS, all expenditure by the Scottish Office Pension Agency outside the UK is apportioned to Scotland, rather than a population share as is standard for other outside UK expenditures.

Public Sector Debt Interest

The public sector debt interest payments in the CRA have been updated to be consistent with the Public Sector Finances published in January 2015.

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.