Government Expenditure and Revenue Scotland 2008-09

B EXPENDITURE METHODOLOGY

This appendix 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.

Total Expenditure on Services ( TES) can be separated 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.

Total Expenditure on Services covers most expenditure by the public sector. Adding an accounting adjustment reconciles it with Total Managed Expenditure ( TME). In 2008-09, TES accounted for approximately 96 per cent of TME.

UK Expenditure Figures

The primary data source used to estimate Scottish public sector expenditure is the Public Expenditure Statistical Analyses ( PESA) database, published by HM Treasury ⁴⁰. Within PESA, tables relating to a Country and Regional Analysis ( CRA) are available in which UK Government departments and devolved administrations have allocated expenditure programmes to Scotland, Wales, Northern Ireland and English regions.

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. None of the methods used to apportion non-identifiable expenditure to Scotland have changed from the previous edition of GERS.

Table B.1: Apportionment Methodologies for Non-Identifiable Expenditure: Scotland 2004-05 to 2008-09 ^{1, 2}

	Non-id	Outside the UK
General public services
Public and common services	Population	n/a
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 3	Population	Population
Science and technology	GVA	Population
Employment policies	n/a	Population
Agriculture, forestry and fisheries	n/a	n/a
Transport	GVA	Population
Environment protection 4	GVA & Population	Population
Housing and community amenities	n/a	n/a
Health	n/a	Population
Recreation, culture and religion	Population	Population
Education and training	n/a	Population
Social protection	n/a	Population
EU transactions	Actual	GVA, VAT & Population

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 apportioned on a per capita basis.
3: All environment protection expenditure is apportioned on a GVA basis, except UKAEA and BNF expenditure on nuclear decommissioning, which is apportioned on a per capita basis.

Methodology for estimating the accounting adjustment

The public sector expenditure analysis in this report focuses on Total Expenditure on Services ( TES). In UK public finance documents, the principal measure of public sector expenditure is Total Managed Expenditure ( TME). 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. TME is consistent with ONS National Accounts and the UK Public Sector Finances.

An accounting adjustment is introduced to align TES to TME. The largest component of the UK accounting adjustment is general government capital consumption. This is a measure of the amount of fixed capital resources used up in the process of providing public services.

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 2008-09, capital consumption for Scotland was estimated at £1.3 billion (9.2 per cent 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 net borrowing.

VAT refunds have been allocated to Scotland using the apportionments derived in the revenue calculations (see Appendix A), and therefore cancel out in the calculation of net borrowing. 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 and royalties'. These items cancel in the net borrowing calculations. The Scottish share of the Nigerian debt write-off has been allocated on a per capita basis. The current and capital residuals are allocated to Scotland using the appropriate TES ratios.

In summary, the accounting adjustment for Scotland was estimated at £2.6 billion in 2008-09, or 9.4 per cent of the total UK Accounting Adjustment.

Amendments to PESACRA Data

A number of significant improvements have been made to the PESACRA database in recent years to apportion expenditure more accurately to countries and regions. While many anomalies in previous editions of PESACRA have been addressed and are now reflected in both PESACRA 2010 and this GERS report, a number of supplementary amendments to the PESACRA 2010 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 revisions to PESACRA 2010 made in GERS can be grouped under the following headings and are summarised in Table B2:

• direct amendment of the PESA database (affecting UK total)
• re-classification of expenditure from Scotland to the rest of UK;
• re-apportionment of expenditure between Scotland and the rest of UK.

Table B.2: Revisions to Estimates of Total Public Sector Expenditure from PESA 2010: Scotland 2004-05 to 2008-09

	(£ million)
	2004-05	2005-06	2006-07	2007-08	2008-09
Total Expenditure in Scotland ( PESA) 41	44,351	47,982	50,357	53,496	56,696
Total Expenditure in Scotland ( GERS)	44,518	47,677	50,093	53,205	56,460
Total revisions between PESA and GERS	167	-306	-265	-291	-236
Of which
Amendment of PESA database	332	120	0	0	21
Re-classification of expenditure	-59	-62	-195	-194	-218
Re-apportionment of expenditure	-106	-364	-70	-97	-38

Amendment of the PESA database

Due to a reporting change, capital expenditure by Scottish Water in PESACRA 2008 was revised downwards from the expenditure reported in PESACRA 2007. While the figures for 2007-08 and 2008-09 in PESACRA 2010 are accurate, the figures for earlier years are incorrect. Following a review of the actual capital expenditure undertaken by Scottish Water, GERS replaced the erroneous data in PESACRA 2010 with the correct data, entered in PESACRA 2007, for the years 2004-05 to 2005-06. These are consistent with Scottish Water's published annual accounts.

Following the publication of PESA 2010, the Local Government Finance team in the Scottish Government identified a number of their expenditure lines which had been since been revised. These revisions have been incorporated into the PESA database.

An inconsistency between the expenditure classification of fisheries science activities was indentified during the production of this publication. In Scotland, Fisheries Research Services ( FRS) expenditure was assigned to "Public and common services" in PESA, whereas the counterpart organisation for the rest of UK - CEFAS - was assigned to the "Environment protection" group. In the interests of comparability by function, FRS expenditure has been re-assigned to the environment protection category albeit with no change to total expenditure.

Table B.3: Amendments to the 2010 PESA database

	(£ million)
	2004-05	2005-06	2006-07	2007-08	2008-09
Scottish Water capital expenditure	361	120	0	0	0
Amendments to Local Government Expenditure	-29	0	0	0	21
Fisheries science - reduction in "Public and common services"	-39	-53	-77	-54	-84
Fisheries science - increase in "Environment protection"	39	53	77	54	84
Total	332	120	0	0	21

Re-classification of expenditure in PESA 2010

In PESACRA 2010, some expenditure by UK Government departments with responsibility only in England and Wales was recorded as UK non-identifiable or a share directly allocated to Scotland. This included:

• Office of the Third Sector
• Office of Government Commerce
• Insolvency Services Executive Agency
• an element of central health administration expenditure and health pensions paid overseas
• Department for Culture, Media and Sport ( DCMS) expenditure on libraries and administration.
• Department of Communities and Local Government research expenditure
• UK Population Census (Office for National Statistics)

In GERS, such expenditure has been re-classified as expenditure for England and Wales only. As a result, no share was apportioned to Scotland in this publication.

An inconsistency was also identified in the attribution of some UK-wide police activities as identifiable expenditure to Scotland. Whilst the powers of the Serious and Organised Crime Agency ( SOCA) and the related Assets Recovery Agency ( ARA) were acknowledged to be weaker in Scotland, an amount equivalent to a population share had been assigned to Scotland in PESA. Further investigation with the Scottish Government's finance team revealed that transfers of money from the Scottish Government to these organisations to pay for these activities had already been accounted for in the Scottish Government's PESA return. Any further attribution of expenditure to Scotland is therefore likely to represent a double-count. As a result, these expenditures have been re-allocated to the rest of the UK.

As discussed in Box 6.1 in last years' edition of GERS, 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 PESA data which affected the expenditure by London and Continental Railways, the Channel Tunnel Rail link, and Network Rail.

Table B.4: Re-classification of Expenditure in PESA 2010: Scotland 2004-05 to 2008-09

	(£ million)
	2004-05	2005-06	2006-07	2007-08	2008-09
Office of the third sector	0	0	0	-1	-1
Office of Government Commerce	-1	-1	-3	-3	-2
Insolvency Services Executive Agency	0	0	-2	-3	-1
Central health administration and pensions	-10	-11	-12	-13	-15
Census	0	0	0	0	-4
Libraries and DCMS Administration	-5	-5	-7	-7	-7
Network Rail	0	0	-94	-90	-112
London and Continental Railways	-12	-11	-8	-6	1
Channel Tunnel	0	-1	-1	-3	-2
Police and Crime Reduction	-13	-18	-50	-49	-54
Other	-18	-15	-19	-21	-22
Total	-59	-62	-195	-194	-218

0 : less than £0.5 million

Re-apportionment of Expenditure in PESA 2010

In PESACRA 2010, expenditure on nuclear decommissioning was classified as identifiable to the region where nuclear facilities are located. However, as discussed in Box 6.4 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 has also been reapportioned on a per capita basis.

In addition to this relatively major revision, a number of smaller amendments were made.

PESACRA 2010 assigns no expenditure from the Export Credit Guarantee Department to Scotland. As the department covers the whole of the UK, an element of this expenditure has been assigned in Scotland in proportion to Scotland's share of UK Manufacturing GVA.

Similarly, a number of learned societies, for example the Royal Society and the Royal Academy of Engineering, are attributed only to London despite the benefits of their activities benefitting all in the UK and overseas. Such organisations have been re-apportioned with Scotland receiving a population share of expenditure. Similarly, research facilities located in England but available for use by all UK-wide academic and commercial researchers have been re-apportioned to Scotland on a population basis.

Finally, in PESACRA 2010, 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 residence of the recipient of the pension. To correct for 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.

Table B.5: Re-apportionment of Expenditure in PESA 2010: Scotland 2004-05 to 2008-09

	(£ million)
	2004-05	2005-06	2006-07	2007-08	2008-09
Nuclear Decommissioning and related expenditure	-135	-399	-104	-122	-62
Export Credit Guarantee Department	3	3	3	2	2
Learned societies	4	4	5	6	6
Research facilities	7	6	4	0	0
Public Pensions	7	9	8	5	1
Other	9	12	14	11	14
Total	-106	-364	-70	-97	-38

Revisions to Expenditure Estimates from GERS 2007-08

Tables B.6 to B.9 set out the changes in estimates of public expenditure in Scotland and the UK between this report and GERS 2007-08. These revisions reflect changes in the underlying PESACRA data and other revisions to the GERS methodology. Revisions to public expenditure that can be traced to changes in the PESACRA database are specified separately.

Revisions to total expenditure

Table B.6 displays the difference between the estimates of total expenditure in GERS 2007-08 and those contained in Chapter 6 of this publication.

Total public sector expenditure for Scotland in 2007-08 has been revised down by £131 million (0.2 per cent of total expenditure). For the UK as a whole total expenditure has been revised up by £441 million in 2007-08 (0.1 per cent of total expenditure). Around 33 per cent of these changes reflect revisions made in PESA 2010 which have a corresponding impact on the estimates for Scotland in this edition of GERS.

Table B.6: Revisions to Estimates of Total Expenditure: Scotland 2004-05 to 2007-08

	(£ million)
	2004-05	2005-06	2006-07	2007-08
Scotland
GERS 2007-08	44,625	47,746	50,267	53,336
GERS 2008-09	44,518	47,677	50,093	53,205
Revision	-107	-70	-174	-131
Of which revisions made in PESA 2010	176	200	25	-43
UK
GERS 2007-08	471,000	501,166	523,003	555,211
GERS 2008-09	471,136	501,180	522,904	555,652
Revision	136	15	-99	441
Of which revisions made in PESA 2010	165	15	-99	441
Scotland/ UK Ratio
GERS 2007-08	9.5%	9.5%	9.6%	9.6%
GERS 2008-09	9.4%	9.5%	9.6%	9.6%
Revision	0.0%	0.0%	0.0%	0.0%

All other revisions are net changes between GERS 2007-08 and GERS 2008-09.

The large revision in the accounting adjustment is due to the revised estimate of local government depreciation. The figures now used are consistent with those in the ONS Regional Accounts as the previous source has discontinued. The revision has also been applied to the gross operating surplus estimates, and so will have no impact on the current budget balance.

Revisions to identifiable expenditure

Table B.7 summarises the effects of methodological changes and revisions to the underlying PESACRA data on the estimates of Scottish identifiable expenditure between 2004-05 and 2007-08. In 2007-08, the estimate of identifiable expenditure in Scotland has been revised down by £77 million. This revision equates to 0.2 per cent of identifiable expenditure in 2007-08.

Revisions made in PESA 2010 reflect changes made by UK Government departments in allocating spending to UK countries and regions. The reduction of £104 million is the difference between the estimate of total identifiable expenditure on services for Scotland reported in Table 9.1 in PESA 2010 and that reported in the same table in PESA 2010.

Table B.7: Revisions to Estimates of Identifiable Expenditure: Scotland 2004-05 to 2007-08

	(£ million)
	2004-05	2005-06	2006-07	2007-08
GERS 2007-08	38,541	41,298	43,438	45,974
GERS 2008-09	38,466	41,267	43,314	45,897
Revision	-75	-30	-124	-77
Of which revisions made in PESA 2010	-75	-101	-151	-104

All other revisions are net changes between GERS 2007-08 and GERS 2008-09.

Revisions to non-identifiable expenditure

Table B.8 summarises the effects of methodological changes and revisions to the underlying PESA data on the estimates of Scottish non-identifiable expenditure between 2004-05 and 2007-08, the final year for which such comparisons are possible.

In total, revisions to the underlying PESA data and changes in apportionment methodologies have resulted in an downward revision of £53 million to the estimate of total non-identifiable expenditure for Scotland in 2007-08. This revision equates to 0.7 per cent of total non-identifiable expenditure in that year.

Table B.8: Revisions to Estimates of Total Non-Identifiable Expenditure: Scotland 2004-05 to 2007-08

	(£ million)
	2004-05	2005-06	2006-07	2007-08
GERS 2007-08	6,084	6,448	6,829	7,362
GERS 2008-09	6,052	6,409	6,778	7,308
Revision	-32	-39	-50	-53
Of which revisions made in PESA 2010	251	301	176	61

All other revisions are net changes between GERS 2007-08 and GERS 2008-09.

Total Revision to expenditure (including accounting adjustment)

The overall change in Total Managed Expenditure ( TME) is highlighted below. The revision is equal to the sum of revisions to Total Expenditure on Services ( TES) and the accounting adjustment.

Table B.9: Revisions to Estimates of Total Managed Expenditure: Scotland 2004-05 to 2007-08

	(£ million)
	2004-05	2005-06	2006-07	2007-08
Total Expenditure on Services
GERS 2007-08	44,625	47,746	50,267	53,336
GERS 2008-09	44,518	47,677	50,093	53,205
Accounting Adjustment
GERS 2007-08	2,292	2,486	2,801	2,949
GERS 2008-09	2,100	2,238	2,408	2,456
Total Managed Expenditure
GERS 2007-08	46,917	50,232	53,068	56,285
GERS 2008-09	46,617	49,914	52,500	55,661
Revision to Total Managed Expenditure	-300	-318	-568	-624

Sensitivity Analysis

As the figures for public sector expenditure for Scotland contained in this report are estimates, it is important to obtain a sense of the impact on total expenditure of any possible variation in the estimates of individual expenditure components. Table B.10 illustrates the effect a 1 per cent variation in the estimate of each expenditure programme would have on overall expenditure for Scotland in 2008-09.

As the largest elements of public sector expenditure for Scotland, changes in the estimated level of social security, health and education will have the most significant impact on estimated total public sector expenditure for Scotland.

Table B.10: Effect of a 1% Change in Expenditure: Scotland 2008-09

	Impact of 1% variation
	(+/- £ million)	as % of total expenditure (+/- %)
General public services
Public and common services	16	~
International services	6	~
Public sector debt interest	27	~
Defence	31	0.1%
Public order and safety	25	~
Economic affairs
Enterprise and economic development
Financial Sector Interventions	7	~
Other enterprise and econ. dev.	10	~
Science and technology	4	~
Employment policies	3	~
Agriculture, forestry and fisheries	8	~
Transport	26	~
Environment protection	10	~
Housing and community amenities	18	~
Health	102	0.2%
Recreation, culture and religion	15	~
Education and training	76	0.1%
Social protection	186	0.3%
EU transactions	-5	~
Total	565	1.0%

- : less than £0.5 million

~ : less than 0.05%