Government Expenditure and Revenue Scotland 2008-09

PREFACE

This report is the sixteenth in the series of official published estimates of expenditure and revenue balances of the public sector in Scotland.

The aims and objectives

The aim of GERS is to enhance public understanding of fiscal issues in Scotland. The primary objective is to estimate a set of public sector accounts for Scotland through detailed analysis of official UK and Scottish Government finance statistics. GERS estimates the contribution of revenue raised in Scotland toward the goods and services provided for the benefit of the people of Scotland. The report is designed to allow users to understand and analyse Scotland's fiscal position under different scenarios.

GERS captures the entire public sector in Scotland and includes activity by each of the constituent sub-sectors of the public sector: central government, local government and public corporations. In addition to providing an analysis of aggregate expenditure and revenue, the report contains a detailed breakdown according to individual expenditure and revenue components.

National Statistics in GERS

All expenditure and revenue data in GERS are classified as UK National Statistics. National Statistics are those figures which come within the scope of the principles of the National Statistics Code of Practice. The Code seeks to ensure that National Statistics will be valued for their relevance, integrity, quality and accessibility. More information about National Statistics is available on the Office for National Statistics ( ONS) web site. ¹

The approach

Unlike many other countries, the UK fiscal framework does not provide separate detailed intra-country or intra-regional fiscal accounts. GERS therefore provides estimates of public sector fiscal accounts for Scotland.

In the absence of formal intra- UK fiscal accounts, estimating a set of equivalent accounts for Scotland raises two key practical issues:

• Firstly, there is no formally agreed set of accounting concepts and definitions for the formulation of UK country or regional fiscal accounts.
• Secondly, a number of key elements of underlying data necessary for constructing public sector country or regional fiscal accounts, while available at the UK level, are not available at the UK country or regional level.

In light of this, GERS develops a robust framework for measuring public sector revenue in and expenditure for Scotland. Firstly, public sector balances of expenditure and revenue are estimated for Scotland on the basis of the national accounting standards adopted by the UK Government: the European System of Accounts 1995 ( ESA 95). Secondly, in the absence of unique data for Scotland, GERS estimates appropriate expenditure and revenue using the best available information and best considered apportionment methodologies. However, there are alternative approaches and data sources that could be used in the analysis. As an acknowledgement of this, the report highlights where there are different options and the sensitivity of the results presented. Furthermore, it should be borne in mind that these methodologies are subjective and therefore the figures should be viewed accordingly.

What questions does GERS address?

GERS fundamentally addresses three questions that can be captured from a set of public sector accounts for a given year:

1. What did the country pay for the full range of public services that were consumed?

2. What tax revenues were raised?

3. To what extent did these revenues raised cover the payments made for these public services?

The methodology

The headline estimates of Scottish public sector expenditure and revenue in GERS embrace two key principles:

1. Public sector expenditure is estimated on the basis of spending incurred for the benefit of residents and enterprises in Scotland;

2. Public sector revenue is estimated for taxes where a financial burden is imposed on residents and enterprises in Scotland.

Both issues are discussed in detail below.

Expenditure

Public sector expenditure is estimated on the basis of spending incurred for the benefit of residents and enterprises in Scotland.

The estimation of regional public sector expenditure is based on an assessment according to the 'who benefits' principle. That is, a particular public sector expenditure is apportioned to a given region if the benefit of the service or transfer derived from the expenditure is thought to accrue to residents and enterprises of that region. Assessing the regional dimension of the 'who benefits' principle is a difficult and complex task. This is especially the case in countries with closely integrated markets, significant inter-regional spillovers and mobile factors of production.

In attempting to determine the regional dimension of public sector expenditure, it is possible to classify each element of expenditure using two approaches:

• Expenditure for a region: where spending is allocated to a given region if the benefit of the service or transfer derived from the expenditure is thought to accrue to residents and enterprises of that region;
• Expenditure in a region: where spending is allocated to the region in which the expenditure actually took place.

An example of the difference between the in and for approach can help clarify the distinction. Consider the case of government funding for a national museum. Here the in approach would associate all government spending on the museum with the region in which the museum is located. However, the for approach would consider the beneficiaries of the service provided; that is, it would consider where the visitors and other users of the museum were located, measuring the spending as spread across the regions where the users live.

For most elements of expenditure, estimates of 'who benefits' based upon the in and for approaches will yield similar results. For example, the vast majority of health expenditure by NHS Scotland occurs in Scotland and is for patients resident in Scotland. Therefore, the in and for approaches should yield virtually identical assessments of 'who benefits'. However, for expenditure where the final impact is more widespread, such as defence, or higher and further education, an assessment of 'who benefits' depends critically upon the nature of the benefit being assessed.

The objective of GERS is to estimate a set of public sector accounts for Scotland. On the expenditure side, it therefore identifies the expenditure in a given year that was incurred for the full range of public services that were consumed: that is, those services provided for the people of Scotland.

The for approach considers the location of the recipients of services or transfers that government expenditure finances, irrespective of where the expenditure takes place. For example, with respect to defence expenditure, as the service provided is a national 'public good', the for methodology operates on the premise that the entire population benefits from the provision of a national defence service. Accordingly, under the for methodology, national defence expenditure is apportioned across the UK on a per capita basis.

An assessment of the more narrow economic benefits of public sector expenditure would concentrate on the production of the good or service and where the expenditure actually took place. The focus of this approach would be on employment levels, procurement costs and local economic multiplier effects.

However, the aim of GERS is to provide an estimate of the full range of public services consumed in a given year for the benefit of Scotland. A study of the economic impact of government expenditure is a separate exercise. Therefore GERS uses, wherever possible, the for methodology.

Appendix B provides a detailed discussion of the methodologies and datasets used to undertake this task.

Financial Sector Interventions

In 2008 and 2009, the global financial system experienced a significant shock. What began as a localised crisis in the US sub-prime mortgage market developed into a full scale international credit crunch and recession. Across the world, financial institutions came under significant pressure following the collapse of the investment bank Lehman Brothers and, in order to prevent a systemic collapse, governments intervened. This action took a number of forms. For example, deposit insurance schemes were extended in at least 40 countries to mitigate the risk of bank runs and mechanisms were established to buy 'toxic' assets, and to insure against excessive losses. In addition, many governments provided direct financial support in the form of capital injections in a number of institutions. In the USA, the insurance company AIG and bank Citigroup received capital funding, as did UBS and Credit Suisse in Switzerland, ING in the Netherlands and Fortis received joint support from the Benelux countries. In the UK, capital injections were made in the Royal Bank of Scotland, Lloyds TSB and HBOS.

Accounting for the full spectrum of financial sector interventions in the public finances is not straightforward. Indeed, ONS have yet to fully incorporate the various financial accounts of RBS and Lloyds Banking Group into the UK National Accounts ².

GERS follows the current practice of ONS and HM Treasury in incorporating the effects of the financial sector interventions into the public accounts. It should be noted that as this remains work in progress at the UK level, the GERS estimates should be viewed accordingly.

In this edition of GERS, estimates are provided of Scotland's public sector accounts both including and not including a share of the expenditure associated with the UK Government's financial sector interventions. Estimates not including the effects of the financial interventions are presented to help highlight underlying trends in the GERS data from previous years to the latest year, 2008-09. The financial crisis has clearly been a unique event, particularly over the publication period of GERS, and therefore separating out this particular element helps provide continuity with previous GERS publications. It should be noted that the GERS estimates of Scotland's fiscal accounts which include the effects of the UK Government's financial sector interventions are directly comparable with the data presented in Tables C3 and C4 in the March 2010 UK Budget.

A discussion of the current methodologies undertaken in this edition of GERS, and the various alternative approaches, is provided in Chapter 3.

Revenue

Public sector revenue is estimated for taxes where a financial burden is imposed on residents and enterprises in Scotland

Corresponding to the 'who benefits' principle is the 'who pays' principle, which concerns the identification of the location of the source of public sector revenue. In GERS, the 'who pays' principle is based upon the residential location of where the revenue is raised.

For a variety of practical and theoretical reasons, estimating revenue for individual countries and regions of the UK is generally more difficult than estimating expenditure. Revenue is generally collected on a UK basis, whereas the benefits of expenditure are generally targeted on a regional basis. Under current UK Budgetary accounting procedures, separately identified revenue figures for each country and region of the UK are not available.

As a result, Scottish public sector revenue is estimated by considering each revenue stream separately. Appendix A provides a detailed discussion of the methodologies and datasets used.

The data sources

The primary data source used to estimate Scottish public sector expenditure is the Public Expenditure Statistical Analyses ( PESA) data published by HM Treasury. Within PESA, tables relating to a Country and Regional Analysis ( CRA) are available, together with a database in which UK Government departments and devolved administrations allocate expenditure programmes to Scotland, Wales, Northern Ireland and English regions. Access to the CRA database can be obtained through the HM Treasury website ³.

The source of the revenue data is ONS Public Sector Finance Statistics, which provides disaggregated figures relating to UK public sector revenue. Access to the ONS Public Sector Finance Statistics database can be obtained through the ONS website. ⁴

Future Work

The development of GERS is an ongoing process and feedback from users of the publication is welcome. Please address any comments to