Government Expenditure and Revenue Scotland 2009-2010

ANNEX A REVENUE METHODOLOGY

This appendix outlines the methodologies used to estimate public sector revenue in Scotland. As the issue of North Sea revenue has been discussed extensively in Chapter 5, this appendix focuses on all other elements of public sector revenue.

In contrast to public sector expenditure, there is no one generic approach to estimating public sector revenue in Scotland; instead each revenue stream is estimated using a separate methodology. This appendix discusses these techniques and highlights any significant changes which have been introduced in this edition of GERS. It should be noted that, as the underlying datasets used in GERS have been subject to revision and update, estimates may differ from previous editions of GERS even if the methodology has remained unchanged.

Methodology

As highlighted in Chapter 4, the vast majority of public sector revenue raised in Scotland is collected at the UK level by HM Revenue and Customs.

In some cases, revenue figures can be obtained for Scotland directly. Examples include local government revenue and particular elements of public corporation revenue. Such revenues are the exception and separate identification of most other revenue streams for Scotland is not possible. GERS therefore uses a number of different methodologies to apportion revenue to Scotland. In doing so, there are often theoretical and practical challenges in determining an appropriate share to allocate to Scotland. In certain cases, a variety of alternative methodologies could be applied each leading to different estimates.

Obtaining an estimate of public sector revenue in Scotland is a two-stage process.

In the first stage, the UK outturn figure for each element of revenue is obtained from ONS Public Sector Finance Statistics. In the second stage, Scotland's share of the UK figure is estimated according to a specific apportionment methodology. The methodology used differs for each element of revenue. The detailed Revenue Methodology paper on the GERS website contains a discussion of the apportionment methodology used for each revenue stream and highlights the sensitivity of the results to changes in the underlying assumptions ²⁹.

UK Revenue Figures

The basis for estimating public sector revenue for Scotland is National Statistics outturn figures for UK fiscal revenue taken from ONS Public Sector Finance Statistics. The detailed components, revenue by revenue, are taken from an ONS database ( PSAT2) which is produced on a quarterly basis. The fiscal balance calculations in GERS are constrained to the UK Public Sector Finances for April 2011. An accounting adjustment is applied to both the expenditure and revenue totals so that both sides of the fiscal balance calculations are presented on a consistent basis. The revenue accounting adjustment is very small and has been included in 'other taxes, royalties and adjustments'.

These data are presented on an accruals basis and separately identify revenue attributed to central government, local government and public corporations. The international standards for National Accounts and Government Finance Statistics use the accruals basis rather than a cash approach. This is because accruals accounting reflects a more accurate picture of when revenue is due and spending occurs than the more volatile alternative of cash, which, for example, records when bills are settled rather than when the expenditure occurs.

The assumptions underpinning the apportionment of each revenue source are outlined below.

Summary of Changes

Table A.1 provides a summary of the apportionment methodologies used for each element of revenue and highlights whether or not the methodology has changed since the previous edition of GERS.

In some instances ONS's Public Sector Finance estimates of UK revenue for some taxes have also been revised since the last edition of GERS, these changes will affect the estimates of Scottish tax revenue. In addition, there have been revisions to some of the data sources used to apportion tax revenues to Scotland. This means that there have been small changes in the share of some UK taxes apportioned to Scotland since GERS 2008-09.

More detailed information on the methodologies used and the changes introduced can be found in the Revenue Methodology paper on the GERS website.

Table A.1: Apportionment Methodologies and Sources for Public Sector Revenue in Scotland (Excluding North Sea Revenue)

Table A.2 summarises the revisions in this edition of GERS by comparing the estimates contained in this report with last year's publication. Overall, estimated public sector revenue in Scotland for the years 2005-06 to 2007-08 has been revised upwards by between 0.1 per cent and 0.2 per cent. The estimate of public sector revenue for Scotland in 2008-09 has been revised down by 0.8 per cent.

Table A.2: Revision to Estimates of Total Non-North Sea Public Sector Revenue: 2005-06 to 2008-09

Table A.3 illustrates the revisions to individual public sector revenue streams in Scotland and the UK for 2008-09, the latest year directly comparable between GERS 2008-09 and GERS 2009-10. The methodology changes summarised above, combined with revisions to the UK revenue estimates and to the underlying data used to apportion some taxes to Scotland, have resulted in minor revisions to some revenue estimates. The net effect of all of the changes has been to reduce the estimate of public sector revenue in Scotland by £335 million and to reduce the estimate of UK tax revenue by £346 million.

Table A.3: Revision to Estimates of Public Sector Revenue: Scotland and UK 2008-09

Revisions to previously published estimates are relatively small and largely explained by revisions to the UK constraining totals for each revenue stream. The incorporation of revised estimates of Scottish sectoral Gross Value Added from Regional Accounts explains the revisions to corporation tax and 'other taxes, royalties and adjustments'. Revised estimates of Household Consumption in Scotland from the Living Costs and Food Survey have led to revisions to VAT and duties levied on the consumption of fuel, tobacco and alcohol.

Sensitivity Analysis

As the figures for public sector revenue in Scotland contained in this report are estimates, it is important to obtain a sense of the impact on total revenue of any possible variation in the estimates of individual revenue streams. Table A.4 illustrates the effect a 1 per cent variation in the estimate of each revenue stream would have on total non-North Sea revenue in Scotland for 2009-10.

The largest source of non-North Sea revenue in Scotland is income tax. A 1 per cent variation in the estimate of income tax would revise income tax in Scotland by £104 million, which is equivalent to 0.2 per cent of total non-North Sea revenue.

Table A.4: Effect of a 1% Change in Revenue (Excluding North Sea Revenue): Scotland 2009-10