Government Expenditure and Revenue Scotland 2010-2011

2 SCOTLAND'S PUBLIC SECTOR ACCOUNTS

Introduction

This chapter provides a summary of Scotland's public sector accounts for the years 2006-07 to 2010-11. It outlines the latest estimates of public sector revenue in Scotland and expenditure for Scotland, and includes:

• Headline estimates of 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. Further information on the institutional framework in which Scottish public sector expenditure and revenue is currently set is provided in Annex A.

Current and Capital Budgets

The following tables set out estimates of public sector revenue and expenditure for Scotland for the financial years 2006-07 to 2010-11. The figures for revenue and expenditure correspond to the estimates contained in Chapters 3, 4 and 5⁶.

Current revenue, as defined in the UK National Accounts, is the sum of all revenue raised in a particular year by the entire public sector⁷. 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 and a contribution to debt interest payments. 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.

Table 2.1: Current and Capital Budgets: Scotland 2006-07 to 2010-11

	(£ million)
	2006-07	2007-08	2008-09	2009-10	2010-11
Current Budget
Current revenue
Excluding North Sea revenue	42,272	45,167	43,391	41,916	45,177
Including North Sea revenue (per capita share)	43,026	45,796	44,479	42,462	45,914
Including North Sea revenue (geographical share)	49,776	52,282	55,131	47,846	53,128
Current expenditure	45,363	48,246	50,007	52,992	55,281
Current expenditure accounting adjustment	2,265	2,468	2,392	2,269	2,312
Capital consumption	1,595	1,675	1,739	1,837	1,924
Balance on current budget (surplus is positive, deficit is negative)
Excluding North Sea revenue	-6,951	-7,222	-10,747	-15,182	-14,340
Including North Sea revenue (per capita share)	-6,198	-6,593	-9,660	-14,637	-13,603
Including North Sea revenue (geographical share)	552	-107	993	-9,253	-6,389
Capital Budget
Capital expenditure	5,044	5,218	6,500	6,435	6,344
Capital expenditure accounting adjustment	138	38	-34	329	-130
Capital consumption	-1,595	-1,675	-1,739	-1,837	-1,924
Net Investment	3,587	3,581	4,727	4,927	4,290
Net Fiscal Balance (surplus is positive, deficit is negative)
Excluding North Sea revenue	-10,538	-10,803	-15,474	-20,109	-18,630
Including North Sea revenue (per capita share)	-9,784	-10,174	-14,387	-19,564	-17,893
Including North Sea revenue (geographical share)	-3,034	-3,688	-3,734	-14,179	-10,679

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 2006-07 to 2010-11

	(per cent of GDP)
	2006-07	2007-08	2008-09	2009-10	2010-11
Current Budget
Current revenue (Excluding North Sea revenue)	39.7%	39.5%	37.6%	37.2%	37.9%
Current expenditure	42.6%	42.2%	43.4%	47.1%	46.4%
Current expenditure accounting adjustment	2.1%	2.2%	2.1%	2.0%	1.9%
Capital consumption	1.5%	1.5%	1.5%	1.6%	1.6%
Balance on current budget (surplus is positive, deficit is negative)
Excluding North Sea revenue	-6.5%	-6.3%	-9.3%	-13.5%	-12.0%
Capital Budget
Capital expenditure	4.7%	4.6%	5.6%	5.7%	5.3%
Capital expenditure accounting adjustment	0.1%	0.0%	0.0%	0.3%	-0.1%
Capital consumption	-1.5%	-1.5%	-1.5%	-1.6%	-1.6%
Net Investment	3.4%	3.1%	4.1%	4.4%	3.6%
Net Fiscal Balance (surplus is positive, deficit is negative)
Excluding North Sea revenue	-9.9%	-9.5%	-13.4%	-17.9%	-15.6%

Table 2.2b: Current and Capital Budgets (Per Capita Share North Sea Revenue) % GDP: Scotland 2006-07 to 2010-11

	(per cent of GDP)
	2006-07	2007-08	2008-09	2009-10	2010-11
Current Budget
Current revenue (Including per capita share of North Sea revenue)	39.5%	39.2%	37.7%	37.1%	37.7%
Current expenditure	41.7%	41.3%	42.4%	46.3%	45.4%
Current expenditure accounting adjustment	2.1%	2.1%	2.0%	2.0%	1.9%
Capital consumption	1.5%	1.4%	1.5%	1.6%	1.6%
Balance on current budget (surplus is positive, deficit is negative)
Including North Sea revenue (per capita share)	-5.7%	-5.6%	-8.2%	-12.8%	-11.2%
Capital Budget
Capital expenditure	4.6%	4.5%	5.5%	5.6%	5.2%
Capital expenditure accounting adjustment	0.1%	0.0%	0.0%	0.3%	-0.1%
Capital consumption	-1.5%	-1.4%	-1.5%	-1.6%	-1.6%
Net Investment	3.3%	3.1%	4.0%	4.3%	3.5%
Net Fiscal Balance (surplus is positive, deficit is negative)
Including North Sea revenue (per capita share)	-9.0%	-8.7%	-12.2%	-17.1%	-14.7%

Table 2.2c: Current and Capital Budgets (Geographical Share North Sea Revenue) % GDP: Scotland 2006-07 to 2010-11

	(per cent of GDP)
	2006-07	2007-08	2008-09	2009-10	2010-11
Current Budget
Current revenue (Including geographical share of North Sea revenue)	39.1%	37.3%	38.9%	36.2%	36.7%
Current expenditure	35.7%	34.4%	35.3%	40.1%	38.2%
Current expenditure accounting adjustment	1.8%	1.8%	1.7%	1.7%	1.6%
Capital consumption	1.3%	1.2%	1.2%	1.4%	1.3%
Balance on current budget (surplus is positive, deficit is negative)
Including North Sea revenue (geographical share)	0.4%	-0.1%	0.7%	-7.0%	-4.4%
Capital Budget
Capital expenditure	4.0%	3.7%	4.6%	4.9%	4.4%
Capital expenditure accounting adjustment	0.1%	0.0%	0.0%	0.2%	-0.1%
Capital consumption	-1.3%	-1.2%	-1.2%	-1.4%	-1.3%
Net Investment	2.8%	2.6%	3.3%	3.7%	3.0%
Net Fiscal Balance (surplus is positive, deficit is negative)
Including North Sea revenue (geographical share)	-2.4%	-2.6%	-2.6%	-10.7%	-7.4%

Box 2.1 - UK Public Sector Accounts

The tables below provide estimates of the UK's Public Sector Accounts over the period 2006-07 to 2010-11, as set out in the ONS Public Finance Statistical Bulletin published in January 2012. They are prepared on a consistent basis with the estimates in Tables 2.1 and 2.2. The figures show that, in 2010-11, the estimated current budget balance for the UK public sector was a deficit of £97.8 billion (6.6 per cent 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 £136.1 billion (9.2 per cent of GDP). Current and Capital Budgets: UK 2006-07 to 2010-11 (£ million) 2006-07 2007-08 2008-09 2009-10 2010-11 Current Budget           Current revenue 519,184 548,899 532,730 513,338 551,663 Current expenditure 482,232 509,858 539,199 578,163 605,688 Current expenditure accounting adjustment 24,985 26,307 25,416 23,604 23,513 Capital consumption 16,988 17,683 18,649 19,345 20,310 Balance on current budget -5,021 -4,949 -50,534 -107,774 -97,848 Capital Budget           Capital expenditure 40,888 45,425 64,232 64,990 59,444 Capital expenditure accounting adjustment 1,940 1,347 376 2,979 -840 Capital consumption -16,988 -17,683 -18,649 -19,345 -20,310 Net Investment 25,840 29,089 45,959 48,624 38,294 Net Fiscal Balance -30,861 -34,038 -96,493 -156,398 -136,142 Current and Capital Budgets: UK 2006-07 to 2010-11 (% of GDP) 2006-07 2007-08 2008-09 2009-10 2010-11 Current Budget           Current revenue 38.6% 38.5% 37.6% 36.5% 37.3% Current expenditure 35.8% 35.8% 38.0% 41.1% 41.0% Current expenditure accounting adjustment 1.9% 1.8% 1.8% 1.7% 1.6% Capital consumption 1.3% 1.2% 1.3% 1.4% 1.4% Balance on current budget -0.4% -0.3% -3.6% -7.7% -6.6% Capital Budget           Capital expenditure 3.0% 3.2% 4.5% 4.6% 4.0% Capital expenditure accounting adjustment 0.1% 0.1% 0.0% 0.2% -0.1% Capital consumption -1.3% -1.2% -1.3% -1.4% -1.4% Net Investment 1.9% 2.0% 3.2% 3.5% 2.6% Net Fiscal Balance -2.3% -2.4% -6.8% -11.1% -9.2%

Current Budget Balance

In 2010-11, excluding North Sea revenue, current expenditure exceeded current revenue in Scotland leading to a current budget deficit of £14.3 billion, or 12.0 per cent 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 11.2 per cent of GDP), as illustrated in Table 2.2b.

In 2010-11, including an illustrative geographical share of North Sea revenue, total current expenditure for Scotland exceeded current revenue to yield a current budget deficit of £6.4 billion (or 4.4 per cent of GDP - as illustrated in Table 2.2c). In 2010-11, the equivalent UK current budget position, including 100 per cent of all North Sea revenue, was a deficit of £97.8 billion (or 6.6 per cent 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 2006-07 to 2010-11, the estimated cumulative current budget balance in Scotland when North Sea revenue is excluded was a deficit of £54.4 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 £14.2 billion. The cumulative current budget balance for the UK over the same period was a deficit of £266.1 billion.

Net Fiscal Balance

The net fiscal balance is equal to public sector current and capital revenue less public sector current and capital 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 2010-11, excluding North Sea revenue, total revenue was less than total expenditure yielding an estimated negative net fiscal balance of £18.6 billion (or 15.6 per cent of GDP). With a per capita share of North Sea revenue the estimated negative net fiscal balance for Scotland was £17.9 billion (or 14.7 per cent of GDP). Including an illustrative geographical share of North Sea revenue, total revenue was less than total expenditure for Scotland to yield a net fiscal deficit of £10.7 billion (or 7.4 per cent of GDP). In 2010-11, the equivalent UK position including 100 per cent of all North Sea revenue, referred to in the UK Public Sector Accounts as 'net borrowing', was a deficit of £136.1 billion (or 9.2 per cent 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 effects 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. The net fiscal balance improved in 2010-11 in both Scotland and the UK, although the deficits remained high relative to their pre-crisis levels.

The improvement in Scotland and the UK's fiscal positions in 2010-11 was driven by increased revenues (as shown in Table 2.4). Non-North Sea revenues in Scotland grew by 7.8 per cent between 2009-10 and 2010-11, primarily due to growth in income tax and VAT receipts. The growth in VAT receipts reflects the reversal in January 2010 of the temporary reduction in VAT, and the subsequent increase in the standard rate of VAT to 20 per cent in January 2011.

Scotland's deficit fell most under the scenario where it is assigned a geographical share of North Sea revenues. This is because overall North Sea receipts grew by 35.3 per cent in 2010-11 from the previous year, driven by a 24.8 per cent increase in average oil prices between 2009-10 and 2010-11.

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 North Sea activities. When a proportion of North Sea revenue is included in the Scottish public sector revenue estimates, the same share is included in Scottish GDP. For example, if 100 per cent of North Sea revenue were to be included in the Scottish estimate, then 100 per cent of North Sea GDP would be included in Scotland's corresponding GDP figure. Scotland's GDP figures, produced as part of the Scottish National Accounts Project (SNAP), under the three sets of estimates presented above are reflected in the following table. Scottish GDP Including and Excluding North Sea GDP: 2006-07 to 2010-11 (£ million) 2006-07 2007-08 2008-09 2009-10 2010-11 Scottish GDP           Excluding North Sea GDP 106,592 114,204 115,265 112,542 119,149 Including per capita share of North Sea GDP 108,826 116,830 117,984 114,559 121,732 Including geographical share of North Sea GDP 127,141 140,239 141,824 132,244 144,820 Source: Scottish National Accounts Project (SNAP), http://www.scotland.gov.uk/snap Comparable estimates of UK GDP, including 100 per cent of North Sea GDP are provided in the table below. UK GDP: 2006-07 to 2010-11 (£ million) 2006-07 2007-08 2008-09 2009-10 2010-11 UK GDP 1,346,647 1,426,101 1,417,690 1,406,771 1,477,883 Source: ONS

Expenditure

This section presents summary estimates of public sector expenditure for Scotland (excluding accounting adjustments) for the years 2006-07 to 2010-11. Table 2.3 provides estimates for the six largest functions of public sector expenditure. For a discussion and more detailed breakdown of expenditure, refer to Chapter 5 and Annex C.

Table 2.3: Summary of Total Public Sector Expenditure: Scotland 2006-07 to 2010-11

	(£ million)
	2006-07	2007-08	2008-09	2009-10	2010-11
Social protection	16,264	17,291	18,613	20,203	21,047
Health	9,099	9,807	10,260	10,687	10,936
Education and training	7,150	7,372	7,581	7,751	8,050
General public services	4,350	4,572	4,865	4,883	5,973
Defence	2,721	2,838	3,094	3,169	3,277
Public order and safety	2,309	2,402	2,549	2,618	2,657
Other	8,515	9,183	9,545	10,115	9,686
Total	50,407	53,464	56,507	59,427	61,625

In 2010-11, total public sector expenditure for Scotland was estimated to be £61.6 billion, a £2.2 billion (3.6 per cent) increase on the previous year. The largest increase was in general public services, which rose by 22.3 per cent in nominal terms as a result of increased public sector debt interest payments.

Over the five year period since 2006-07, total public expenditure grew by 22.3 per cent in nominal terms. As well as rising public sector debt repayments, spending on social protection, which includes social transfers through the benefit system, grew by 29.4 per cent. However, growth in social protection slowed between 2009-10 and 2010-11, rising by 4.2 per cent, the lowest nominal growth over the five year period.

Box 2.3: Total Managed Expenditure as a Share of GDP

Total Managed Expenditure (TME) is the main aggregate of total public sector expenditure used in the UK National Accounts. It is equal to the sum of total current and capital expenditure and the respective accounting adjustments, as detailed in Table 2.1. In 2010-11 Total Managed Expenditure (TME) was £63.8 billion for Scotland, and £687.8 billion for the UK as a whole. Total Managed Expenditure for Scotland and the UK: 2006-07 to 2010-11 (£ million) 2006-07 2007-08 2008-09 2009-10 2010-11 Total Managed Expenditure for Scotland 52,810 55,969 58,866 62,025 63,807 Total Managed Expenditure for the UK 550,045 582,937 629,223 669,736 687,805 The tables below present the estimates of Scottish and UK TME as a share of GDP. In 2010-11, the ratio of TME for Scotland to GDP was 53.6 per cent excluding North Sea GDP and 52.5 per cent including a per capita share. This ratio falls to 44.1 per cent when an illustrative geographical share of North Sea GDP is included. In comparison, UK TME was equivalent to 46.5 per cent of GDP in 2010-11, including 100 per cent of North Sea GDP. Such statistics provide a useful illustration of the relative size of public spending between countries 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: 2006-07 to 2010-11 (per cent of GDP) 2006-07 2007-08 2008-09 2009-10 2010-11 Scottish TME as a Share of GDP:           Excluding North Sea GDP 49.5% 49.0% 51.1% 55.1% 53.6% Including per capita share of North Sea GDP 48.5% 47.9% 49.9% 54.1% 52.4% Including geographical share of North Sea GDP 41.5% 39.9% 41.5% 46.9% 44.1% UK TME as a share of GDP:           100% of North Sea GDP 40.8% 40.9% 44.4% 47.6% 46.5%

Current Revenue

Table 2.4 provides estimates of Scottish public sector current revenue by economic category for the years 2006-07 to 2010-11. A more detailed discussion and breakdown of revenue is provided in Chapters 3 and 4 and in Annex B.

Table 2.4: Summary of Current Revenue by Economic Category: Scotland 2006-07 to 2010-11

	(£ million)
	2006-07	2007-08	2008-09	2009-10	2010-11
Taxes on income and wealth	14,160	15,378	14,288	13,145	14,240
National insurance contributions	7,303	7,841	7,990	7,819	8,018
Taxes on production and imports	14,625	15,298	14,530	14,776	16,537
Other current taxes	2,467	2,597	2,644	2,705	2,712
Taxes on capital	227	269	178	146	159
Gross operating surplus	2,528	2,624	2,739	2,722	2,934
Rent and other current transfers	397	393	416	397	395
Interest and dividends from private sector and abroad	564	767	606	206	183
Total current non-North Sea revenue	42,272	45,167	43,391	41,916	45,177
North Sea revenue
Per capita share	754	629	1,087	545	736
Geographical share	7,503	7,115	11,740	5,930	7,951
Total current revenue (including North Sea revenue)
Per capita share	43,026	45,796	44,479	42,462	45,914
Geographical share	49,776	52,282	55,131	47,846	53,128

In 2010-11, total current revenue, excluding revenue from the North Sea was estimated to be approximately £45.2 billion. This represented a nominal increase of 7.8 per cent on the previous year, driven by an 8.3 per cent rise in receipts from taxes on income and wealth and an 11.9 per cent rise in receipts from taxes on production and imports. The growth in receipts during 2010-11 reversed the decline in non-North Sea revenue observed between 2007-08 and 2009-10.

As Table 2.4 highlights, Scotland's geographical share of North Sea revenue followed an upward trend between 2006-07 and 2008-09, increasing by 56.5 per cent. However, between 2008-09 and 2009-10, North Sea revenues fell by 49.5 per cent to £5.9 billion reflecting the significant drop in global oil and gas prices as the global recession sharply reduced demand. In 2010-11, North Sea revenue recovered, returning to £8.0 billion, in line with the average for the previous four years.

Box 2.4 - 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. The UK Budget and the Office for Budget Responsibility's (OBR) accompanying Economic and Fiscal Outlook8, publish estimates of the UK's public sector finances which include the permanent effects of the interventions, but excluded the temporary effects. GERS adopts the same approach. The expenditure and revenue estimates, and the estimates of Scotland's current budget balance and overall fiscal position are therefore directly comparable to the equivalent UK estimates published by the UK Government and OBR. In PESA 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)9. PESA 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) 2008-09 2009-10 2010-11 Current -88 -30 -154 Capital 788 380 0 Total 699 351 -154 A discussion paper providing further information on the treatment of the financial sector interventions in GERS is provided on the GERS website10. Supplementary analysis is also provided which includes an estimate of Scotland's public sector finances when both the permanent and temporary effects of the financial sector interventions are incorporated.