Government Expenditure & Revenue Scotland 2013-14

CHAPTER 1: SCOTLAND'S PUBLIC SECTOR ACCOUNTS

Net Fiscal Balance: Scotland & UK 1998-99 to 2013-14

Current Budget Balance: Scotland & UK 1998-99 to 2013‑14

Introduction

This chapter provides a summary of Scotland's public sector accounts for the years 2009-10 to 2013-14 under the current constitutional arrangements. A longer time series is available on the GERS website from 1998-99. It outlines the latest estimates of public sector revenue in Scotland and expenditure for Scotland, and includes:

• Headline estimates of total public sector revenue in Scotland and of expenditure for Scotland, the key aggregates for assessing the strength of public finances in Scotland; and
• 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, there are no UK country and regional fiscal accounts. The results presented in this section are therefore statistical estimates of public sector revenue raised in Scotland and of public sector expenditure for Scotland.

Current and Capital Budgets

The following tables set out estimates of public sector revenue and expenditure for Scotland for the financial years 2009-10 to 2013-14. The figures for revenue and expenditure correspond to the estimates contained in Chapters 3, 4 and 5.^[8]

Current revenue, as defined in the UK National Accounts, is the sum of all revenue raised in a particular year by the entire public sector.^[9] 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 central and local 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. Public sector capital expenditure is referred to as net investment.

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, excluding capital investment by the public sector. It is therefore used as an indicator of intergenerational fairness and 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 population 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 1.1 and 1.2.

Table 1.1: Current and Capital Budgets: Scotland 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Current Budget
Current revenue
Excluding North Sea revenue	43,316	45,523	47,279	48,321	49,958
Including North Sea revenue (population share)	43,819	46,227	48,196	48,838	50,354
Including North Sea revenue (geographical share)	48,998	52,981	56,947	53,555	53,954
Current expenditure	55,560	57,776	58,265	59,353	59,653
Capital consumption	3,789	3,777	3,746	3,818	4,142
Balance on current budget (surplus is positive, deficit is negative)
Excluding North Sea revenue	-16,033	-16,030	-14,732	-14,851	-13,837
Including North Sea revenue (population share)	-15,530	-15,325	-13,815	-14,334	-13,441
Including North Sea revenue (geographical share)	-10,351	-8,571	-5,064	-9,616	-9,840
Capital Budget
Capital expenditure	7,973	7,336	7,503	8,495	6,735
Capital consumption	-3,789	-3,777	-3,746	-3,818	-4,142
Net Investment	4,184	3,559	3,757	4,676	2,593
Net Fiscal Balance (surplus is positive, deficit is negative)
Excluding North Sea revenue	-20,217	-19,589	-18,489	-19,527	-16,430
Including North Sea revenue (population share)	-19,714	-18,885	-17,572	-19,010	-16,034
Including North Sea revenue (geographical share)	-14,535	-12,130	-8,821	-14,293	-12,434

Table 1.2 presents the estimates of Scotland's public sector accounts as a percentage of Gross Domestic Product (GDP).

Table 1.2: Current and Net Fiscal Balances % GDP: Scotland 2009-10 to 2013-14

	(per cent of GDP)
	2009-10	2010-11	2011-12	2012-13	2013-14
Excluding the North Sea
Balance on current budget	-13.3%	-13.1%	-11.5%	-11.5%	-10.3%
Net investment	3.5%	2.9%	2.9%	3.6%	1.9%
Net fiscal balance	-16.8%	-16.0%	-14.5%	-15.1%	-12.2%
Including a population share of the North Sea
Balance on current budget	-12.7%	-12.3%	-10.6%	-10.9%	-9.8%
Net investment	3.4%	2.8%	2.9%	3.6%	1.9%
Net fiscal balance	-16.1%	-15.1%	-13.5%	-14.5%	-11.7%
Including an geographical share of the North Sea
Balance on current budget	-7.4%	-5.9%	-3.4%	-6.5%	-6.4%
Net investment	3.0%	2.5%	2.5%	3.2%	1.7%
Net fiscal balance	-10.4%	-8.4%	-5.9%	-9.7%	-8.1%

Table 1.3 below provides estimates of the UK's Public Sector Accounts over the period 2009‑10 to 2013-14, as set out in the ONS Public Sector Finances Statistical Bulletin published in January 2015, expressed as a percentage of GDP. They are prepared on a consistent basis with the estimates in Tables 1.1 and 1.2. The figures show that, in 2013-14, the estimated current budget deficit for the UK public sector was 4.1% of GDP. For the same year, the estimated UK public sector net fiscal balance, or net borrowing, was a deficit of 5.6% of GDP.

Table 1.3 Current and Capital Budgets: UK 2009-10 to 2013-14 (% of GDP)

	2009-10	2010-11	2011-12	2012-13	2013-14
Current Budget
Current revenue	35.5%	36.3%	36.4%	36.2%	36.0%
Current expenditure	40.4%	40.2%	39.4%	39.1%	38.1%
Capital consumption	2.0%	2.0%	2.0%	2.1%	2.0%
Balance on current budget	-6.9%	-5.9%	-5.0%	-5.0%	-4.1%
Capital Budget
Capital expenditure	5.3%	4.6%	3.9%	4.2%	3.5%
Capital consumption	-2.0%	-2.0%	-2.0%	-2.1%	-2.0%
Net Investment	3.3%	2.6%	1.9%	2.1%	1.5%
Net Fiscal Balance	-10.2%	-8.5%	-6.9%	-7.2%	-5.6%

Fiscal Balance

Current Budget Balance

As Tables 1.1 and 1.2 highlight, any estimate of Scotland's current budget balance varies according to the allocation of North Sea revenue. Over the period 2009-10 to 2013-14, the estimated current budget balance in Scotland when North Sea revenue is excluded was an average deficit of 11.9% of GDP, or 11.3% when a population share of North Sea revenue is included. When an illustrative geographical share of North Sea revenue is assigned to Scotland, the estimated current budget balance over the same period was an average deficit of 5.9% of GDP. The average current budget balance for the UK over this period, including 100% of North Sea revenue, was a deficit of 5.4% of GDP.

Net Fiscal Balance

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 effect of the global financial crisis and subsequent recession, which resulted in a significant deterioration in the strength of the public finances across many countries.

Between 2012-13 and 2013-14, the net fiscal balance for Scotland, excluding the North Sea, improved from a deficit of 15.1% of GDP to a deficit of 12.2% of GDP. This primarily reflects expenditure related to the transfer of the Royal Mail Pension Plan into central government in 2012-13, which resulted in a one-off increase in spending of approximately £10 billion for the UK in this year. As this was a one-off spending item, there is a reduction in spending in 2013-14 and in turn a reduction in the net fiscal deficit.

Scotland's net fiscal deficit including an illustrative geographical share of North Sea revenue decreased from 9.7% of GDP in 2012-13 to 8.1% of GDP in 2013-14. The reduction in this deficit under this scenario is relatively smaller, compared to the scenario where North Sea oil is excluded. This reflects the fact that Scotland's illustrative geographical share of North Sea oil and gas revenues is estimated to have fallen from £5.2 billion in 2012-13 to £4.0 billion in 2013-14.

North Sea tax receipts are driven by a number of factors, including the oil price, the sterling dollar exchange rate, production, operating expenditure, capital investment, and the tax regime. The drivers of the decline in 2013-14 were rising operating costs and capital investment. Operating costs in the North Sea grew by approximately 11% between 2012-13 and 2013‑14, whilst capital investment increased by 12%, which in turn has reduced companies' tax liabilities.

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 adopts the same assumptions made in the corresponding budget calculations. As such, when Scotland's public sector accounts are presented excluding North Sea revenue, they are expressed as a percentage of Scotland's GDP excluding GDP arising from offshore North Sea activities.

Similarly, when a proportion of North Sea revenue is included in the Scottish public sector revenue estimates, a related share of offshore GDP is included in Scottish GDP. For example, if 100% of North Sea revenue were to be included in the Scottish estimate, then 100% of North Sea GDP would be included in Scotland's corresponding GDP figure.

As explained throughout this document the expenditure and revenue statistics are now reported on the basis of the European System of Accounts 2010 (ESA10). This updated system also leads to changes in other parts of the national accounts, including GDP, due to the inclusion of new activities within GDP and other conceptual changes. A key change is the capitalisation of research and development expenditure. To allow comparisons between Scotland and the UK, and to properly compare GDP, expenditure and revenue on the same basis, provisional estimates of GDP on an ESA10 basis were published in Scotland's Quarterly National Accounts Scotland in February.^[10]

GDP figures for Scotland and the UK are reflected in the Table 1.4.

Table 1.4 Scottish GDP Including and Excluding North Sea GDP: 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Scottish GDP
Excluding North Sea GDP	120,679	122,715	127,928	129,670	134,905
Including population share of North Sea GDP	122,676	125,014	130,259	131,516	136,752
Including geographical share of North Sea GDP	139,890	145,167	150,724	147,251	152,765
UK GDP	1,501,670	1,576,231	1,628,485	1,663,163	1,732,914

Source: Quarterly National Accounts Scotland, http://www.gov.scot/snap; ONS

Current Revenue

Table 1.5 provides estimates of Scottish public sector current revenue for the main taxes by value for the years 2009-10 to 2013-14. A more detailed discussion and breakdown of revenue is provided in Chapters 3 and 4 and in Annex A.

Table 1.5: Summary of Current Revenue by Economic Category: Scotland 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Income tax	10,300	10,611	10,780	10,856	11,410
Corporation tax (excluding North Sea revenue)	2,542	2,728	2,646	2,799	2,817
National Insurance contributions	7,911	7,968	8,266	8,501	8,730
Value added tax	7,326	8,366	9,386	9,569	10,060
Local authority revenue 1	3,716	3,764	3,847	3,875	3,869
All other revenue	11,520	12,085	12,355	12,721	13,073
Total current non-North Sea revenue	43,316	45,523	47,279	48,321	49,958
North Sea revenue
Population share	503	705	917	518	396
Geographical share	5,682	7,459	9,668	5,235	3,996
Total current revenue (including North Sea revenue)
Population share	43,819	46,227	48,196	48,838	50,354
Geographical share	48,998	52,981	56,947	53,555	53,954

1. Council tax and non-domestic rates

As Table 1.5 highlights, Scotland's illustrative geographical share of North Sea revenue increased in both 2010-11 and 2011-12. However, between 2011-12 and 2013-14, it fell by 58.7% to £4.0 billion, as discussed earlier in this chapter.

Public Sector Expenditure

This section presents summary estimates of total public sector expenditure for Scotland for the years 2009-10 to 2013-14. The estimates of total public sector expenditure provided in GERS are based on the National Accounts aggregate Total Managed Expenditure (TME), which is equal to the sum of total current and capital expenditure. This ensures that the estimates in this report are produced on the same basis as the estimates of total public expenditure for the UK in the National Accounts.

In 2013-14 total public sector expenditure for Scotland was £66.4 billion. As outlined in Table 1.6, Scotland accounted for 9.2% of total UK public spending in 2013-14.

Table 1.6: Total Managed Expenditure: Scotland and UK 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Total Managed Expenditure for Scotland	63,533	65,112	65,768	67,848	66,388
Total Managed Expenditure for the UK	686,295	706,520	706,190	720,836	721,489
Total Managed Expenditure for Scotland as share of UK (%)	9.3%	9.2%	9.3%	9.4%	9.2%

Table 1.7 provides estimates for the six largest functions of public sector expenditure. Over the five year period since 2009-10, total public sector expenditure grew by 4.5% in nominal terms. However, growth has slowed in more recent years, with public spending falling 2.2% in cash terms between 2012-13 and 2013-14. As discussed above, much of this fall is due to the one-off effect of the Royal Mail Pension Plan transfer, if this effect was excluded, spending would have fallen by 1.0% in 2013-14.

Social protection expenditure, which includes benefit expenditure, is the largest single category of expenditure. It grew relatively strongly between 2009-10 and 2012-13, due to the impact of the recession. However, in 2013-14, this trend ended, with growth of only 0.2%, reflecting improving labour market conditions and welfare reforms.

Table 1.7: Summary of Public Sector Expenditure: Scotland 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Social protection	20,005	20,617	21,100	22,285	22,323
Health	10,670	10,931	11,046	11,290	11,465
Education and training	7,727	7,652	7,489	7,674	7,599
General public services	4,500	5,661	5,814	5,310	5,526
Defence	3,164	3,292	3,234	3,028	3,025
Public order and safety	2,698	2,806	2,866	2,850	2,557
Other	14,769	14,153	14,219	15,411	13,893
Total Managed Expenditure	63,533	65,112	65,768	67,848	66,388

For a more detailed breakdown of expenditure, refer to Chapter 5 and Annex B.

Box 1.1: Figures on a General Government basis

The figures presented in GERS are consistent with the presentation in ONS's Public Sector Finances Statistical Bulletin, and cover the whole of the public sector. However, many institutions, such as the IMF or OECD, use figures on a general government basis when comparing across countries. The key difference between the public sector finances and general government finances is that the general government basis excludes revenue and spending associated with public corporations, which are market bodies controlled by government. In the UK, this includes the Bank of England and bodies such as Channel 4 and Scottish Water. In order to help improve comparability of the GERS figures, the table below estimates Scottish and UK revenue, expenditure, and net fiscal balance on a general government basis. The figures are also shown on a calendar year rather than financial year basis, consistent with the approach adopted by most international institutions. In most years, the Scottish and UK general government position is slightly worse than the position of the public sector as a whole. This is because UK public corporations, including the Bank of England, which are excluded from the measure, tend to run at a slight surplus.

General government revenue, expenditure, and balance: Scotland and UK
2009-10 to 2013-14

	(£ million)
	2009	2010	2011	2012	2013
Revenue
Excluding North Sea revenue	41,565	43,523	45,923	46,784	49,744
Including North Sea revenue (population share)	42,126	44,166	46,772	47,454	50,180
Including North Sea revenue (geographical share)	47,963	50,382	54,929	53,652	54,141
UK	517,957	553,432	583,937	591,848	628,214
Expenditure
Scotland	62,621	64,629	65,059	68,203	66,568
UK	678,136	703,568	706,449	729,242	726,450
Net fiscal balance
Excluding North Sea revenue	-21,056	-21,105	-19,136	-21,419	-16,824
Including North Sea revenue (population share)	-20,495	-20,463	-18,287	-20,749	-16,388
Including North Sea revenue (geographical share)	-14,658	-14,246	-10,130	-14,551	-12,427
UK	-160,179	-150,136	-122,512	-137,394	-98,236
	(% of GDP)
Excluding North Sea revenue	-17.4%	-17.3%	-15.1%	-16.6%	-12.6%
Including North Sea revenue (population share)	-16.7%	-16.4%	-14.2%	-15.8%	-12.1%
Including North Sea revenue (geographical share)	-10.4%	-9.9%	-6.8%	-9.8%	-8.2%
UK	-10.8%	-9.6%	-7.6%	-8.3%	-5.7%