Scottish Government

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; 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 ¹⁸.

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 which is consistent with both the totals published in the Public Sector Finances and the figures published in table PSAT2 of Public Sector Accounts. PSAT2 is HM Treasury's preferred

presentation of revenues, and is shown in Tables 21 and 22 of the Supplementary Material to UK Budget 2008 ¹⁹, and underlies the main tables in the UK Budget.

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 revenue figures used in GERS are taken from published outturns as at February 2008, consistent with those used for UK Budget 2008 ²⁰.

It should be noted that the UK figures for individual revenues presented in GERS 2006-07 may differ from other publications as, on certain occasions, figures are still presented on a cash rather than an accruals basis. For example, Table C6 of Budget 2008 shows types of tax on a cash basis. However, to be consistent with the presentation throughout GERS and international standards, the equivalent table to C6 is presented on an accruals basis.

The treatment of tax credits and EU revenue in GERS follows international standards for National Accounts and is different from Table C6 of UK Budget 2008. Revenue raised for the EU (on VAT, import levies and sugar levy) is not shown as public sector revenue, instead it is considered to be paid directly to the EU, even though the UK Government may act as an intermediary in the process between the taxpayer and the EU²¹.

The use of ONS Public Sector Finance Statistics is a new development in GERS and represents a significant improvement in data quality over the source used in previous editions. There are three main reasons for this: (i) moving from a cash approach to accruals; (ii) the use of a source that provides more up to date data; and (iii) the apportionment methodology is better targeted to individual types of tax and there is no longer any need for assumptions in apportioning 'accruals adjustments'. Although the UK revenue figures previously used in GERS were obtained from ONS, they were based on a National Accounts version of the data, which were an earlier and outdated vintage of data than that used in the Public Sector Finances. 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. Some of these revisions have been relatively minor. 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 previous publications. Overall, estimated public sector revenue in Scotland has been revised upwards by between 2.3 per cent and 3.4 per cent over the years 2002-03 and 2004-05.

Table A.2: Revision to Estimates of Total Non-North Sea Public Sector Revenue: 2002-03 to 2004-05

Table A.3 illustrates the revisions to individual public sector revenue streams in Scotland and the UK for 2004-05, the last year for which such a comparison is possible. The changes introduced have resulted in significant revisions to fuel duty, VAT, stamp duty and other taxes and royalties. The net effect of all of the changes has been to raise the estimate of public sector revenue in Scotland and the UK by £824 million and £432 million, respectively.

Table A.3: Revision to Estimates of Public Sector Revenue: Scotland and UK 2004-05

Footnotes:
1. This was not a separate category in the previous edition of GERS.
2. Different taxes were covered by this category in the previous edition of GERS.
3. These two revenues were not separately identified in the previous edition of GERS.
4. This tax is not separately identified in this latest report. In the previous edition of GERS it was separately identified, although the tax was then netted off in 'other revenue', given that the tax raised does not stay in UK.
5. This was a category used in GERS 04-05, but is not in this latest report. It mainly included the netting off of EU taxes and accruals adjustments.

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 2006-07.

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 £103 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 2006-07

- : less than £0.5 million
~ : less than 0.05%