Scottish Government

Preface

This report is the fourteenth 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 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 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 spill-overs and mobile factors of production.

In attempting to determine the regional dimension of public sector expenditure, it would be 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 located 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 concept of 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.

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 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 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 ².

The source of the revenue data is Office for National Statistics ( 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. ³

THE REVIEW

Introduction and starting point of the review

Since January 2007, a team of Scottish Government officials, comprising both statisticians and economists, have conducted a full and detailed review of the GERS report. As part of this process, the review team met with a number of key expert users of GERS to discuss various aspects of the report. These meetings provided an important contribution to the review process.

The review was initiated following the Scottish Parliament Finance Committee session of 16 January 2007. While the methodology used in GERS has always been subject to revision due to the considerable amount of estimation required, this is the first fundamental review of the publication since it achieved National Statistics status in 2005. On at least one occasion every five years, National Statistics publications are subject to a full review. All aspects of the GERS report, including quality of data sources, key assumptions and methodologies, format, presentation and timing of publication, have been scrutinised. Further details of these are outlined below.

Public sector revenue

Following consultation with colleagues in ONS, the data source used for UK public sector revenue has been changed from the National Accounts, which have a considerable lag in being updated, to the more up to date ONS Public Sector Finance Statistics dataset. In a further change, and to be consistent with other UK Government public finance publications and international standards for Government Finance Statistics and National Accounts, public sector revenue is now presented on an accruals basis rather than on a cash basis.

The methodologies used to estimate each individual element of public sector revenue in Scotland have been reviewed. This involved detailed scrutiny of over 45 elements of public sector revenue. New estimation techniques have been adopted in a number of areas and this has led to a significant improvement in the accuracy of the estimates. For instance, fundamental changes have been made to the way in which Scottish estimates of fuel duties and stamp duties are calculated. Details of changes to the methodologies and their impact on the estimates contained in previous editions of GERS are outlined in Appendix A. The detailed web appendix available on the Scottish Government GERS webpage provides a full discussion of each element of revenue ⁴.

The methods for estimating revenue generated by public corporations and local government were also reviewed. Whereas in earlier reports, most of this revenue was estimated by apportioning a share of the UK total (based on population or GVA), actual data for Scotland have now been obtained wherever possible. As a consequence, there has been a fundamental change to the way in which gross operating surpluses of public corporations in Scotland are calculated. Where direct data are still unavailable, the apportionment methods have been reviewed and where necessary, more appropriate methods have been applied.

North Sea revenue

As part of the review process, further consideration was given to the appropriate contribution of North Sea revenue to the aggregate Scottish revenue estimated in GERS. In consequence, three sets of estimates of total public sector revenue raised in Scotland are provided: (i) an estimate excluding North Sea revenue, (ii) an estimate based upon a per capita share of North Sea revenue and (iii) an estimate based upon an illustrative geographical share of North Sea revenue.

Public sector expenditure

For public sector expenditure, Scottish Government officials, in conjunction with UK central government departments, reviewed all individual spending programmes contained within the GERS report. The review process took place in a number of stages.

Firstly, following a detailed scrutiny of over 2,300 programme object groups in the PESACRA 2007 database, the review team liaised with UK Government departments to seek clarification on a number of individual expenditure entries in the database relating to spend for Scotland. In light of this, and where possible, any anomalies were amended in time for the latest release of PESACRA in April 2008. A number of significant changes took place including re-classification of expenditure on prisons in England and Wales, re-apportionment of Scottish Enterprise and Highland and Islands Enterprise expenditure, and a review of the regional apportionment of Department for Work and Pensions Annually Managed Expenditure ( AME). Improvement has also been made in recent years by UK Government departments themselves to apportion expenditure more accurately to countries and regions.

The review team then scrutinised the published April 2008 PESACRA data to identify any remaining issues. From over 1,400 programme object groups in PESACRA 2008, a small number were identified and, in these cases, GERS uses different data to those in the underlying PESACRA database. All such amendments are set out in Chapter 6 and Appendix B. Although every effort has been made when compiling this report to verify the credibility and accuracy of the data contained in PESA, it is inevitable that minor anomalies will remain. Work to improve the quality of PESA is an ongoing objective of HM Treasury and UK Government departments and Scottish Government officials will continue to liaise with UK Government colleagues to improve further the quality of the PESA data.

In the next stage of the review, all apportionment methodologies for non-identifiable expenditure were reviewed to ensure that the approach taken was best practice. Finally, the methodology to estimate Scotland's share of the UK accounting adjustments was reviewed and a significantly improved methodology was developed.

Details of changes to the methodologies and their impact on the estimates contained in previous editions of GERS are outlined in Appendix B which is also available on the Scottish Government GERS website ⁵.

Presentation

A further aspect of the review involved consideration of the presentation and timing of the publication. GERS will now be published annually each June - six months earlier than previously. This new publication date is scheduled to allow the most up to date data to feed directly into the report as early as possible.

The structure of the GERS report has changed considerably from previous editions. This new layout is detailed in Chapter 1.

The format of the report has been revised to make it more user-friendly and easier to read. For the vast majority of the detailed analysis, statistics are now presented over a five year time period. For expenditure, in line with most other international publications on public finance, a disaggregation according to current and capital expenditure is provided. There is a clear distinction between day to day current expenditure and capital expenditure (which yields benefits for many years to come). This is a fundamental improvement and allows greater scrutiny of public expenditure for Scotland than was previously possible.

This difference between current and capital expenditure is also reflected in GERS' assessment of the overall fiscal position in Scotland. When estimating a country's fiscal position, it is important to distinguish between the fiscal position on the current balance and the overall fiscal position once net investment has been taken into consideration. This revision to the presentation of an overall fiscal position of Scotland is consistent with UK and international public finance convention and is a further major improvement in the GERS report. The current budget position is defined here to be the balance between the revenue raised in Scotland for a given year and the level of current expenditure for Scotland in that year. It also includes a charge for a share of UK general government debt interest payments. Net investment in Scotland reflects accumulation of assets for the benefit of future years.

One key aspect of the review has concerned the terminology adopted in GERS. In previous GERS reports, the difference between estimated public sector expenditure and revenue was referred to as 'Scotland's net borrowing requirement'. The gap between the two figures, in reality, is not reflected in actual borrowing (or saving). This term has been replaced with the phrase 'net fiscal balance'. A full discussion on the fiscal balance figure for Scotland is provided in Chapter 3.

To enhance transparency, the GERS website on the Scottish Government internet site contains detailed methodology notes on the estimation techniques applied in the GERS report to estimate public sector revenue in Scotland and public sector expenditure for Scotland ⁶.

Future work

While this GERS report represents a significant step forward from previous editions, the development of GERS is an ongoing process.

Feedback from users of this publication is welcome.

Government Expenditure and Revenue Scotland ( GERS)

As part of the longer-term development of the GERS report, officials are in the process of developing estimates of a detailed set of integrated public sector accounts for each level of the public sector in Scotland. This will show a detailed trail of expenditure, revenue and transfers across the Scottish Government, the UK Government in Scotland, local government and public corporations. This work is currently in train and will be presented at a later date on the GERS website.