2 FISCAL BACKGROUND
This chapter outlines the institutional framework in which Scottish public sector expenditure and revenue is set.
PUBLIC SECTOR EXPENDITURE FOR SCOTLAND
Total Managed Expenditure in the United Kingdom
In the current UK public finance framework, the key expenditure aggregate is Total Managed Expenditure ( TME) 10. TME comprises public sector current expenditure, net investment, and capital consumption. TME covers the entire public sector, including central government, local government, and public corporations.
System of Public Expenditure and Data Sources
The primary source of public sector expenditure data across the four countries of the UK is the Public Expenditure Statistical Analyses ( PESA) database published by HM Treasury. Expenditure figures in PESA are net expenditure ( e.g. expenditure net of any sales).
Included in PESA is an analysis of Total Expenditure on Services ( TES) by country and region ( CRA). HM Treasury request that UK departments and devolved administrations apportion spending between countries and regions on the basis of 'who benefits', using the for methodology. Guidance on how this should be done is provided by HM Treasury and ONS. HM Treasury then collates departments' returns and combines these with the known spending of local authorities. The results for 2002-03 to 2006-07 are published in Chapters 9 and 10 of PESA.
The data in PESA and CRA are presented according to the Classification Of the Functions Of Government ( COFOG), a United Nations based code for functional analysis of government expenditure 11.
It is important to note that expenditure allocated to Scotland in PESA includes expenditure by the Scottish Government, expenditure by Scottish local authorities, expenditure by public corporations for Scotland and expenditure by the UK Government on goods and services for the benefit of Scotland.
In this context, the term 'central government' comprises: parliaments; government departments and their executive agencies; government funds such as the national loans fund; the official foreign exchange reserves; non-departmental public bodies; NHS trusts and various other non-market public bodies controlled by the public sector. Central government does not include some non-profit institutions that receive significant government funding, but are not controlled by government. These are classified in the private or third sector: for example, universities, further education colleges, and housing associations.
Local government comprises all local government administrations in the UK. Scotland has 32 local authorities operating over the period of this edition of GERS.
Public corporations are publicly controlled entities that are deemed to operate in the market based on a test of their sales to operating costs. A body that fails this test, such as the BBC where the majority of its income is from the licence fee rather than sales, is deemed non-market and will hence be classified as either central or local government.
The Framework for the Management of Expenditure by the Scottish Government
Scottish Government spending programmes fall into two categories: those within the Scottish Departmental Expenditure Limit ( DEL) and those within Annually Managed Expenditure ( AME).
- Departmental Expenditure Limit ( DEL) expenditure is expenditure that is planned and controlled across the period of each spending review; and,
- Annually Managed Expenditure ( AME) is expenditure that cannot reasonably be subject to firm, multi-year limits in the same way as DEL.
DEL is significantly larger. DEL plus AME plus an 'accounting adjustment' sum to TME.
Programmes outside the Scottish Government's DEL are mainly those where expenditure cannot be planned far ahead and has to be adjusted annually; for example, expenditure on the capital costs relating to motorways and trunk roads.
For programmes within DEL, Scotland (like the other devolved administrations) receives a grant from the UK government. Expenditure limits are raised according to the population-related proportion of spending increases on comparable expenditure by Whitehall departments (this process is known as the "Barnett Formula"). For the years contained within this publication, such expenditure has, by and large, been determined by the UK Government as part of the UK Comprehensive Spending Review process.
The Framework for the Management of Expenditure for Scotland by the UK Government
UK Government expenditure for Scotland falls into the same two categories: DEL and AME. This expenditure is governed by the same rules and accounting procedures as those for the Scottish Government.
The single largest element of identifiable public sector expenditure for Scotland by a Whitehall Department is social security expenditure, which is administered by the Department for Work and Pensions ( DWP).
The Framework for the Management of Local Government Expenditure for Scotland
Scotland's local government 'net revenue expenditure' is supported through a combination of funding from central government, known as Aggregate External Finance ( AEF), and resources raised locally by local authorities themselves through council tax. AEF comprises three elements: the amount which Scottish Ministers have estimated will be payable to local authorities as specific revenue grants; the distributable amount of non-domestic rate income ( NDRI); and the revenue support grant ( RSG). The total amount of AEF is distributed to local authorities using an agreed needs-based methodology, known as the client group approach. Statistical data describing the 'clients' - i.e. those who 'benefit' from particular services - are used to re-distribute resources between local authorities in Scotland.
The Framework for the Management of Expenditure by Public Corporations for Scotland
Expenditure by public corporations for Scotland is set out with DEL and AME. Individual public corporations are responsible for their own expenditure. The largest public corporation for Scotland is Scottish Water. The expenditure incurred by public corporations in producing goods and services for sale is not included in public sector current expenditure. Instead, it is deducted from their sales and the net position is recorded in public sector revenue.
PUBLIC SECTOR REVENUE IN SCOTLAND
UK Fiscal Revenues
The vast majority of fiscal revenue raised by the public sector in Scotland is controlled by the UK Government with collection the responsibility of HM Revenue and Customs. Changes to UK taxation are typically announced in UK Budget or Pre-Budget Reports ( PBR). Taxes on income and wealth and on production are the two largest sources of tax revenue in the UK.
The primary source of UK revenue data is the ONS's Public Sector Finance statistics.
Devolved Fiscal Revenues
Under The Scotland Act, the Scottish Parliament has the power to vary the UK basic rate of income tax by up to 3 pence. To date, this power has not been used. For 2008-09, the anticipated change in revenue from the full use of this power is approximately £1.1 billion 12.
Local government 'own-source' revenues stem from council tax, non-domestic rates (also known as business rates) and non-tax revenues such as user charges, fees and fines. Council tax and non-tax revenues are controlled and administered by individual local authorities.
Since 1 April 1993, all non-domestic rates income ( NDRI) in Scotland has been placed in a national 'pool' and shared between local authorities pro rata to their population. Although the poundage rate is set nationally by the Scottish Government, local authorities are responsible for the local collection of NDRI. Any over-estimation of NDRI is compensated for by a reduction in the RSG and vice versa.
Government Borrowing
Under the current devolution settlement, the Scottish Government does not have the authority to raise extra resource by borrowing or sanctioning borrowing. Local authorities do have the power to borrow. The Scottish Government funds the debt servicing costs of some of this borrowing, known as "supported borrowing", via the revenue support grant whilst the unsupported borrowing element, arranged under the prudential regime, is financed through local authorities' own general resources.
The UK Government is able to borrow to fund public sector expenditure across the UK, including the Scottish Government block grant.