« Previous | Contents | Next »
Listen
Government Expenditure and Revenue in Scotland 2001-2002
Section 2: Fiscal Background
Fiscal Rules
The UK Government's fiscal policy is guided by two rules, first laid out in the Financial Statement and Budget Report (FSBR), July 1997:
- the golden rule: over the economic cycle the Government will only borrow to invest and not to fund current expenditure; and
- the sustainable investment rule: public debt as a proportion of national income will be held over the economic cycle at a stable and prudent level (which is deemed to be not more than 40 per cent of national income).
The rules require that current taxpayers pay for current spending since it is the present generation that enjoys its benefits. In addition, a stable and prudent debt ratio will ensure that fiscal policy is run in a responsible way and does not threaten the stability of the economy.
The framework in which the UK Government formulates and implements fiscal policy is set out in The Code for Fiscal Stability, published in March 1998. The Code sets five key principles to fiscal management:
- transparency in the setting of objectives, implementation of fiscal policy, and in the public accounts;
- stability in the policy-making process and the way policy impacts on the economy;
- responsibility in managing public finances;
- fairness, including fairness between generations; and
- efficiency in the design, implementation, and management of fiscal policy.
A further important requirement of the Code is that governments report regularly on progress in meeting their fiscal objectives.
Total Managed Expenditure in the United Kingdom
The key spending aggregate in the UK is Total Managed Expenditure (TME). 2 TME covers the current and capital expenditure of the whole public sector, including local government, and public corporations. TME does not include financial transactions.
System of Public Expenditure and Data Sources
In the Economic and Fiscal Strategy Report 1998, the Government introduced a new regime for the long-term control of public expenditure. The new approach moves away from planning at an annual cycle to multi-year plans.
In order to provide more information on the division of public sector expenditure on services between the four countries of the UK, the Treasury carries out the Public Expenditure Statistical Analyses (PESA) exercise each year. 3 Departments are asked to allocate, where possible, expenditure to Scotland, Wales, Northern Ireland and England.
Since public spending is planned, in several areas, on a national rather than a territorial basis, the figures from PESA cover more expenditure items than those for which the devolved administrations alone are responsible.
The expenditure data in this report are based primarily on the latest Treasury exercise, which covers the outturn 4 years up to 2001-02.
The Treasury's data by country ( PESA Chapter 8) show expenditure on services. This is a definition of expenditure that excludes debt interest payments, net public service pensions and most of the accounting adjustments.
The Institutional Framework for the Management of Expenditure in Scotland in 2001-02
Within the expenditure-planning framework, the First Minister's spending programmes fall into two categories: those within the Scottish Departmental Expenditure Limit (DEL) and those within Annually Managed Expenditure (AME). The former is by far the bigger category.
The programmes outside Scotland's DEL are mainly those where expenditure cannot be planned far ahead and has to be adjusted annually, like the spending on Common Agricultural Policy.
For programmes within DEL, Scotland (like Wales and Northern Ireland) receives a block grant from the UK government. Expenditure limits are raised according to the population-related proportion of spending increases on existing provisions for comparable expenditure, agreed to by non-territorial or Whitehall Departments ("Barnett Formula"). This arrangement dates back to the late 1970s. Before then, changes to provision for Scotland were negotiated separately, and in detail, by the Secretary of State for Scotland with the Chief Secretary to the Treasury.
An important feature of this arrangement is that, once the size of the Scottish Block is established, the Scottish Cabinet is free to allocate these total resources according to its perception of the needs and priorities for Scotland. The Cabinet is not constrained to follow the pattern of spending in Whitehall Departments.
« Previous | Contents | Next »