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Government Expenditure and Revenue in Scotland 2001-2002
Appendix C: The Format and National Accounting Basis for Public Finances
Format
The current format and framework for the UK public finances was introduced by the Chancellor of the Exchequer in the first Economic and Fiscal Strategy Report, published in June 1998. The Financial Statement and Budget Report, March 1999 and those following have, used the new UK format and were on an ESA95 basis, the European System of Accounts.
GERS has moved in line with developments at the UK level, but with a slight lag as PESA data moved onto an ESA95 footing in time for GERS 1999-00. Annex E in both GERS 1998-99 and GERS 1999-00 provides a full explanation of both the presentational and ESA95-based methodological changes at the UK and Scotland levels. The most complex methodological change is in relation to the treatment of EU transactions. This Annex provides an explanation of that treatment.
The Treatment of EU Transactions
ESA95 changed the national accounting practice of recording EU transactions in two ways.
First, contributions to the EC budget from VAT, agricultural and sugar levies, and customs duties are seen as taxes paid directly by UK households and businesses to the EC (previously they were treated as taxes collected by the UK Government and went towards financing UK contributions). The effect of the accounting change under ESA95 is to reduce UK Government receipts and expenditure equally, by about 5.6 billion in 2001-02. However, the actual transactions between the UK and the EC are unaltered
Second, the treatment in the national accounts of receipts from the EC has also changed. Most of these are treated as direct transfers from the EC to sectors other than general government (previously these grants, when paid to the private sector recipient, scored as expenditure, but the actual government receipts were netted off current expenditure, i.e. net contributions, and hence total public expenditure was unaffected). This change has no effect on UK net borrowing.
Although changes to the national accounts under ESA95 have effects on the way in which the UK's gross contributions to, and receipts from, the EC Budget are reported in the official national accounts statistics - in effect, seeing the UK Government as acting as an agent for the EU in these regards - there are no changes in actual transaction processes. The UK will continue to contribute to, and receive receipts from, the EC Budget and the Treasury report - European Community Finances - will continue to present the UK's net contribution as before.
At the Scottish level, the other expenditure and all other revenues categories include negative entries to reflect a share of the UK's contribution to the EU in respect of VAT, customs duties, and agricultural and sugar levies. This is as per the first change highlighted above, and the Scottish share is allocated by GDP share, amounting to around 466 million.
Regarding the second ESA change, the ESA95 practice adopted in the report essentially attempts to reflect Scotland's share of the UK's gross contribution (after abatement). In effect, Scotland's actual receipts are no longer incorporated directly as they are viewed under ESA95 as a transfer from the EU. The change does not apply to the control aggregate measures of Departmental Expenditure Limits and Annually Managed Expenditure, which continue to record expenditure financed by receipts from the EU.
Scottish expenditure amounts need to be adjusted. This is because the analysis in Section 3 includes expenditure financed by receipts from the EC, whereas an ESA treatment would suggest that Scottish expenditure should reflect EU transactions insofar as Scotland contributes to the UK's gross contribution after the abatement.
More specifically, an adjustment to the Section 3 expenditure data has been made through taking the difference in (a) the amounts reflecting Scotland's share of net contributions, plus its receipts from ERDF, CAP, ESF, EAGGF Guidance and estimated payments associated with BSE, and (b) the amount obtained by simply taking a pro-rata share of UK gross contributions after the abatement.
That is, for 2001-02 we calculate:
Estimate of Scotland's share of UK Gross Contribution (after abatement): 389 million,
Less Public Sector EU receipts in Scotland: 545 million,
Less Pro-rata share of UK Net Contribution (after abatement): 124 million,
Equals EU Adjustment to Expenditure figures: -281 million.
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