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Section 3: Expenditure

PESA splits the data on regional expenditure into three categories: identifiable expenditure, non-identifiable expenditure and accounting adjustments. GERS uses the data provided on identifiable expenditure directly and apportions Scottish shares of non-identifiable expenditure and accounting adjustments to produce an estimate of total expenditure.

Identifiable Expenditure

Identifiable expenditure is defined as expenditure that can be identified as having been incurred for the benefit of the population of a particular country/region. This is the fundamental "who benefits" principle. Alternatively, expenditure could be allocated to the country where it is incurred. In the latter case, the location of the beneficiaries of the service is not explicitly taken into account. In practice, the allocation under the two approaches is similar for most kinds of spending.

By convention, all Scottish Executive spending is regarded as being for the benefit of Scotland. In practice some expenditure, classed as "identifiable", will inevitably be to the benefit of people residing outside of Scotland. For example, health facilities are not used solely by the residents of the region where they are located, and roads serve the needs of people beyond the area where they are built.

The data in this section are taken from Chapter 8 of the Treasury's Public Expenditure Statistical Analyses 2005, ( PESA 2005), which is compiled on a "who benefits" basis.

Identifiable Expenditure across the UK

Table 3.1 shows identifiable expenditure in the UK and its constituent countries. Scotland received 10.1 per cent of UK identifiable expenditure in 2003-04, which translates into the largest per head expenditure after Northern Ireland. Scotland's identifiable expenditure on services per head is about 19 per cent higher than in the UK on average.

Data on total identifiable expenditure for all UK countries over the period from 1999-2000 to 2003-04 can be found in Section 6.

Table 3.1 Identifiable expenditure on services by country, 2003-04

Source: Public Expenditure Statistical Analyses 2005, Tables 8.1, 8.2.

Identifiable Expenditure by Programme

Table 3.2 shows identifiable expenditure allocated across the main spending programmes in Scotland and the UK. "Social protection" is by far the biggest expenditure programme and, together with "Health", accounts for 58.9 per cent of total Scottish identifiable expenditure. The third largest spending programme is "Education and training". As is to be expected, a similar pattern applies at the UK level.

Table 3.2 Identifiable expenditure on services by programme, 2003-04

Source: Public Expenditure Statistical Analyses 2005, Tables 8.9a, 8.9b; own calculations.
Note: 1 This category includes spending for the Office of the Chief Executive and legislative bodies at all levels of government, for libraries, etc.

Table 3.3 shows Scottish identifiable expenditure on services per head in 2003-04 by value and relative to the UK, broken down by programme. Total Scottish identifiable expenditure per head amounted to £7,346 in 2003-04 which is £1,182 higher than in the UK as a whole.

The larger expenditure per head is reflected in the relative spending on programmes, notably in "Employment policies", "General public services", "Environment protection", "Housing and community amenities", and "Agriculture, fisheries and forestry".

Table 3.3 Identifiable expenditure on services per head, 2003-04 (£)

Source: Public Expenditure Statistical Analyses 2005, Table 8.11; own calculations.

Within the UK, the levels of public expenditure vary from one constituent part to another, reflecting the needs rather than the wealth or tax capacity of an area.

There are many reasons for the differences in expenditure priorities in Scotland. In some cases, higher expenditure per head reflects the greater importance that particular activities have in the economic life of the country. Here in Scotland, "Agriculture, fisheries and forestry" is a case in point. Scotland is also the most sparsely populated area in the UK, and lower population density raises programme costs, for example, in primary and secondary education.

Differences also occur because of variations in the distribution of activities between the public and private sectors. For example, water and sewerage services are a public sector responsibility in Scotland, and are included in the Scottish public expenditure totals.

In "Health" expenditure, Scotland's needs are greater for a number of reasons, including high death rates from circulatory diseases and cancer. Higher costs also accrue in "Education and training". There is traditionally a net inflow of students from the rest of the UK to Scotland and Scottish University courses are typically longer. The honours degree course takes four years, compared with a typical three-year course in England and Wales. Lastly, "Housing and community amenities" spending is relatively higher, because there is a higher proportion of housing stock in the public sector.

Non-identifiable Expenditure

"Non-identifiable" expenditure is expenditure generally incurred on behalf of the UK as a whole. Table 3.4 shows total expenditure on services in the UK. The non-identifiable expenditure data are taken from PESA 2005 and form the basis for the calculations of Scottish non-identifiable expenditure. The data for the UK presented here also include identifiable expenditure outside the UK. This treatment is consistent with the view that expenditure outside the UK is non-identifiable from the perspective of the UK's constituent countries, as the benefits are shared between them. To make the Scottish non-identifiable expenditure comparable with UK data, this category is therefore included in UK non-identifiable expenditure.

UK Non-identifiable Expenditure

In 2003-04, UK non-identifiable expenditure was £70.5 billion, representing 16.1 per cent of UK total expenditure on services. Defence expenditure was the main item; it accounted for £27.4 billion, or 38.8 per cent of non-identifiable expenditure. The other principal segments of non-identifiable expenditure were "Debt interest" (32.3 per cent), "General public services" (10.2 per cent), "International services" (7.6 per cent) and "Public order and safety" (7.4 per cent).

Table 3.4 Expenditure on services in the UK, 2003-04 (£ million)

Source: Public Expenditure Statistical Analyses 2005, Tables 8.9a, 8.9b.

Notes: 1 Excludes identifiable spending outside the UK. - 2 Includes identifiable spending outside the UK. - 3 This category includes spending for the Office of the Chief Executive and legislative bodies at all levels of government, for libraries, etc.

Scottish Non-Identifiable Expenditure

There are a number of possible ways in which to allocate Scotland a share of UK non-identifiable expenditure. The Scottish share of the UK population (8.5 per cent in 2003) or of UK Gross Value Added ⁵ (8.2 per cent in 2003) or a more specific method, if available, could be used.

Scotland's share of non-identifiable service spending has been allocated primarily, but not exclusively, on a population basis - see Appendix A for more information. Some programmes included in UK non-identifiable expenditure benefit England (or England and Wales) only but could not be allocated to any English region in particular. HM Treasury is planning to consult with UK departments and the devolved administrations to provide further, more disaggregated data, which will improve the accuracy of the GERS estimates.

The Scottish share of identifiable expenditure outside of the UK is allocated according to the population share (except EU transactions; see Appendix A) and included in non-identifiable expenditure.

Table 3.5 Expenditure on services in Scotland, 2003-04 (£ million)

Source: Public Expenditure Statistical Analyses 2005, Table 8.17; own calculations.
Notes: 1 Includes Scottish share of identifiable spending outside the UK - 2 Includes spending by Local Authorities and £18m general public service expenditure by Scotland Office. - 3 This category includes spending for the Office of the Chief Executive and legislative bodies at all levels of government, for libraries, etc.

Estimates of non-identifiable expenditure for Scotland by programme in 2003-04 are shown in Table 3.5. Total non-identifiable expenditure was £5.7 billion, 8.1 per cent of the UK total. The largest components, as for the UK, were "Defence", "Debt interest" and "General public services".

Taking identifiable and non-identifiable expenditure together, total expenditure on services for Scotland in 2003-04 was £42.9 billion (9.8 per cent of the UK amount).

As noted, defence expenditure is the largest item in UK non-identifiable expenditure, accounting for 38.8 per cent of the total in 2003-04. The Scottish contribution to this (£2.3 billion) is based on Scotland's population share. This approach is determined by - and consistent with - the "who benefits" principle, given that defence expenditure is incurred on behalf of the UK population as a whole.

It is worth noting here that the geographic location of defence contractors and employees is a separate issue. Some background discussion can be found in previous reports and the Scottish Economic Report (November 2004).

Accounting Adjustments

Accounting adjustments are necessary to bring expenditure on services into line with Total Managed Expenditure. The largest component of this category is Non-Trading Capital Consumption ( NTCC). It is a measure of the amount of fixed capital resources used up in the process of production: in other words, depreciation. The Scottish figure is calculated from Regional Accounts estimates produced by the Office for National Statistics, and from the UK total in PESA 2005. In 2003-04, NTCC in Scotland is estimated at £1.9 billion (16.2 per cent of the UK value).

A timing adjustment reconciles the data in PESA 2005 with the latest Treasury numbers, which show that Total Managed Expenditure in the UK was £1.1 billion lower in 2003-04 than reported in April's PESA. The Scottish share of this adjustment together with the remainder of expenditure adjustments were allocated according to the share of Total Expenditure on Services ( TES) and amounted to £440 million.

In sum, accounting adjustments are estimated at £2.4 billion in 2003-04, or 14.5 per cent of the UK amount.

Table 3.6 Accounting Adjustments

Sources : Public Expenditure Statistical Analyses 2005, Table 8.1, HM Treasury, Scottish Executive.

Note: Includes timing reconciliation and non-market capital consumption.

Aggregate Expenditure

In 2003-04, UK Total Managed Expenditure was £454 billion, or 41.3 per cent of GDP. The measurement of aggregate expenditure for individual regions or countries cannot be carried out with the same precision as that for the UK as a whole.

On the basis of the assumptions and methodology described in this report, aggregate expenditure for Scotland in 2003-04 is estimated at £45.3 billion. As shown above, £37.2 billion of this was identifiable expenditure, while non-identifiable expenditure was £5.7 billion, and adjustments were £2.4 billion. Overall, the Scottish share of UK Total Managed Expenditure in 2003-04 is estimated to be 10.0 per cent.

The ratio of the estimated Scottish figure for aggregate expenditure to Scottish GDP is 51.8 per cent in 2003-04. This is 10.5 percentage points higher than the equivalent UK ratio. It should be noted that this ratio does not indicate the public sector's contribution to GDP. Only that part of expenditure which is spent on compensation of public sector employees, intermediate consumption and capital replacement would be counted towards Scottish GDP. It is estimated that about 21 per cent of Scottish Gross Value Added is public sector activity.

As mentioned, some caution is required in comparing the estimates of government expenditure with the corresponding figures published in previous editions of GERS.

Table 3.7 Expenditure in the UK and Scotland, 2003-04

Sources: Public Expenditure Statistical Analyses 2005, own calculations.
Notes: 1 Identifiable expenditure on the UK level excludes identifiable spending outside the UK, which is included in non-identifiable expenditure. - 2 Includes Local Authorities and Scotland Office. - 3 Scottish number includes share of identifiable spending outside the UK. - 4 Includes timing reconciliation and non-market capital consumption.

Aggregate expenditure per head in Scotland is estimated at £8,948 in 2003-04. This is 17.3 per cent higher than the equivalent UK figure of £7,626 per head.

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