Government Expenditure and Revenue in Scotland 2004 - 2005

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Section 5: Scotland's Fiscal Position: Net Borrowing

In this report, Net Borrowing is the difference between expenditure and receipts, defined to exclude North Sea oil revenues. It is the difference between the aggregate expenditure and aggregate receipts estimates in Sections 3 and 4.

The Net Borrowing figure is an estimate for Scotland, based on expenditure and receipts calculations that by necessity include some estimation. It should therefore be used with some caution.

Net Borrowing for Scotland

Table 5.1 sets out the estimate of Scotland's fiscal position in 2004-05 and compares this with the equivalent UK figure.

With aggregate expenditure for Scotland in 2004-05 estimated at £47.7 billion and aggregate receipts (excluding North Sea revenues) estimated at £36.4 billion, Scotland's estimated NB excluding oil revenues is £11.2 billion. On the same basis, the UK's NB is £43.6 billion in 2004-05.

To give a sense of orders of magnitude, it is conventional to express the fiscal position as a percentage of the respective GDP. In the case of Scotland, the NB in 2004-05 was 12.0 per cent of GDP; the corresponding figure for the UK was 3.8 per cent.

Table 5.1 Net Borrowing, 2004-05 (excluding North Sea revenues)

United Kingdom

Scotland

£ million

£ million 2

Share of UK

Aggregate expenditure 1

491,044

47,662

9.7%

Aggregate receipts 2

447,431

36,439

8.1%

Net borrowing

43,613

11,223

NB as a percentage of GDP3

3.8%

12.0%

Sources: UK figures from ONS, HMRC and Treasury.
Notes: 1 As reported in table 3.7. - 2 As reported in table 4.1. - 3 Excluding Extra-regio GDP.

The Effect of North Sea Revenues

As noted in Section 4, the UK Continental Shelf is treated in the Regional Accounts as a separate region. As a result, the foregoing estimates of receipts and, in turn, the NB estimates do not include North Sea revenues. However, following the convention of previous reports, this sub-section considers the effects on the estimated Scottish fiscal position of different assumptions on the allocation of North Sea revenues. As shown in Section 4, total North Sea revenues amounted to around £5.2 billion in 2004-05.

Table 5.2 shows the effects of allocating various proportions (from 0 to 100 per cent) of North Sea oil revenue to Scotland. It shows the estimated Scottish NB under each scenario. If, for example, all oil revenues were attributed to Scotland, the fiscal position would fall from the central estimate of £11.2 billion to around £6 billion.

When estimating net borrowing as a proportion of GDP, for consistency, the same share of North Sea oil and gas included in Scottish public receipts should also be included in Scottish output. For example, if the assumption were made to allocate 100 per cent of oil revenues and output to Scotland, the NB would be 4.8 per cent of a "Scottish" GDP figure, including oil output.

Table 5.2 Fiscal position for Scotland, 2004-05: Effects of different allocations of North Sea revenues, £ million

North Sea revenues …

wholly excluded

66% included

75% included

90% included

100% included

allocated by GDP share

Aggregate expenditure

47,662

47,662

47,662

47,662

47,662

47,662

Aggregate receipts

36,439

39,908

40,341

41,122

41,642

36,863

Net borrowing

11,223

7,754

7,320

6,540

6,020

10,798

NB as a percentage of GDP1

12.0%

6.8%

6.3%

5.4%

4.8%

11.3%

Notes: 1 Scottish GDP including relevant proportion of oil output.

Principal Conclusions

The calculations to derive a fiscal position for Scotland are subject to inevitable imprecision due to the need to estimate a number of elements of both expenditure and revenue. The calculation of expenditure for Scotland (specifically the non-identifiable and other expenditure components) cannot be carried out with the same accuracy as that for the UK as a whole. Moreover, there are practical and theoretical difficulties in determining an appropriate share of UK revenues to allocate to Scotland.

Variation in methods would inevitably change the detailed arithmetic of the fiscal position. As a result, the NB estimate presented here should be regarded as indicative rather than precise.

Nonetheless, it remains the case that the analysis of public sector expenditure and revenue undertaken in this report does provide a good assessment of the broad orders of magnitude in Scotland, thus enabling some important conclusions to be drawn.

Based on the assumptions outlined in the earlier sections of the report, the estimate of Scotland's NB in 2004-05 is £11.2 billion, or 12.0 per cent of GDP (excluding oil revenues). The comparable UK figures are respectively £43.6 billion and 3.8 per cent. If, in the extreme case, all North Sea revenues are included and the definition of "Scottish" GDP incorporates all oil and gas production, the Scottish NB would be £6 billion, or 4.8 per cent of GDP.

Over time, an important determinant of the estimated fiscal position for Scotland is that of the UK as a whole. In 2004-05 there was a weakening in the UK fiscal position and this is reflected in estimates of Scotland's 2004-05 fiscal position.

The five-year trend in Scotland's NB (excluding oil revenues) between 2000-2001 and 2004-05 is shown in Section 6. Over that five-year period, Scotland's net borrowing increased up to 2003-04, and fell very slightly in 2004-05.