Government Expenditure and Revenue Scotland 2006-2007

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3 SCOTLAND'S PUBLIC SECTOR ACCOUNTS

Introduction

This chapter provides a summary of Scotland's public sector accounts for the years 2002-03 to 2006-07. It outlines the latest estimates of public sector revenue in Scotland and expenditure for Scotland, and includes:

  • Headline estimates of public sector revenue in Scotland and of expenditure for Scotland, the key aggregates for assessing the strength of public finances in Scotland
  • Five-year estimates of current and capital expenditure for Scotland and key elements of public sector revenue in Scotland
  • Estimates of the current budget balance and net fiscal balance of the public sector in Scotland.

As discussed in the preface, within the present constitutional arrangements, there is no formal requirement for a comprehensive compilation of UK country and regional budgetary accounts. The results presented in this section are estimates of public sector revenue in Scotland and of expenditure for Scotland and should be viewed accordingly.

Current and Capital Budgets

Table 3.1 sets out estimates of public sector revenue and expenditure for Scotland over the financial years 2002-03 to 2006-07. The figures for revenue and expenditure correspond to the estimates contained in Chapters 4, 5 and 6.

Current revenue is the sum of all revenue raised in a particular year by the entire public sector. In Scotland, this consists of the Scottish Government, the UK Government, local authorities and public corporations. The main component is tax revenues.

Public sector current expenditure is the sum of the current expenditure of general government for Scotland and certain distributive transactions (interest and dividends) payable by public corporations. Current expenditure includes items such as wages and salaries, social security payments and day to day health expenditure.

Public sector capital expenditure includes capital formation, the net acquisition of land, and net expenditure through capital grants. Net investment is public sector capital expenditure, net of capital consumption. Capital consumption represents the amount of fixed capital used up each year. It is generally derived from a model based on assumptions about asset lives and a rolling estimate of the public sector's stock of capital assets derived from annual capital expenditure data.

In this edition of GERS, the term net fiscal balance measures the difference between public sector expenditure and revenue. In previous GERS reports, this figure was referred to as Scotland's 'net borrowing' but is more appropriately viewed as a fiscal balance. In Scotland, the gap between public sector revenue and expenditure is not directly reflected in borrowing (or saving) and instead, is part of the overall fiscal stance of the UK public sector.

In GERS, three estimates of Scotland's public sector accounts are presented, (i) an estimate excluding North Sea revenue, (ii) an estimate based upon a per capita share of North Sea revenue and (iii) an estimate based upon an illustrative geographical share of North Sea revenue. Chapter 5 contains a discussion of North Sea revenue and the precise definitions used here.

All figures in Table 3.1 are in market prices ( i.e. nominal terms).

Table 3.1: Current and Capital Budgets: Scotland 2002-03 to 2006-07

(£ million)

2002-03

2003-04

2004-05

2005-06

2006-07

CURRENT BUDGET

Current revenue

Excluding North Sea revenue

32,664

34,760

37,263

39,854

42,353

Including North Sea revenue (per capita share)

33,098

35,124

37,703

40,675

43,119

Including North Sea revenue (geographical share)

36,896

38,282

41,591

47,985

49,915

Current expenditure

36,036

39,062

40,587

43,046

45,317

Current expenditure accounting adjustment

1,662

1,593

2,063

2,222

2,367

Capital consumption

1,117

1,174

1,202

1,298

1,395

Balance on current budget (surplus is positive, deficit is negative)

Excluding North Sea revenue

-6,150

-7,069

-6,589

-6,711

-6,726

Including North Sea revenue (per capita share)

-5,716

-6,705

-6,149

-5,890

-5,960

Including North Sea revenue (geographical share)

-1,918

-3,547

-2,261

1,420

837

CAPITAL BUDGET

Capital expenditure

2,877

2,870

3,486

3,910

4,579

Capital expenditure accounting adjustment

136

121

177

297

305

Capital consumption

-1,117

-1,174

-1,202

-1,298

-1,395

Net Investment

1,895

1,817

2,461

2,910

3,489

Net Fiscal Balance (surplus is positive, deficit is negative)

Excluding North Sea revenue

-8,046

-8,886

-9,050

-9,620

-10,215

Including North Sea revenue (per capita share)

-7,611

-8,522

-8,610

-8,800

-9,449

Including North Sea revenue (geographical share)

-3,813

-5,364

-4,722

-1,490

-2,652

Box 3.1: Current Budget Balance and Net Fiscal Balance

Scotland's current budget balance illustrates the difference between current revenue and current expenditure, including capital consumption and an accounting adjustment. It measures the degree to which current taxpayers meet the cost of paying for the public services they use and a contribution to debt interest payments. It is therefore an important indicator of intertemporal fairness ( i.e. not creating problems for future generations) and indicates the sustainability of current policies. National governments typically manage current surpluses and deficits to ensure balance over the longer term and that any systematic excess of total expenditure over and above revenue is used for capital expenditure for the benefit of future tax payers.

Tables 3.2 a - c present the estimates of Scotland's public sector accounts as a percentage of Gross Domestic Product ( GDP). Box 3.2 discusses the process used to estimate Scotland's GDP under the three sets of estimates.

Table 3.2a: Current and Capital Budgets (Excluding North Sea Revenue) % GDP: Scotland 2002-03 to 2006-07

(per cent of GDP)

2002-03

2003-04

2004-05

2005-06

2006-07

CURRENT BUDGET

Current revenue

Excluding North Sea revenue

38.4

38.6

39.3

40.2

40.2

Current expenditure

42.4

43.4

42.8

43.4

43.0

Current expenditure accounting adjustment

2.0

1.8

2.2

2.2

2.2

Capital consumption

1.3

1.3

1.3

1.3

1.3

Balance on current budget (surplus is positive, deficit is negative)

Excluding North Sea revenue

-7.2

-7.9

-6.9

-6.8

-6.4

CAPITAL BUDGET

Capital expenditure

3.4

3.2

3.7

3.9

4.3

Capital expenditure accounting adjustment

0.2

0.1

0.2

0.3

0.3

Capital consumption

-1.3

-1.3

-1.3

-1.3

-1.3

Net Investment

2.2

2.0

2.6

2.9

3.3

Net Fiscal Balance (surplus is positive, deficit is negative)

Excluding North Sea revenue

-9.5

-9.9

-9.5

-9.7

-9.7

Table 3.2b: Current and Capital Budgets (Per Capita Share North Sea Revenue) % GDP: Scotland 2002-03 to 2006-07

(per cent of GDP)

2002-03

2003-04

2004-05

2005-06

2006-07

CURRENT BUDGET

Current revenue

Including North Sea revenue (per capita share)

38.2

38.3

39.0

40.2

40.1

Current expenditure

41.6

42.6

42.0

42.5

42.1

Current expenditure accounting adjustment

1.9

1.7

2.1

2.2

2.2

Capital consumption

1.3

1.3

1.2

1.3

1.3

Balance on current budget (surplus is positive, deficit is negative)

Including North Sea revenue (per capita share)

-6.6

-7.3

-6.4

-5.8

-5.5

CAPITAL BUDGET

Capital expenditure

3.3

3.1

3.6

3.9

4.3

Capital expenditure accounting adjustment

0.2

0.1

0.2

0.3

0.3

Capital consumption

-1.3

-1.3

-1.2

-1.3

-1.3

Net Investment

2.2

2.0

2.5

2.9

3.2

Net Fiscal Balance (surplus is positive, deficit is negative)

Including North Sea revenue (per capita share)

-8.8

-9.3

-8.9

-8.7

-8.8

Table 3.2c: Current and Capital Budgets (Geographical Share North Sea Revenue) % GDP: Scotland 2002-03 to 2006-07

(per cent of GDP)

2002-03

2003-04

2004-05

2005-06

2006-07

CURRENT BUDGET

Current revenue

Including North Sea revenue (geographical share)

36.6

36.2

37.2

40.4

39.2

Current expenditure

35.7

36.9

36.3

36.3

35.6

Current expenditure accounting adjustment

1.6

1.5

1.8

1.9

1.9

Capital consumption

1.1

1.1

1.1

1.1

1.1

Balance on current budget (surplus is positive, deficit is negative)

Including North Sea revenue (geographical share)

-1.9

-3.4

-2.0

1.2

0.7

CAPITAL BUDGET

Capital expenditure

2.9

2.7

3.1

3.3

3.6

Capital expenditure accounting adjustment

0.1

0.1

0.2

0.3

0.2

Capital consumption

-1.1

-1.1

-1.1

-1.1

-1.1

Net Investment

1.9

1.7

2.2

2.5

2.7

Net Fiscal Balance (surplus is positive, deficit is negative)

Including North Sea revenue (geographical share)

-3.8

-5.1

-4.2

-1.3

-2.1

Box 3.2: Scotland's GDP with and without North Sea GDP

When calculating Scotland's capital and current budgets as a percentage of GDP, the measure of GDP which should be used must adopt the same assumptions made in the corresponding budget calculations.

When Scotland's public sector accounts are presented excluding North Sea revenue, they are expressed as a percentage of Scotland's GDP excluding the amount of GDP arising from North Sea activities.

When a proportion of North Sea revenue is included in the Scottish public sector revenue estimates, the same share is included in Scottish GDP. For example, if 100 per cent of North Sea revenue were included in the Scottish estimate, then 100 per cent of North Sea GDP is included in Scotland's corresponding GDP figure.

Scotland's GDP figures under the three sets of estimates presented above are reflected in the following table.

It should be noted that GDP figures on a cash basis for Scotland have never been published before. In previous GERS publications, and in other analyses produced by the Scottish Government, proxy estimates for GDP were produced by applying the UK basic price adjustment ratio to the Scottish GVA estimate derived from the ONS' Regional Accounts. As part of the GERS review process, a comprehensive assessment has been made of the UK revenue streams relating to taxes less subsidies on products, and appropriate apportionments to Scotland have been applied. This analysis has been used to estimate a Scottish basic price adjustment, and to produce GDP on a cash basis for Scotland. This methodology will be discussed with users with a view to making them National Statistics in due course.

Scottish GDP Including and Excluding North Sea GDP: 2002-03 to 2006-07

(£ million)

2002-03

2003-04

2004-05

2005-06

2006-07

Scottish GDP

Excluding North Sea GDP

84,999

90,011

94,882

99,224

105,294

Per capita share of North Sea GDP

86,711

91,722

96,692

101,288

107,630

Geographical share of North Sea GDP

100,872

105,725

111,766

118,706

127,330

The current budget surplus is defined as current revenue (including capital taxes) less current expenditure and capital consumption.

In 2006-07, excluding North Sea revenue, current expenditure exceeded current revenue in Scotland leading to a current budget deficit of £6.7 billion (or 6.4 per cent of GDP - see Table 3.2a). With a per capita share of North Sea revenue, current expenditure exceeded current revenue in Scotland by £6.0 billion (or 5.5 per cent of GDP - see Table 3.2b).

In 2006-07, including an estimated geographical share of North Sea revenue, total current revenue exceeded current expenditure for Scotland to yield a current budget surplus of £0.8 billion (or 0.7 per cent of GDP - see Table 3.2c). In 2006-07, the UK current budget position including 100 per cent of all North Sea revenue, was a deficit of £4.3 billion (or 0.3 per cent of GDP), as published in the HM Treasury Financial Statement and Budget Report 2008.

As Tables 3.1 and 3.2 highlight, any estimate of Scotland's current balance depends on assumptions regarding the allocation of North Sea revenue. Over recent years, the estimated surplus on the current budget in Scotland including a geographical share of North Sea revenue has been strengthened due to increased revenue from the North Sea. Under the assumption of a geographical share of North Sea revenue, the greatest surplus on the current budget over the past five years was £1.4 billion in 2005-06 with the greatest deficit £3.5 billion in 2003-04.

The 'net fiscal balance' is equal to public sector current and capital revenue less public sector current and capital expenditure. A positive figure, i.e. a surplus, in any given year is obtained if total public sector revenue in Scotland is greater than total public sector expenditure.

In 2006-07, excluding North Sea revenue, total revenue was less than total expenditure yielding an estimated negative net fiscal balance of £10.2 billion (or 9.7 per cent of GDP). With a per capita share of North Sea revenue the estimated negative net fiscal balance for Scotland was £9.4 billion (or 8.8 per cent of GDP).

Including an estimated geographical share of North Sea revenue, total revenue was less than total expenditure for Scotland to yield a negative net fiscal balance of £2.7 billion (or 2.1 per cent of GDP). In 2006-07, the equivalent UK position including 100 per cent of all North Sea revenue, referred to in the UK Budget 2008 Report as net borrowing, was a deficit of £30.1 billion (or 2.3 per cent of GDP), as published in the HM Treasury Financial Statement and Budget Report 2008.

Excluding North Sea revenue, the largest gap between public sector revenue and expenditure in Scotland was observed in 2006-07 (£10.2 billion). With a per capita share of North Sea revenue the largest gap was observed in 2006-07 (£9.4 billion). As a proportion of GDP, the largest deficit both excluding, and with a per capita share of North Sea revenue, was in 2003-04.

Under the assumption of a geographical share of North Sea revenue, the largest gap between public sector revenue and expenditure in Scotland was observed in 2003-04 with an estimated deficit of £5.4 billion (or 5.1 per cent of GDP). This had fallen to £1.5 billion in 2005-06 (or 1.3 per cent of GDP).

Current Revenue

This section summarises the estimates of public sector revenue in Scotland for the years 2002-03 to 2006-07. Table 3.3 provides an estimate of Scottish public sector current revenue by economic category. A fuller discussion and a more detailed breakdown of revenue is provided in Chapters 4, 5 and Appendix A.

Table 3.3: Summary of Current Revenue by Economic Category: Scotland 2002-03 to 2006-07

(£ million)

2002-03

2003-044

2004-05

2005-06

2006-07

Taxes on income and wealth

10,225

10,557

11,524

12,785

13,913

National insurance contributions

5,210

6,128

6,581

7,001

7,464

Taxes on production and imports

12,080

12,748

13,550

13,811

14,522

Other current taxes

1,964

2,074

2,180

2,320

2,438

Taxes on capital

142

155

165

198

228

Gross operating surplus

2,205

2,244

2,276

2,647

2,757

Rent and other current transfers

391

402

394

417

403

Interest and dividends from private sector and abroad

446

452

594

675

628

Total current non-North Sea revenue

32,664

34,760

37,263

39,854

42,353

North Sea revenue

Per capita share

434

364

440

821

766

Geographical share

4,232

3,522

4,328

8,130

7,563

Total current revenue (including North Sea revenue)

Per capita share

33,098

35,124

37,703

40,675

43,119

Geographical share

36,896

38,282

41,591

47,985

49,915

In 2006-07, total current revenue, excluding revenue from the North Sea was estimated to be approximately £42.4 billion. This represented a nominal increase of 29.7 per cent from the £32.7 billion estimated to have been raised in 2002-03. This was largely a consequence of increased revenue from taxes on income and wealth, national insurance contributions and taxes on production and imports.

As Table 3.3 highlights, there was a significant increase in revenue from the North Sea in 2005-06 and 2006-07. In 2002-03, Scotland's geographical share of North Sea revenue was estimated at approximately £4.2 billion, but in 2006-07, this figure had increased to £7.6 billion. A similar relative increase was observed under a per capita apportionment though the overall impact was much smaller.

Expenditure

This section presents summary results of estimates of public sector expenditure for Scotland for the years 2002-03 to 2006-07. Table 3.4 provides estimates for the six largest functions of public sector expenditure. For a discussion and more detailed breakdown of expenditure, refer to Chapter 6 and Appendix B.

Table 3.4: Summary of Total Public Sector Expenditure: Scotland 2002-03 to 2006-07

(£ million)

2002-03

2003-04

2004-05

2005-06

2006-07

Social protection

13,608

14,361

15,119

15,624

16,183

Health

6,712

7,383

7,743

8,594

9,108

Education and training

5,369

5,681

6,088

6,515

7,106

General public services

3,412

3,671

3,949

4,311

4,350

Defence

2,309

2,442

2,544

2,589

2,729

Public order and safety

1,775

1,962

2,082

2,201

2,292

Other

5,728

6,433

6,547

7,122

8,127

Total

38,912

41,932

44,073

46,956

49,895

In 2006-07, total public sector expenditure was estimated to be £49.9 billion. This represented a nominal increase of 28.2 per cent from the £38.9 billion estimated for 2002-03. Health and education expenditure experienced the greatest relative increases, rising by approximately 35.7 per cent and 32.4 per cent respectively over these five years.

Note: In most tables in this publication, figures are presented as rounded to the nearest £ million. Components of tables may not therefore sum exactly to the published totals.