Scottish Government

6 PUBLIC SECTOR EXPENDITURE

Introduction

This chapter provides detailed estimates of public sector expenditure for Scotland.

The primary data source used to estimate Scottish public sector expenditure is the Country and Regional Analysis ( CRA) contained in the National Statistics publication Public Expenditure Statistical Analyses ( PESA) published by HM Treasury ¹⁷.

In GERS, public sector expenditure is divided into three categories: identifiable expenditure, non-identifiable expenditure and an accounting adjustment. Identifiable expenditure is expenditure that can be clearly allocated to Scotland in terms of having been spent for the benefit of Scottish residents and enterprises. Examples of identifiable expenditure include unemployment benefits and most education and health expenditure.

Non-identifiable expenditure is expenditure that cannot be allocated to a particular country of the UK or English region but is instead incurred on behalf of the UK as a whole. The largest element of non-identifiable expenditure is defence expenditure.

Finally, an accounting adjustment ensures that public sector expenditure reported in PESA is consistent with Total Managed Expenditure ( TME), the UK Government's principal measure of public sector expenditure used in the UK Public Finance Accounts.

For total expenditure and each expenditure component, a detailed breakdown according to current and capital is provided.

Each element of expenditure is discussed in greater detail below. Appendix B discusses the revisions from previous reports and the relevant apportionment methodologies applied.

Total Public Sector Expenditure

Estimated total public sector expenditure for Scotland by spending category for 2006-07 is shown in Table 6.1. On the basis of the assumptions and methodologies described in this report, in 2006-07, total public sector expenditure for Scotland was £49.9 billion. This was equivalent to 9.5 per cent of total UK public sector expenditure. Social protection was the largest Scottish expenditure programme and together with health expenditure, accounted for approximately 50 per cent of total public sector expenditure for Scotland in 2006-07.

Table 6.1: Total Expenditure: Scotland 2006-07

1 In the TME presentation, expenditure on grants abroad is shown net of grants payable to the UK. This is why the EU transaction shows negative net expenditure.

Current expenditure is the sum of the current expenditure of general government ( i.e. the Scottish Government, the UK Government in Scotland and Scottish local authorities) and certain distributive transactions (interest and dividends) payable by public corporations to the private sector and abroad. It does not include expenditure incurred by public corporations in producing goods and services for sale. Instead, the surplus of sale receipts over operating costs for public corporations is scored as a public sector receipt and does not affect the expenditure measure. Public sector current expenditure is defined to be net of certain revenue items, such as some sales of goods and services by general government. As it is defined at the public sector level, any transactions between parts of the public sector are also excluded.

Public sector capital expenditure refers to new capital formation, the net acquisition of land, and expenditure on capital grants. Capital expenditure leads to the holding of assets that can be used repeatedly to produce goods and services and generally have an economic life of more than one year.

Table 6.2 provides a summary of total current and capital expenditure over the years 2002-03 to 2006-07.

Table 6.2: Total Current and Capital Expenditure: Scotland and UK 2002-03 to 2006-07

Table 6.3 highlights the share of total expenditure according to current and capital expenditure. Between 2002-03 and 2006-07, capital expenditure for Scotland increased as a share of total expenditure, rising from 7.4% to 9.2%.

Table 6.3: Current and Capital Expenditure (% of Total Expenditure): Scotland 2002-03 to 2006-07

Tables 6.4 and 6.5 provide a more detailed breakdown of total public sector expenditure by current and capital split for Scotland and the UK.

Between 2002-03 and 2006-07, estimated total public sector expenditure for Scotland increased from £38.9 billion to £49.9 billion, an increase of 28.2 per cent in nominal terms. Over the same period, UK public sector expenditure increased from £403.6 billion to £523.7 billion, an increase of 29.8 per cent in nominal terms.

Estimated public sector current expenditure for Scotland was £45.3 billion in 2006-07; 90.8 per cent of total Scottish public sector expenditure. Current expenditure for Scotland was estimated to have grown by 25.8 per cent in nominal terms between 2002-03 and 2006-07. In comparison UK public sector current expenditure was £482.5 billion in 2006-07; 92.1 per cent of total UK public sector expenditure. UK public sector current expenditure was estimated to have grown by 27.7 per cent in nominal terms between 2002-03 and 2006-07.

Estimated public sector capital expenditure for Scotland was £4.6 billion in 2006-07, 9.2 per cent of total estimated Scottish public sector expenditure. The majority of capital expenditure occurred on 'transport' and 'housing and community amenities' programmes. Over the period 2002-03 to 2006-07, capital expenditure increased by 59.2 per cent in nominal terms, much faster than the growth observed in current expenditure. The greatest increases occurred in 2005-06 and 2006-07 following significant investment in environmental protection, and housing and community amenities.

Table 6.4: Total Expenditure: Scotland 2002-03 to 2006-07

Table 6.5: Total Expenditure: UK 2002-03 to 2006-07

Table 6.6 shows estimated total public sector expenditure for Scotland and the UK on a per capita basis. The table also highlights the per capita difference between Scotland and the UK and shows Scottish expenditure relative to the UK level. Total expenditure per capita for Scotland is estimated to have been £9,751 in 2006-07; £1,107 (or 12.8 per cent) higher than the UK average.

It should be noted that UK Government departments may have classified certain expenditures to particular categories using a different approach to that taken by Scottish Government officials. Therefore, allocations of certain expenditure for Scotland may differ from those for the UK, not as a result of different levels of actual expenditure, but as a result of different classification of similar expenditures. Caution should therefore be exercised when comparing expenditure per capita for Scotland with UK figures for individual expenditure categories.

With the exception of defence, international services, training, public sector debt interest payments and public order and safety, public expenditure per capita for Scotland was estimated to be higher than the UK average across all programme types. The biggest absolute differences were in education, transport, social protection and health where per capita expenditure for Scotland was between £170 and £250 higher than the UK average. In relative terms, the greatest differences in expenditure per capita occurred in enterprise and economic development and agriculture, forestry and fisheries expenditure.

Table 6.6: Total Expenditure per capita: Scotland and UK 2006-07

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 a number of reasons why public expenditure for Scotland often lies above the UK average. In some cases, higher expenditure per capita reflects the greater relative importance of particular activities for Scotland. Agriculture, fisheries and forestry is one such example. Scotland also has a lower population density than the UK which increases the cost of providing the same level of public service activity, particularly in areas such as education, health and transport.

The scope and remit of the public sector also differs in Scotland compared to the UK. For example, water and sewage services are a public sector responsibility in Scotland, and are therefore included in Scottish public expenditure, whilst in England they are operated by the private sector.

In other areas, the higher observed Scottish expenditure reflects greater demand for Scottish-based providers. For example, the strength of Scottish universities has created a net inflow of students from other parts of the UK. Additionally, Scottish university courses are typically longer - the honours degree course takes four years, compared with a typical three year course in England and Wales. Therefore, expenditure on education and training for Scotland will be relatively higher than the rest of the UK. However, this benefits the UK as a whole. Scottish universities have also been able to attract above average levels of research funding which has contributed to the high level of public expenditure for science and technology in Scotland (Box 6.4).

Higher public expenditure may also reflect Scotland's greater need for some public services such as in health and housing.

Identifiable and Non-identifiable Expenditure

GERS classifies public sector expenditure for Scotland according to three categories: identifiable expenditure, non-identifiable expenditure and accounting adjustments.

In the vast majority of cases, GERS uses the data on identifiable expenditure contained in PESACRA directly. It is a fundamental principle of PESA that the apportionment of UK expenditure adheres to the 'who benefits' principle whereby spending is allocated to a given region if the benefit of the service derived from the expenditure is thought to accrue to residents and enterprises of that region. As highlighted in the PESA publication, there are limitations in the ability to capture precisely 'who benefits' from a given item of expenditure:

• there are practical difficulties. For example, schools are not used solely by the residents of a region in which the facility is located and roads serve the needs of more than the geographical area through which they pass. Definitional and border problems become increasingly significant the smaller the geographical unit considered;
• there are also significant definitional problems associated with assessing 'who benefits'. For example, agricultural support is treated as benefiting the farmers who receive subsidies rather than the final consumers of food; and
• there are also issues around collecting accurate country and regional data in a cost efficient way. UK government departments are encouraged but not required to allocate all expenditure on the basis of 'who benefits'. If spending is not significant (less than £20 million on capital or current) and/or relevant data for allocating this to regions are not available, departments may use some statistical proxy instead, for example: using straight per capita shares, or using the regional allocation proportions used for related spending. Further, it is not practical or cost effective to collect local government spending data on the basis of 'who benefits'. Instead, local government spending is assumed to benefit the area where the expenditure occurs.

Following a detailed review of all 1,400 expenditure programme object groups in PESA 2008, a number of important modifications to the PESA data have been made before being used for the GERS report. These changes were undertaken in consultation with HM Treasury and reflect the fact that in certain circumstances, a more accurate assessment of 'who benefits' is thought possible than is currently presented in PESA. The principal change relates to the treatment of expenditure on nuclear decommissioning by the UK Atomic Energy Authority ( UKAEA) and British Nuclear Fuels. Box 6.5 outlines the rationale for the changes made to this expenditure and the impact they have on the estimates of total public expenditure for Scotland.

Appendix B contains a detailed list of all amendments to PESA implemented in this report. The development of PESA continues to be work in progress and further improvements in the regional apportionment of public sector expenditure will be reflected in future GERS reports.

UK identifiable expenditure covered approximately 84 per cent of UKTES in 2006-07. The remaining spending cannot be attributed to individual locations, for example, because it is spent for the benefit of the UK as a whole. A proportion of such UK non-identifiable expenditure is allocated to the public sector for Scotland either on the basis of Scotland's share of the UK population, Gross Value Added or a more specific apportionment variable. Information on the methodologies used to apportion each element of expenditure is provided in Appendix B.

Table 6.7 illustrates the estimated level of identifiable and non-identifiable expenditure assigned to Scotland for each year between 2002-03 and 2006-07. Identifiable expenditure was estimated to be £43.1 billion in 2006-07. In comparison, non-identifiable expenditure was £6.8 billion in 2006-07, approximately 13.6 per cent of estimated total public sector expenditure for Scotland.

Across most programme categories, the level of non-identifiable expenditure is relatively modest. This, in part, reflects development work that has been undertaken in compiling the PESACRA database in recent years to better identify particular elements of expenditure on a regional basis. Debt interest payments, defence and international services are typically the largest elements of non-identifiable expenditure. These three elements of expenditure combined accounted for 83.4 per cent of total non-identifiable expenditure for Scotland in 2006-07.

Table 6.7: Total Expenditure, Identifiable and Non-identifiable: Scotland 2002-03 to 2006-07

Analysis of Identifiable Expenditure

This section provides a more detailed analysis of identifiable expenditure for Scotland.

Table 6.8 disaggregates identifiable expenditure for Scotland into expenditure by the Scottish Government and by other UK Government departments for the years 2002-03 to 2006-07. Tables 6.9 and 6.10 provide a similar disaggregation but with an additional split for current and capital expenditure. Finally, Table 6.11 provides an assessment of the contribution of each expenditure programme to overall identifiable expenditure for Scotland and the UK as a whole.

The Scottish Government accounted for over two thirds of total Scottish identifiable public expenditure in each year between 2002-03 and 2006-07 with the majority of such expenditure on health and education. It should be noted that the figures presented for Scottish Government expenditure in GERS will not reconcile directly with Scottish Government budget statements. The identifiable expenditure figures contained in GERS include expenditure by non-ministerial departments, such as General Register Office for Scotland ( GROS), and by public corporations. They exclude a small expenditure by the Scottish Government on services outside Scotland. Furthermore, the figures presented in GERS are consistent with the National Accounts framework for public sector expenditure and will therefore differ from the Scottish Government budget documents in their treatment of certain cash and non-cash items. There are also important differences in classification of expenditure.

UK Government departments accounted for a third of Scottish identifiable expenditure. Their spending is dominated by expenditure on social protection - i.e. welfare payments and unemployment benefits. Social protection is the only function where the majority of identifiable expenditure is not undertaken by the Scottish Government.

Decomposing the data into current and capital components shows that the Scottish Government accounted for two thirds of identifiable current expenditure and over 90 per cent of identifiable capital expenditure in 2006-07. The proportion of capital expenditure undertaken by the Scottish Government increased from 84.5 per cent in 2002-03 to 94.0 per cent in 2006-07, though a significant element of this was re-classification of railways expenditure (Box 6.1).

As Table 6.11 highlights, the pattern of identifiable expenditure for Scotland was broadly similar to that for the UK as a whole, with social protection and health being the dominant factors.

Table 6.8: Total, Identifiable Expenditure: Scotland 2002-03 to 2006-07

Table 6.9: Identifiable Expenditure - Scottish Government: Scotland 2002-03 to 2006-07

Table 6.10: Identifiable Expenditure - Other UK Government: Scotland 2002-03 to 2006-07

Table 6.11: Identifiable Expenditure: Scotland and UK 2006-07

Table 6.12 shows identifiable expenditure per capita for Scotland in 2006-07 and compares this with the corresponding per capita figure for the UK. In 2006-07, identifiable expenditure per capita for Scotland was estimated to be £8,430 which is £1,154 (15.9 per cent) higher than the UK average.

In absolute terms, the largest differences arose in transport, social protection, education and health where per capita identifiable expenditure for Scotland was between £170 and £250 higher than the UK average. These differences are the key factors in explaining the difference in total identifiable expenditure between Scotland and the UK.

In relative terms, the greatest differences in spending per capita arose in enterprise and economic development, recreation culture and religion and agriculture, forestry and fisheries.

Table 6.12: Identifiable Expenditure per capita: Scotland and UK 2006-07

Analysis of Non-Identifiable Expenditure

This section provides a more detailed analysis of non-identifiable expenditure. There are a number of possible ways in which to allocate a share of UK non-identifiable expenditure to Scotland including Scotland's share of UKGVA or population. The methodologies used to apportion each element of non-identifiable expenditure are discussed in Appendix B.

In addition to non-identifiable expenditure, PESA also includes a small amount of UK Government expenditure which is classified as identifiable but for programmes outside the UK. This includes expenditure on international development programmes. This category is included in GERS within non-identifiable expenditure for both Scotland and 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.

Table 6.13 presents total non-identifiable expenditure for Scotland and the UK between 2002-03 and 2006-07. Tables 6.14 and 6.15 decompose Scottish and UK non-identifiable expenditure into their current and capital components.

Total non-identifiable expenditure apportioned to Scotland was estimated to be £6.8 billion in 2006-07, 8.2 per cent of the equivalent UK figure. Defence and debt interest payments comprise the largest components, together accounting for 76.0 per cent of Scotland's non-identifiable expenditure.

As Tables 6.14 and 6.15 highlight, current expenditure was the major component of non-identifiable expenditure for both Scotland and the UK accounting for approximately 95 per cent of total non-identifiable expenditure.

Table 6.13: Non-Identifiable Expenditure: Scotland and UK 2002-03 to 2006-07

Table 6.14: Non-Identifiable Expenditure: Scotland 2002-03 to 2006-07

Table 6.15: Non-Identifiable Expenditure: UK 2002-03 to 2006-07

Table 6.16 compares the composition of non-identifiable expenditure for Scotland and the UK for 2006-07. For both Scotland and the UK, the structure of non-identifiable expenditure is broadly similar with debt interest and defence expenditure contributing the largest amounts.

Table 6.16: Non-Identifiable Expenditure: Scotland and UK 2006-07

Table 6.17 outlines Scottish non-identifiable expenditure on services per capita in 2006-07 and compares this with the corresponding figure for the UK. For Scotland, non-identifiable expenditure was estimated to be £1,321 per capita, marginally lower than the equivalent UK per capita figure of £1,368. This reflects the fact that for some apportionments, GVA was used and Scotland's GVA (excluding extra-regio) was marginally smaller than the corresponding UK figure in 2006-07.

Table 6.17: Non-Identifiable Expenditure per capita: Scotland and UK 2006-07