Government Expenditure and Revenue Scotland 2007-2008

4 PUBLIC SECTOR REVENUE

Introduction

This chapter provides detailed estimates of Scottish public sector revenue. As Chapter 5 discusses the treatment of North Sea revenue in detail, the focus of this chapter is on non-North Sea elements of public sector revenue.

The majority of public sector revenue payable by Scottish residents and enterprises is collected at the UK level. Generally it is not possible to separately identify the proportion of that revenue receivable from Scotland. GERS therefore uses a number of different methodologies to apportion revenue to Scotland. These methods are discussed in Appendix A and in the detailed revenue methodology paper on the GERS website ¹⁴.

For certain revenue sources, there are theoretical and practical challenges in determining an appropriate share to allocate to Scotland. In some cases, a variety of methodologies could be applied, each leading to different estimates of public sector revenue in Scotland. GERS makes use of the best data sources and methodologies available and therefore represents as accurate a reflection of public sector revenue in Scotland as is currently possible. The effect that any change to the revenue estimates contained in this chapter would have on the estimate of total public sector revenue due to alternative methodologies is discussed in Appendix A. The appendix highlights that there are only a small number of taxes for which variations in the proportion assigned to Scotland will have a significant impact on the estimate of total public sector revenue in Scotland.

Estimated Revenue 2007-08

Table 4.1 highlights estimated public sector revenue in Scotland and the outturn data for the UK in 2007-08. The contribution of each element of taxation to the total estimated tax yield in Scotland, and the proportion of UK revenue raised in Scotland, are also included in the table.

On the basis of the assumptions and methodologies described in this report, in 2007-08, total public sector non-North Sea current revenue in Scotland was £45.2 billion. This is equivalent to 8.4 per cent of UK total non-North Sea current revenue which is in line with Scotland's share of the UK population.

Table 4.1: Current Revenue: Scotland 2007-08

	£ million	% of total non-North Sea revenue	£ million	Scotland as % of UK
	Scotland		UK	Scotland as % of UK
Income tax	11,244	24.9%	151,746	7.4%
Corporation tax (excl North Sea)	3,465	7.7%	40,017	8.7%
Capital gains tax	299	0.7%	5,267	5.7%
Other taxes on income and wealth	244	0.5%	2,764	8.8%
National insurance contributions	7,766	17.2%	95,510	8.1%
VAT	7,972	17.6%	89,878	8.9%
Fuel duties	2,074	4.6%	24,905	8.3%
Stamp duties	908	2.0%	14,123	6.4%
Tobacco duties	923	2.0%	8,031	11.5%
Alcohol duties	718	1.6%	8,215	8.7%
Betting and gaming and duties	103	0.2%	961	10.7%
Air passenger duty	164	0.4%	1,949	8.4%
Insurance premium tax	195	0.4%	2,311	8.4%
Landfill tax	83	0.2%	898	9.2%
Climate change levy	65	0.1%	705	9.2%
Aggregates levy	52	0.1%	340	15.3%
Inheritance tax	269	0.6%	3,890	6.9%
Vehicle excise duty	425	0.9%	5,412	7.9%
Non-domestic rates ¹	1,724	3.8%	20,357	8.5%
Council tax	1,936	4.3%	23,495	8.2%
Other taxes and royalties ²	552	1.2%	6,368	8.7%
Interest and dividends	748	1.7%	8,719	8.6%
Gross operating surplus	2,865	6.3%	22,698	12.6%
Rent and other current transfers	398	0.9%	1,591	25.0%
Total current revenue (excluding North Sea revenue)	45,191	100.0%	540,150	8.4%
North Sea revenue ³
Per capita share	660		7,831
Geographical share	7,320		7,831
Total current revenue (including North Sea revenue)
Per capita share	45,851		547,981	8.4%
Geographical share	52,511		547,981	9.6%

1. Excludes non-domestic rates that local authorities pay themselves

2. Although this group includes some 13 separate revenues (as set out in the detailed methodology paper on the GERS website), the two largest - TV Licences and National Lottery Distribution Fund - account for 72% (£339 million) of this estimate for Scotland.

3. A full discussion of North Sea revenue is provided in Chapter 5.

Income tax is the single largest source of public sector revenue in Scotland. In 2007-08, income tax revenue was estimated at £11.2 billion - approximately a quarter of all public sector revenue in Scotland (excluding revenues from the North Sea). Scottish income tax revenue is estimated on the basis of residence of the tax-payer. A full discussion of the methodology used to estimate Scottish income tax receipts is provided in GERS 2006-07 and the revenue methodology paper on the GERS website.

Value Added Tax ( VAT) represented the second largest revenue source in Scotland, an estimated £8.0 billion in 2007-08 - 17.6 per cent of total non-North Sea revenues. A similar proportion of revenue was collected from national insurance contributions.

Corporation tax revenue (excluding that from the North Sea) was estimated at £3.5 billion in Scotland during 2007-08, 7.7 per cent of total non-North Sea current revenue collected in Scotland.

The estimates of corporation tax for Scotland between 2003-04 and 2006-07 have been revised in this edition of GERS. This reflects revisions to the ONS data source used to apportion a share of UK corporation tax to Scotland and is set out in detail in Box 4.1. The allocation of corporation tax revenue raises an important methodological issue of whether to apportion revenue based on where profits are generated or by the location of the parent company's headquarters. In GERS, corporation tax revenue is allocated on the basis of the profits generated in Scotland. A full discussion of the methodology used to estimate corporation tax revenue is presented in GERS 2006-07 and in the detailed revenue methodology paper on the GERS website.

Box 4.1 - Corporation Tax Revisions

Corporation tax is a tax on a company's taxable income or profits.

As discussed in GERS 2006-07, GERS estimates corporation tax revenue in Scotland on the basis of profits generated in Scotland. GERS uses the ONS' Regional Accounts estimates of profits less holding gains of public and private corporations to apportion corporation tax revenue in Scotland (it excludes 'mixed income profits' from self-employment businesses that are classified in the household sector in National Accounts). Holding gains are an adjustment relating to the changing prices of assets held.

The Regional Accounts allocate corporations' (excluding partnerships) gross trading profits to regions according to wage and salary data used to estimate regional compensation of employees' and estimates of profits for the manufacturing industry from ONS' Annual Business Inquiry. Profits from the extraction of offshore oil and gas are considered extra-regio.

Profits data from the Regional Accounts are considered the most appropriate published source of information with which to estimate Scotland's share of corporation tax revenue. Since GERS 2006-07 was published, ONS have revised the methodology to apportion profits across the UK in Regional Accounts, the most important revision being the way in which account is taken for 'Financial Intermediation Services Indirectly Measured' ( FISIM). These changes are consistent with changes in the UK National Accounts which were published in the latest Blue Book in September 2008. FISIM accounts for the value of services provided by the financial services sector that is not explicitly charged for. For example, most banks do not charge for running savings accounts, but implicitly charge for this service through the difference between the interest it pays savers and receives from borrowers. Further information about the FISIM methodology changes are provided in Scottish Economic Statistics 2008. ¹⁵

Revisions by ONS to the calculation of FISIM are set out in the ONS Economic and Labour Market Review ¹⁶. The revisions to FISIM have served to raise the amount of profit estimated to have been generated in Scotland. The revisions to FISIM stem from two main sources. Firstly, in the revised format, not all of FISIM is now treated as intermediate consumption expenditure. Some FISIM, for example, is final consumption expenditure by households. Secondly, FISIM is now apportioned by industry, rather than for the region as a whole. Taken together, these revisions have led to an upward revision in the level of corporation tax generated in Scotland over the period studied. These changes are reflected in the table below.

Revised Estimates of onshore Corporation tax in Scotland

	2003-04	2004-05	2005-06	2006-07
	(£ million)
Corporation Tax (excl North Sea) ( GERS 2006-07)	2,008	2,389	2,753	3,019
Corporation Tax (excl North Sea) ( GERS 2007-08)	2,027	2,490	2,932	3,217
Revision	19	101	179	198

Gross operating surplus ( GOS) refers to the operating (or trading) surpluses (or losses) of central government, local government and public corporation trading activity. It is the fifth largest revenue source in Scotland generating £2.9 billion in revenue during 2007-08, 6.3 per cent of total non-North Sea revenue in Scotland.

After these five main categories, all other types of tax listed each accounted for less than 5 per cent of total non-North Sea revenue in Scotland in 2007-08. Together, council tax and non-domestic rates raised £3.7 billion (8.1 per cent of total non-North Sea revenue) while fuel duties raised £2.1 billion.

The Scottish share of total UK revenue for each element of revenue varies according to the particular tax being estimated. For income tax, the Scottish percentage was slightly less than both a per capita share and a GVA share ¹⁷. For national insurance contributions the Scottish percentage was slightly less than a per capita share but in line with a GVA share. For VAT and corporation tax (excluding North Sea), the Scottish percentage was broadly in line with a per capita share. In contrast, revenue from duties on betting and gaming and tobacco were considerably higher than Scotland's share of the UK population or GVA.

Scotland accounted for 12.6 per cent of the total UKGOS in 2007-08. Scotland's large share of the UKGOS is partly due to Scottish Water which is one of the largest contributors to UK public corporations' GOS. The equivalent water companies in England and Wales are outside the public sector and hence do not contribute to their GOS. A more detailed discussion of GOS is provided in the detailed revenue methodology paper on the GERS website.

The estimated Scottish share of revenue from stamp duties and capital gains tax were considerably lower than both a GVA share and a per capita share. This is largely explained by the lower value of asset sales relative to other parts of the UK, and in particular London and the South East of England.

Box 4.2 - Capital Gains Tax

Capital gains tax ( CGT) is a tax on capital gains from the buying and selling of assets. The capital gain is broadly the difference between the disposal proceeds and the cost of acquiring an asset. Individuals have an annual amount on which CGT is not liable and, as with other forms of personal taxation, various reliefs and exemptions are available.

In previous GERS reports, capital gains taxation was estimated for Scotland on the basis of Scotland's share of UK (less extra-regio) GVA. This was the best available methodology at that time. Following ongoing refinement of the various revenue methodologies, it has been possible to obtain estimated disaggregated data for Scottish CGT returns for the first time. These estimates are based upon returns identified by HMRC according to UK postcode. The impact of this revised methodology is summarised in the table below.

Capital Gains Tax, Scotland: 2003-04 to 2007-08

	2003-04	2004-05	2005-06	2006-07
	(£ million)
GERS 2006-07	178	183	245	308
GERS 2007-08	147	114	172	222
Revision	-31	-69	-73	-86

Environmental taxes, such as aggregates levy, climate change levy and landfill tax contribute relatively small amounts of revenue to the overall fiscal envelope in Scotland and the UK as discussed in Box 4.3.

Box 4.3 - Environmental Taxation in Scotland

Environmental taxes (or 'green taxes') are broadly defined as those taxes which are levied on activities which have a direct impact on the environment ( i.e. greenhouse gas emissions, pollution, congestion etc). Alongside other instruments, such as regulation, trading permits, charges and information strategies, such taxes assist policy makers in achieving environmental goals.

In many cases such intervention is motivated on the grounds that the impact on the environment of an economic activity is not fully reflected in market prices. Therefore, the tax system can be used to address this 'externality' and to offset the difference between the private and social cost (or benefit) of a particular activity.

In Scotland, environmental taxes can be classified according to four categories: taxes on energy, taxes on transport, taxes on pollution and taxes on resources. These include fuel duties, air passenger duty, landfill tax, climate change levy, aggregates levy and vehicle excise duty. While taxes on North Sea oil and gas production are sometimes justified on environmental grounds they are typically not referred to as an environmental tax.

The table below presents estimates of the revenue raised by the principal environmental taxes in Scotland between 2003-04 and 2007-08. In 2007-08, environmental taxes are estimated to have raised £2.9 billion in Scotland, 6.3 per cent of non-North Sea current revenue. Fuel duty is estimated to account for 72.4 per cent of the revenue generated by environmental taxes in Scotland during 2007-08, with Vehicle Excise Duty accounting for a further 14.8 per cent. The receipts generated by the remaining environmental taxes listed are much less significant. For example, climate change levy is estimated to have generated £65 million in revenue during 2007-08, 0.1 per cent of non-North Sea current revenue in Scotland.

Environmental Tax Receipts in Scotland 2003-04 to 2007-08

	2003-04	2004-05	2005-06	2006-07	2007-08
	(£ million)
Fuel duties	1,866	1,923	1,943	1,964	2,074
Air passenger duty	68	74	77	94	164
Landfill tax	58	62	68	76	83
Climate change levy	72	68	65	63	65
Aggregates levy	49	50	50	50	52
Vehicle excise duty	356	365	389	400	425
Total Environmental Taxes	2,468	2,541	2,592	2,647	2,863

Note: In the case of duties, VAT is often levied on the after duty price of a product and therefore constitutes an additional 'environmental' tax. Hydrobenefit is not shown in the above table and is included within other taxes and royalties. It accounted for £43 million revenues in 2003-04, £40 million in 2004-05 and zero in subsequent years.

Estimated Revenue: Scotland and the UK, 2003-04 to 2007-08

Table 4.2 shows estimated current revenue in Scotland and the UK between 2003-04 and 2007-08.

Current non-North Sea revenue in Scotland and the UK are estimated to have both grown by approximately 29 per cent since 2003-04 in nominal terms.

In general, tax revenue in Scotland and the UK are estimated to have followed similar patterns of growth between 2003-04 and 2007-08. Income tax revenue in Scotland grew by 36.7 per cent in nominal terms between 2003-04 and 2007-08 compared to growth of 35.1 per cent at the UK level, while VAT rose by 20.6 per cent in Scotland and 17.3 per cent in the UK. National insurance contributions increased by approximately 28 per cent in both Scotland and the UK.

Among some of the smaller taxes, there was greater variation in the growth rates between Scotland and the UK. The greatest variation was in stamp duties and inheritance tax where Scottish revenue rose considerably faster than the UK average. In contrast, other taxes and royalties and non domestic rates increased faster in the UK than they did in Scotland.

Table 4.2: Current Revenue: Scotland and UK 2003-04 to 2007-08

	Scotland					UK
	(£ million)
	2003-04	2004-05	2005-06	2006-07	2007-08	2003-04	2004-05	2005-06	2006-07	2007-08
Income tax	8,226	8,788	9,598	10,466	11,244	112,354	121,273	130,557	141,226	151,746
Corporation tax (excl North Sea)	2,027	2,490	2,932	3,217	3,465	24,928	29,720	34,278	37,156	40,017
Capital gains tax	147	114	172	222	299	2,225	2,278	3,041	3,812	5,267
Other taxes on income and wealth	147	182	221	259	244	1,652	2,014	2,517	2,997	2,764
National insurance contributions	6,081	6,561	6,978	7,386	7,766	75,148	80,923	85,559	90,818	95,510
VAT	6,613	6,891	7,144	7,677	7,972	76,638	79,978	81,497	87,739	89,878
Fuel duties	1,866	1,923	1,943	1,964	2,074	22,786	23,313	23,438	23,585	24,905
Stamp duties	423	532	554	722	908	7,544	8,966	10,918	13,393	14,123
Tobacco duties	1,008	1,102	1,028	997	923	8,092	8,113	7,952	8,146	8,031
Alcohol duties	676	726	712	702	718	7,610	7,889	7,876	7,914	8,215
Betting and gaming and duties	89	90	92	101	103	898	876	884	961	961
Air passenger duty	68	74	77	94	164	799	872	906	1,112	1,949
Insurance premium tax	196	200	198	195	195	2,313	2,353	2,347	2,304	2,311
Landfill tax	58	62	68	76	83	636	673	753	825	898
Climate change levy	72	68	65	63	65	816	750	741	696	705
Aggregates levy	49	50	50	50	52	341	326	323	324	340
Inheritance tax	155	164	198	228	269	2,521	2,931	3,276	3,618	3,890
Vehicle excise duty	356	365	389	400	425	4,689	4,737	4,950	5,139	5,412
Non-domestic rates	1,533	1,623	1,734	1,739	1,724	17,358	17,802	18,798	19,890	20,357
Council tax	1,577	1,663	1,773	1,862	1,936	18,903	20,194	21,226	22,340	23,495
Other taxes and royalties	508	546	491	521	552	5,404	5,710	5,641	6,072	6,368
Interest and dividends	397	533	600	555	748	4,577	6,093	6,807	6,468	8,719
Gross operating surplus	2,361	2,238	2,668	2,795	2,865	18,205	17,936	21,089	22,084	22,698
Rent and other current transfers	391	386	411	383	398	1,695	1,719	1,728	1,627	1,591
Total current revenue (excluding North Sea revenue)	35,022	37,369	40,095	42,674	45,191	418,132	447,439	477,102	510,246	540,150
North Sea revenue
Per capita share	364	439	793	766	660	4,284	5,183	9,384	9,075	7,831
Geographical share	3,522	4,329	7,861	7,664	7,320	4,284	5,183	9,384	9,075	7,831
Total current revenue (including North Sea revenue)
Per capita share	35,385	37,808	40,889	43,440	45,851	422,416	452,622	486,486	519,321	547,981
Geographical share	38,543	41,697	47,957	50,338	52,511	422,416	452,622	486,486	519,321	547,981

Table 4.3 shows estimates of Scotland's share of UK revenue for five key taxes between 2003-04 and 2007-08. Over this period, Scotland's share of UK revenue has remained relatively stable.

Between 2003-04 and 2007-08 total non-North Sea revenue in Scotland accounted for 8.4% of UK non-North Sea revenue, broadly in line with Scotland's share of the UK population. Scotland's share of UK income tax, corporation tax and VAT both increased over this period but this was offset by a decline in Scotland's share of both local authority revenue and the 'other revenue' categories.

Table 4.3: Non-North Sea Current Revenue: Scotland/ UK Share 2003-04 to 2007-08

	2003-04	2004-05	2005-06	2006-07	2007-08
	(per cent of UK revenue)
Income tax	7.3%	7.2%	7.4%	7.4%	7.4%
Corporation tax (excluding North Sea revenue)	8.1%	8.4%	8.6%	8.7%	8.7%
National Insurance contributions	8.1%	8.1%	8.2%	8.1%	8.1%
Value added tax	8.6%	8.6%	8.8%	8.7%	8.9%
Local authority revenue ¹	8.6%	8.6%	8.8%	8.5%	8.3%
All other revenue	9.7%	9.6%	9.4%	9.3%	9.3%
Total non-North Sea current revenue	8.4%	8.4%	8.4%	8.4%	8.4%

1. Includes council tax and non-domestic rates only ¹⁸

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Government Expenditure and Revenue Scotland 2007-2008

4 PUBLIC SECTOR REVENUE