Government Expenditure and Revenue Scotland 2008-09

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A REVENUE METHODOLOGY

This appendix outlines the methodologies used to estimate public sector revenue in Scotland. As the issue of North Sea revenue has been discussed extensively in Chapter 5, this appendix focuses on all other elements of public sector revenue.

In contrast to public sector expenditure, there is no one generic approach to estimating public sector revenue in Scotland; instead each revenue stream is estimated using a separate methodology. This appendix discusses these techniques and highlights any significant changes which have been introduced in this edition of GERS. It should be noted that, as the underlying datasets used in GERS have been subject to revision and update, estimates may differ from previous editions of GERS even if the methodology has remained unchanged.

Methodology

As highlighted in Chapter 4, the vast majority of public sector revenue raised in Scotland is collected at the UK level by HM Revenue and Customs.

In some cases, revenue figures can be obtained for Scotland directly. Examples include local government revenue and particular elements of public corporation revenue. Such revenues are the exception and separate identification of most other revenue streams for Scotland is not possible. GERS therefore uses a number of different methodologies to apportion revenue to Scotland. In doing so, there are often theoretical and practical challenges in determining an appropriate share to allocate to Scotland. In certain cases, a variety of alternative methodologies could be applied each leading to different estimates.

Obtaining an estimate of public sector revenue in Scotland is a two-stage process.

In the first stage, the UK outturn figure for each element of revenue is obtained from ONS Public Sector Finance Statistics. In the second stage, Scotland's share of the UK figure is estimated according to a specific apportionment methodology. The methodology used differs for each element of revenue. The detailed Revenue Methodology paper on the GERS website contains a discussion of the apportionment methodology used for each revenue stream and highlights the sensitivity of the results to changes in the underlying assumptions 36.

UK Revenue Figures

The basis for estimating public sector revenue for Scotland is National Statistics outturn figures for UK fiscal revenue taken from ONS Public Sector Finance Statistics. The detailed components, revenue by revenue, are taken from an ONS database which is consistent with both the totals published in the Public Sector Finances and the figures published in table PSAT2 of Public Sector Accounts. PSAT2 is HM Treasury's preferred presentation of revenues, it is shown in Tables 21 and 22 of the Supplementary Material to the March 2010 UK Budget 37, and underlies the main tables in the UK Budget.

These data are presented on an accruals basis and separately identify revenue attributed to central government, local government and public corporations. The international standards for National Accounts and Government Finance Statistics use the accruals basis rather than a cash approach. This is because accruals accounting reflects a more accurate picture of when revenue is due and spending occurs than the more volatile alternative of cash, which, for example, records when bills are settled rather than when the expenditure occurs.

The revenue figures used in GERS are taken from published outturns as at April 2010, consistent with those used for the UK Budget in March 2010 38.

It should be noted that the UK figures for individual revenues presented in GERS 2008-09 may differ from other publications as, on certain occasions, figures are still presented on a cash rather than an accruals basis. For example, Table C6 of the UK Budget in March 2010 shows types of tax on a cash basis. However, to be consistent with the presentation throughout GERS and international standards, the equivalent table to C6 is presented on an accruals basis.

The treatment of tax credits and EU revenue in GERS follows international standards for National Accounts and is different from Table C6 of the UK Budget in March 2010. Revenue raised for the EU (on VAT, import levies and sugar levy) is not shown as public sector revenue, instead it is considered to be paid directly to the EU, even though the UK Government may act as an intermediary in the process between the taxpayer and the EU39.

The assumptions underpinning the apportionment of each revenue source are outlined below.

Summary of Changes

Table A.1 provides a summary of the apportionment methodologies used for each element of revenue and highlights whether or not the methodology has changed since the previous edition of GERS. Most of these revisions have been relatively minor.

In some instances ONS's Public Sector Finance estimates of UK revenue for some taxes have also been revised since the last edition of GERS, these changes will affect the estimates of Scottish tax revenue. In addition, there have been revisions to some of the data sources used to apportion tax revenues to Scotland. This means that the share of some UK taxes apportioned to Scotland has changed since GERS 2007-08.

More detailed information on the methodologies used and the changes introduced can be found in the Revenue Methodology paper on the GERS website.

Table A.1: Apportionment Methodologies and Sources for Public Sector Revenue in Scotland (Excluding North Sea Revenue)

Revenue

Apportionment Methodology

Source

Revised

Income tax

Scottish share of UK income tax liabilities applied to income tax gross of tax credits. Negative expenditure on tax credits estimated using Scot/ UK share of overall spend on tax credits (negative tax plus benefits)

Survey of Personal Income ( SPI): HMRC

Data on overall spend on tax credits: HMRC

No

Corporation tax (excl. North Sea)

Scotland's share of profits (less holding gains) of UK corporations

Regional Accounts: ONS

No

Capital gains tax

Actual outturns for Scotland

Supplied directly by HMRC

No

Other taxes on income and wealth

Various (see web appendix)

Various (see web appendix)

No

National insurance contributions

Estimates of employer, employee, class 2 and class 3 NIC revenue in UK and Scotland

Supplied directly by HMRC

No

VAT

VAT net of LG and CG refunds: Scotland's share of UK household VAT expenditure

LG refunds: Scotland's share of UKLG current expenditure on goods and services

CG Refunds - MOD: Scotland/ UK populations

- NHS: Scotland/ UKTES for Health

- Other Gov depts: Scotland/ UK total TES (Excluding NHS/ MOD)

Expenditure and Food Survey: ONS

Public Sector Finances: ONS

ONS and GROS

PESA

PESA

Yes

Fuel duties

Scotland's share of road traffic fuel consumption

Fuel consumption statistics: DECC

No

Stamp duties

Land and property stamp duty: Actual outturns for Scotland

Stocks and shares: - Scotland/ UK ratio of adults owning shares

Land and property stamp duty: HMRC

Stocks and shares: Family Resources Survey ( DWP)

No

Tobacco duties

Spend on tobacco in Scotland/ UK

Expenditure and Food Survey : ONS

Yes

Alcohol duties

Spend on alcohol in Scotland/ UK

Expenditure and Food Survey : ONS

Yes

Betting and gaming duties

Spend on betting and gaming in Scotland/ UK

Expenditure and Food Survey : ONS

Yes

Air passenger duty

Scotland/ UK population

ONS and GROS

No

Insurance premium tax

Scotland/ UK population

ONS and GROS

No

Landfill tax

Scotland's share of UK tonnage of waste sent to landfill

Scottish Environment Protection Agency, Environment Agency, Dept. of Environment in Northern Ireland

No

Climate change levy

Electricity: Scotland's share of UK electricity consumption by commercial and industrial users

Gas: Scotland's share of UK gas sales to commercial and industrial users

Solid and other fuels: Scotland's share of UK (less extra-regio) GVA

Electricity: DECC

Gas: DECC

Solid and other fuels: Regional Accounts: ONS

No

Aggregates levy

Scotland's share of UK's aggregate production

United Kingdom Minerals Yearbook 2008: British Geological Survey

No

Inheritance tax

Actual outturns for Scotland

Supplied directly by HMRC

No

Vehicle excise duty

Scotland's share of total value of UK vehicle licences issued (less refunds)

DVLA

No

Non-domestic rates

Actual Data

Scottish Local Government Finance Statistics

No

Council tax

Actual Data

Scottish Local Government Finance Statistics

No

Other taxes and royalties

Various (see web appendix)

Various (see web appendix)

Yes

Interest and dividends

For PC receipts: Scotland's share of public sector UKGVA

For LG and CG receipts: Scotland/ UK population

Regional Accounts: ONS

No

Gross operating surplus

CG: Scottish/ UK share of central government NMCC

LG: Scottish/ UK share of local government NMCC

Public corporations - individual data for Scottish PCs - data for UK-wide PCs based on relevant industry GVA - and actual data for Local Authority housing rentals

CG: ONS Regional Accounts

LG: ONS Regional Accounts

PC: Supplied by Public Sector Finance team: ONS, and Regional Accounts: ONS

Yes

Rent and other current transfers (excluding oil royalties and licence fees)

Various (see web appendix)

Various (see web appendix)

No

North Sea revenue

See Chapter 5

See Chapter 5

Table A.2 summarises the revisions in this edition of GERS by comparing the estimates contained in this report with last year's publication. Overall, estimated public sector revenue in Scotland has been revised downwards by between 0.5 per cent and 1.1 per cent over the years 2004-05 and 2007-08.

Table A.2: Revision to Estimates of Total Non-North Sea Public Sector Revenue: 2004-05 to 2007-08

(£ million)

2004-05

2005-06

2006-07

2007-08

Scotland

Estimates published in GERS 07-08

37,369

40,095

42,674

45,191

Estimates published in GERS 08-09

36,983

39,787

42,198

44,966

Revision

-386

-308

-476

-225

UK

Estimates published in GERS 07-08

447,439

477,102

510,246

540,150

Estimates published in GERS 08-09

447,326

477,149

510,059

540,621

Revision

-113

47

-187

471

Scotland/ UK ratio

Estimates published in GERS 07-08

8.4%

8.4%

8.4%

8.4%

Estimates published in GERS 08-09

8.3%

8.3%

8.3%

8.3%

Revision

-0.1%

-0.1%

-0.1%

-0.1%

Table A.3 illustrates the revisions to individual public sector revenue streams in Scotland and the UK for 2007-08, the latest year directly comparable between GERS 2007-08 and GERS 2008-09. The methodology changes summarised above, combined with revisions to the UK revenue estimates and to the underlying data used to apportion some taxes to Scotland, have resulted in minor revisions to some revenue estimates. The net effect of all of the changes has been to reduce the estimate of public sector revenue in Scotland by £225 million and to increase the estimate of UK tax revenue by £471 million.

Table A.3: Revision to Estimates of Public Sector Revenue: Scotland and UK 2007-08

(£ million)

Scotland

UK

Income tax

22

282

Corporation tax (excluding North Sea)

-32

0

Capital gains tax

6

0

Other taxes on income and wealth

8

0

National insurance contributions

106

-73

VAT

-89

13

Fuel duties

5

0

Stamp duties

-14

0

Tobacco duties

-27

0

Alcohol duties

32

0

Betting and gaming and duties

7

0

Air passenger duty

0

0

Insurance premium tax

-1

-9

Landfill tax

6

-1

Climate change levy

0

0

Aggregates levy

5

-1

Inheritance tax

0

0

Vehicle excise duty

0

0

Non-domestic rates

0

0

Council tax

-1

9

Other taxes and royalties

26

18

Interest and dividends

18

206

Gross operating surplus

-299

61

Rent and other current transfers

-3

-34

Revision

-225

471


The large revision to the gross operating surplus estimate for Scotland is due to a revised estimate of local government depreciation. The figures now used are consistent with those in the ONS Regional Accounts as the previous source has been discontinued. The revision has also been applied to the accounting adjustment, and so will have no impact on the current budget balance.

Sensitivity Analysis

As the figures for public sector revenue in Scotland contained in this report are estimates, it is important to obtain a sense of the impact on total revenue of any possible variation in the estimates of individual revenue streams. Table A.4 illustrates the effect a 1 per cent variation in the estimate of each revenue stream would have on total non-North Sea revenue in Scotland for 2008-09.

The largest source of non-North Sea revenue in Scotland is income tax. A 1 per cent variation in the estimate of income tax would revise income tax in Scotland by £107 million, which is equivalent to 0.2 per cent of total non-North Sea revenue.

Table A.4: Effect of a 1% Change in Revenue (Excluding North Sea Revenue): Scotland 2008-09

Impact of 1% variation

(+/- £ million)

As % of total non-North Sea revenue
(+/- %)

Income tax

107

0.2%

Corporation tax (excluding North Sea)

28

0.1%

Capital gains tax

5

0.0%

Other taxes on income and wealth

3

0.0%

National insurance contributions

80

0.2%

VAT

75

0.2%

Fuel duties

21

0.0%

Stamp duties

6

0.0%

Tobacco duties

9

0.0%

Alcohol duties

8

0.0%

Betting and gaming and duties

1

0.0%

Air passenger duty

2

0.0%

Insurance premium tax

2

0.0%

Landfill tax

1

0.0%

Climate change levy

1

0.0%

Aggregates levy

1

0.0%

Inheritance tax

2

0.0%

Vehicle excise duty

4

0.0%

Non-domestic rates

17

0.0%

Council tax

20

0.0%

Other taxes and royalties

7

0.0%

Interest and dividends

7

0.0%

Gross operating surplus

26

0.1%

Rent and other current transfers
(excluding oil royalties and licence fees)

4

0.0%

Total

435

1.0%