Government Expenditure and Revenue Scotland 2009-2010

ANNEX B EXPENDITURE METHODOLOGY

This appendix outlines the methodologies used to estimate public sector expenditure for Scotland and highlights where these methodologies differ from those used in previous editions of GERS.

Methodology

Figures for UK and Scottish public sector expenditure are taken directly from official UK Government sources.

Total Expenditure on Services ( TES) can be separated into two components:

• Identifiable expenditure: that is expenditure that can be clearly allocated to a country or region in terms of having been spent for the benefit of that country or region; and

• Non-identifiable expenditure; that is expenditure that cannot be identified as benefiting a particular country or region of the UK but is instead incurred on behalf of the UK as a whole.

Total Expenditure on Services covers most expenditure by the public sector. Adding an accounting adjustment reconciles it with Total Managed Expenditure ( TME). In 2009-10, TES accounted for approximately 95 per cent of TME.

UK Expenditure Figures

The primary data source used to estimate Scottish public sector expenditure is the Public Expenditure Statistical Analyses ( PESA) database, published by HM Treasury ³⁰. Within PESA, tables relating to a Country and Regional Analysis ( CRA) are available in which UK Government departments and devolved administrations have allocated expenditure programmes to Scotland, Wales, Northern Ireland and English regions.

Methodologies for apportioning non-identifiable expenditure

In GERS, the methodology to apportion non-identifiable expenditure and identifiable expenditure which occurs outside the UK to Scotland varies according to the particular expenditure estimated.

The methodologies used are listed in Table B.1. Each reflects the approach that is thought to capture most appropriately the 'who benefits' principle. None of the methods used to apportion non-identifiable expenditure to Scotland have changed from the previous edition of GERS.

Table B.1: Apportionment Methodologies for Non-Identifiable Expenditure: Scotland 2005-06 to 2009-10 ^{1, 2}

	Non-id	Outside the UK
General public services
Public and common services	Population	n/a
International services	Population	Population
Public sector debt interest	Population	n/a
Defence	Population	n/a
Public order and safety	Population	n/a
Economic affairs
Enterprise and econ development 3	Population	Population
Science and technology	GVA	Population
Employment policies	n/a	Population
Agriculture, forestry and fisheries	n/a	n/a
Transport	GVA	Population
Environment protection 4	GVA & Population	Population
Housing and community amenities	n/a	n/a
Health	n/a	Population
Recreation, culture and religion	Population	Population
Education and training	n/a	Population
Social protection	n/a	Population
EU transactions	Actual	GVA, VAT & Population

1: Where there is no UK non-identifiable expenditure this is entered as not applicable (n/a).

2: Identifiable expenditure outside the UK, except EU transactions, is apportioned on a per capita basis.

3: All environment protection expenditure is apportioned on a GVA basis, except UKAEA and BNF expenditure on nuclear decommissioning, which is apportioned on a per capita basis.

Methodology for estimating the accounting adjustment

The public sector expenditure analysis in this report focuses on Total Expenditure on Services ( TES). In UK public finance documents, the principal measure of public sector expenditure is Total Managed Expenditure ( TME). The main difference between TES and TME is that TES does not include general government capital consumption and does not reverse the deduction of certain VAT refunds in the budget-based expenditure data. It also contains a number of items that are in budgets but not in TME, for example the grant equivalent element of student loans. TME is consistent with ONS National Accounts and the UK Public Sector Finances.

An accounting adjustment is introduced to align TES to TME. The largest component of the UK accounting adjustment is general government capital consumption. This is a measure of the amount of fixed capital resources used up in the process of providing public services.

The estimate of an accounting adjustment for Scotland is calculated using a variety of apportionment methodologies. Firstly, estimates of capital consumption from the ONS regional accounts, together with data from UK local government returns, have been used to estimate capital consumption for Scotland. In 2009-10, capital consumption for Scotland was estimated at £1.8 billion (9.2 per cent of the UK total). This calculation is identical to that underpinning the estimates of general government gross operating surplus on the revenue side. These two elements cancel out when calculating net borrowing.

VAT refunds have been allocated to Scotland using the apportionments derived in the revenue calculations (see Appendix A), and therefore cancel out in the calculation of net borrowing. The figures for Scottish student loan subsidies were provided by HM Treasury. The imputed subsidy from local authorities to HRA adopt the same apportionment allocation as in the gross operating surplus calculations on the revenue side, and the imputed flows for Renewable Obligation Certificates adopts the same methodology used in 'other taxes, royalties and adjustments'. These items cancel in the net borrowing calculations. The Scottish share of the Nigerian debt write-off has been allocated on a per capita basis. The current and capital residuals are allocated to Scotland using the appropriate TES ratios.

In summary, the accounting adjustment for Scotland was estimated at £2.9 billion in 2009-10, or 9.6 per cent of the total UK Accounting Adjustment.

Amendments to PESACRA Data

A number of significant improvements have been made to the PESACRA database in recent years to apportion expenditure more accurately to countries and regions. While many anomalies in previous editions of PESACRA have been addressed and are now reflected in both PESACRA 2011 and this GERS report, a small number of supplementary amendments to the PESACRA 2011 dataset were made in producing GERS. The aim of these refinements was to ensure that the public sector expenditure figure for Scotland captures as accurately as possible expenditure for the benefit of Scotland.

The total amendment made to PESA in producing this edition of GERS is shown in Table B2 below. In the financial year 2009-10, the figure of total expenditure attributed to Scotland in GERS is £411 million lower than the corresponding PESA figure (using default apportionments for non- ID expenditure without further consideration). Table B3 sets out in detail the sources of these revisions.

Table B.2: Amendments to Estimates of Total Public Sector Expenditure from PESA 2011: UK and Scotland 2005-06 to 2009-10

	(£ million)
	2005-06	2006-07	2007-08	2008-09	2009-10
Total Expenditure in Scotland ( PESA) 31	48,214	50,491	53,629	56,715	59,581
Total Expenditure in Scotland ( GERS)	47,732	50,274	53,299	56,342	59,170
Total revision to expenditure in Scotland	-482	-217	-330	-373	-411

Table B.3: Amendments to Estimates of Total Public Sector Expenditure from PESA 2011: 2005-06 to 2009-10

	(£ million)
	2005-06	2006-07	2007-08	2008-09	2009-10
Nuclear-related Expenditure	-426	-115	-134	-77	-128
Cross-border policing	-29	-64	-58	-63	-72
Railways expenditure	-11	-9	-80	-112	-89
Olympics	-	-8	-32	-92	-91
Pensions revisions	2	-	-4	-10	-11
Learned Societies	4	5	6	6	7
Other minor revisions	-22	-25	-28	-25	-27
Total	-482	-217	-330	-373	-411

Nuclear decommissioning and related expenditures

In PESACRA 2011, expenditure on nuclear decommissioning was classified as identifiable to the region where nuclear facilities are located. However, as discussed in previous editions of GERS³², it is believed that this expenditure is best captured as a non-identifiable expenditure. This has been amended and nuclear decommissioning expenditure has been apportioned on a per capita basis. Other associated nuclear expenditure, such as security at nuclear facilities, has also been reapportioned on a per capita basis.

Cross-Border Policing

PESACRA 2011 assigns a population share of the expenditure associated with the Serious and Organised Crime Agency ( SOCA) and the Assets Recovery Agency ( ARA). However a transfer from the Scottish Government to these organisations is already included in PESA to pay for the activities these organisations undertake in Scotland. Any further attribution of expenditure to Scotland would therefore double count the expenditure occurred on behalf of Scotland. As a result, the additional population share of expenditure assigned to Scotland in PESACRA 2011 has been re-allocated to the rest of the UK.

Railways Expenditures

As discussed in previous editions of GERS³³, railways expenditure, alongside expenditure on roads, is apportioned to Scotland on an 'in' basis. This means that expenditure 'in' Scotland on railways is apportioned to Scottish public sector expenditure while, where possible, a zero share is allocated to Scotland for all expenditure on rail across the rest of the UK. This required a number of modifications to the underlying PESA data which affected the expenditure by London and Continental Railways, the Channel Tunnel Rail link, and Network Rail.

2012 Olympics

A number of changes have been made to the treatment of expenditure associated with the London Olympic Games. These are discussed in Box 6.3.

Public Sector Pensions

In PESACRA 2011, expenditure for the Scottish Office Pension Agency, NHS and Teacher pensions was allocated only to Scotland. In contrast, expenditure by comparable pension agencies across the rest of the UK was allocated to the countries and regions of the UK based on the residence of the recipient of the pension. To correct this asymmetry, information from the Scottish Office Pension Agency was used to re-apportion these pension expenditures across the UK according to residence. As some elements of the pension expenditure were negative this change has resulted in a slight increase in expenditure assigned to Scotland in one of the years.

Learned Societies

Expenditure associated with a number of learned societies, for example the Royal Society and the Royal Academy of Engineering, are attributed only to London in PESACRA 2011 despite the benefits of their activities benefitting all in the UK and overseas. Such organisations have been re-apportioned with Scotland receiving a population share of expenditure.

Other amendments

A number of other minor amendments have been made to PESA to correct asymmetries in the regional attribution of expenditures related to consumer protection, civil aviation, tourism and libraries amongst others. These are discussed further in previous editions of GERS.

Revisions to Expenditure Estimates from GERS 2008-09

Tables B.4 and B.5 set out the changes in estimates of public expenditure in Scotland and the UK between this report and GERS 2008-09. These revisions reflect changes in the underlying PESACRA data, revisions to the GERS methodology and revisions to the data sources used to apportion non identifiable expenditure to Scotland. Revisions to public expenditure that can be traced to changes in the PESACRA database are specified separately.

Revisions to total expenditure

Table B.4 displays the difference between the estimates of total expenditure in GERS 2008-09 and those contained in Chapter 6 of this publication.

Total public sector expenditure for Scotland in 2008-09 has been revised down by £118 million (0.2 per cent of total expenditure). Approximately three quarters of this revision reflects changes to the methodology used to apportion expenditure associated with the London Olympic Games, as discussed in Box 6.3. For the UK as a whole total expenditure has been revised down by £297 million in 2008-09 (less than 0.1 per cent of total expenditure). Around 90 per cent of this revision reflects changes made in the estimates of total UK public sector expenditure reported in PESA 2011 which have a corresponding impact on the estimates for the UK in this edition of GERS.

Table B.4: Revisions to Estimates of Total Expenditure: Scotland 2005-06 to 2008-09

	(£ million)
	2005-06	2006-07	2007-08	2008-09
Scotland
GERS 2008-09	47,677	50,093	53,205	56,460
GERS 2009-10	47,732	50,274	53,299	56,342
Revision	55	181	94	-118
Of which revisions made in PESA 2011	228	131	127	10
UK
GERS 2008-09	501,180	522,904	555,652	602,399
GERS 2009-10	501,208	522,853	555,619	602,102
Revision	28	-51	-33	-297
Of which revisions made in PESA 2011	147	-51	-33	-276
Scotland/ UK Ratio
GERS 2008-09	9.5%	9.6%	9.6%	9.4%
GERS 2009-10	9.5%	9.6%	9.6%	9.4%
Revision	0.0%	0.0%	0.0%	0.0%

All other revisions are net changes between GERS 2008-09 and GERS 2009-10.

Total Revision to expenditure (including accounting adjustment)

The overall change in Total Managed Expenditure ( TME) between GERS 2008-09 and GERS 2009-10 is highlighted below. The revision is equal to the sum of revisions to Total Expenditure on Services ( TES) and the accounting adjustment. For all years the revisions to TME are less than 0.4 per cent.

Table B.5: Revisions to Estimates of Total Managed Expenditure: Scotland 2005-06 to 2008-09

	(£ million)
	2005-06	2006-07	2007-08	2008-09
Total Expenditure on Services
GERS 2008-09	47,677	50,093	53,205	56,460
GERS 2009-10	47,732	50,274	53,299	56,342
Accounting Adjustment
GERS 2008-09	2,238	2,408	2,456	2,553
GERS 2009-10	2,230	2,418	2,503	2,571
Total Managed Expenditure
GERS 2008-09	49,915	52,501	55,661	59,013
GERS 2009-10	49,962	52,692	55,803	58,913
Revision to Total Managed Expenditure	47	191	142	-100

Sensitivity Analysis

As the figures for public sector expenditure for Scotland contained in this report are estimates, it is important to obtain a sense of the impact on total expenditure of any possible variation in the estimates of individual expenditure components. Table B.6 illustrates the effect a 1 per cent variation in the estimate of each expenditure programme would have on overall expenditure for Scotland in 2009-10.

As the largest elements of public sector expenditure for Scotland, changes in the estimated level of social security, health and education will have the most significant impact on estimated total public sector expenditure for Scotland.

Table B.6: Effect of a 1% Change in Expenditure: Scotland 2009-10

	Impact of 1% variation
	(+/- £ million)	as % of total expenditure (+/- %)
General public services
Public and common services	16	~
International services	7	~
Public sector debt interest	26	~
Defence	32	0.1%
Public order and safety	26	~
Economic affairs
Enterprise and economic development	11	~
Science and technology	4	~
Employment policies	3	~
Agriculture, forestry and fisheries	9	~
Transport	29	~
Environment protection	12	~
Housing and community amenities	19	~
Health	107	0.2%
Recreation, culture and religion	15	~
Education and training	77	0.1%
Social protection	202	0.3%
EU transactions	-2	~
Total	592	1.0%

- : less than £0.5 million

~ : less than 0.05%