Government Expenditure and Revenue Scotland 2009-2010

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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 identify separately 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 18.

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 2009-10

Table 4.1 highlights estimated public sector revenue in Scotland and the outturn data for the UK in 2009-10. 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 2009-10, total public sector non-North Sea current revenue in Scotland was £42.2 billion. This is equivalent to 8.3 per cent of UK total non-North Sea current revenue which is broadly in line with Scotland's share of the UK population 19.

Table 4.1: Current Revenue: Scotland 2009-10

Scotland

UK £ million

Scotland as % of UK

£ million

% of total non-North Sea revenue

Income tax

10,405

24.7%

140,955

7.4%

Corporation tax (excl North Sea)

2,597

6.2%

29,968

8.7%

Capital gains tax

174

0.4%

2,504

7.0%

Other taxes on income and wealth

210

0.5%

2,347

8.9%

National insurance contributions

7,997

18.9%

96,638

8.3%

VAT

7,348

17.4%

83,616

8.8%

Fuel duties

2,207

5.2%

26,197

8.4%

Stamp duties

506

1.2%

7,901

6.4%

Tobacco duties

947

2.2%

8,805

10.8%

Alcohol duties

816

1.9%

9,246

8.8%

Betting and gaming and duties

109

0.3%

1,029

10.6%

Air passenger duty

157

0.4%

1,870

8.4%

Insurance premium tax

190

0.5%

2,262

8.4%

Landfill tax

93

0.2%

946

9.9%

Climate change levy

61

0.1%

687

8.9%

Aggregates levy

42

0.1%

276

15.2%

Inheritance tax

146

0.3%

2,431

6.0%

Vehicle excise duty

446

1.1%

5,584

8.0%

Non-domestic rates 1

1,823

4.3%

22,617

8.1%

Council tax

1,960

4.6%

25,088

7.8%

Other taxes, royalties and adjustments 2

659

1.6%

7,790

8.5%

Interest and dividends

231

0.5%

2,626

8.8%

Gross operating surplus

2,685

6.4%

23,648

11.4%

Rent and other current transfers

392

0.9%

1,638

23.9%

Total current revenue (excluding North Sea revenue)

42,201

100.0%

506,669

8.3%

North Sea revenue 3

Per capita share

545

6,491

8.4%

Geographical share

5,931

6,491

91.4%

Total current revenue (including North Sea revenue)

Per capita share

42,747

513,160

8.3%

Geographical share

48,132

513,160

9.4%

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

2. Although this group includes some 11 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 66 per cent (£437 million) of this estimate for Scotland. This group also contains a small accounting adjustment to align the revenue estimates to those in the April 2011 UK Public Sector Finances Statistical Bulletin. This adjustment is apportioned to Scotland on the basis of Scotland's share of total onshore UK tax revenue.

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

Box 4.1 - Capital Gains Tax

Capital Gains Tax ( CGT) is a tax on the profit or gain made by individuals or companies when they sell, or give away, assets. Exemptions are available for some assets, including gifts between spouses, personal possessions worth below £6,000 and, in most cases, an individual's main home. Individuals have an annual CGT tax-free allowance, which allows them to make a certain amount of gains each year before being liable for tax. For the tax year 2009-10, the personal allowance for most individuals was £10,100.

Between 2005-06 and 2007-08 CGT operated on a similar basis to income tax, with three different bands and tax rates. The system was reformed in 2008-09, and an 18 per cent flat rate of CGT was introduced. The rate was subsequently increased to 28 per cent in 2010-11 as part of a wider series of tax reforms.

Capital Gains Tax: 2005-06 to 2009-10

(£ million)

2005-06

2006-07

2007-08

2008-09

2009-10

Scotland

175

230

305

547

174

UK

3,041

3,812

5,267

7,851

2,504

Scotland as % of the UK

5.8%

6.0%

5.8%

7.0%

7.0%

Scotland's share of UKCGT revenues has increased from 5.8 per cent in 2005-06 to 7.0 per cent in 2009-10. This is lower than either a per capita or GVA share, reflecting the lower value of asset sales in Scotland. In both countries, CGT revenues account for less than 1 per cent of public sector revenues. In both Scotland and the UKCGT revenue fell by around 70 per cent between 2008-09 and 2009-10, significantly larger than the decline in any other revenue. This can be attributed to the fall in the value of many assets and the volume of transactions as a result of the recession.

Income tax is the single largest source of public sector revenue in Scotland. In 2009-10, income tax revenue was estimated at £10.4 billion - approximately a quarter of all public sector revenue in Scotland (excluding revenues from the North Sea).

National insurance contributions represented the second largest revenue source in Scotland, an estimated £8.0 billion in 2009-10 - 18.9 per cent of total non-North Sea revenues. VAT represented the third largest source of revenue and was the largest source of revenue from indirect taxes - accounting for 17.4 percent of total non-North Sea revenues.

Gross operating surplus ( GOS) refers to the operating (or trading) surpluses (or losses) of central government, local government and public corporation trading activity. It was the fourth largest revenue source in Scotland during 2009-10, generating £2.7 billion in revenue, 6.4 per cent of total non-North Sea revenue in Scotland.

Scotland accounted for 11.4 per cent of the total UKGOS in 2009-10. Scotland's large share of the UKGOS is partly due to Scottish Water which is one of the greatest 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.

Corporation tax revenue (excluding that from the North Sea) was estimated at £2.6 billion in Scotland during 2009-10, 6.2 per cent of total non-North Sea current revenue collected in Scotland. 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 the detailed revenue methodology paper on the GERS website.

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 2009-10. Together, council tax and non-domestic rates raised £3.8 billion (9.0 per cent of total non-North Sea revenue) while fuel duties raised £2.2 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 lower than both Scotland's share of the UK population and GVA. For national insurance contributions the Scottish percentage was in line with a per capita share and slightly higher than a GVA share. For VAT and corporation tax (excluding North Sea), the Scotland's share of UK revenue was slightly higher than its share of the UK population and GVA. Revenue from duties on betting and gaming, alcohol and tobacco were also considerably higher than Scotland's share of the UK population or GVA.

The estimated Scottish share of revenue from stamp duties and capital gains tax were lower than both a GVA and 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. Boxes 4.1 and 4.2 discuss capital gains tax and stamp duty in more detail.

Environmental taxes, such as aggregates levy, climate change levy and landfill tax contribute relatively small amounts of revenue to the overall total with each contributing less than 1 per cent of revenue in Scotland and the UK.

Box 4.2 - Stamp Duty

Stamp duty is levied on two types of transactions - i) conveyances and transfers of land and property (stamp duty land tax) and ii) share and marketable security transactions (stamp duty reserve tax). The revenue raised from both sources is reported jointly as a consolidated estimate in Table 4.1. The tables below provide further information on the revenue raised by each element.

Stocks and Shares - Stamp Duty Reserve Tax ( SDRT)

In 2009-10 SDRT raised £258 million in Scotland, 8.6 per cent of the UK total. Over the period 2005-06 to 2007-08, SDRT revenue grew by 30.9 per cent in Scotland and by 20.2 per cent in the UK. However, as with SDLT, SDRT revenue fell significantly between 2007-08 and 2009-10 as the economy entered recession. In Scotland, SDRT receipts fell by 24 per cent over these two years, compared to a fall in the UK as a whole of 28 per cent.

Stamp Duty Reserve Tax: 2005-06 to 2009-10

(£ million)

2005-06

2006-07

2007-08

2008-09

2009-10

Scotland

259

286

339

274

258

UK

3,464

3,756

4,165

3,204

3,016

Scotland as % of the UK

7.5%

7.6%

8.1%

8.6%

8.6%

Property or Land - Stamp Duty Land Tax ( SDLT)

Stamp Duty Land Tax has been relatively volatile over the past five years. Between 2005-06 and 2007-08, SDLT grew by 95 per cent in Scotland, and 34 per cent in the UK. However revenue subsequently fell by 55 per cent in Scotland, and by 49 per cent in the UK, between 2007-08 and 2009-10. This fall is attributed to two factors. Firstly, the recession reduced average selling prices and the number of transactions. Secondly, the UK Government temporarily increased the threshold at which domestic properties were liable to stamp duty between September 2008 and 2009 to support the housing market. This measure was effectively a tax cut and reduced revenues.

Stamp Duty Land Tax: 2005-06 to 2009-10

(£ million)

2005-06

2006-07

2007-08

2008-09

2009-10

Scotland

284

423

554

321

248

UK

7,453

9,634

9,956

4,797

4,885

Scotland as % of the UK

3.8%

4.4%

5.6%

6.7%

5.1%

Estimated Revenue: Scotland and the UK, 2005-06 to 2009-10

Table 4.2 shows estimated current revenue in Scotland and the UK between 2005-06 and 2009-10. Current non-North Sea revenue in Scotland and the UK are estimated to have both grown by approximately 6 percent between 2005-06 and 2009-10 in nominal terms. This reflects strong revenue growth between 2005-06 and 2007-08. During these three years, non-North Sea revenue grew by 13.0 per cent in Scotland and by 13.4 per cent in the UK as a whole. However, non-North Sea revenue subsequently fell by 6.3 per cent in Scotland, and by 6.4 per cent in the UK, between 2007-08 and 2009-10, clearly displaying the effects of the recession on the public finances. This trend is mirrored in most advanced economies. For example, the IMF estimates that across the G7 economies as a whole, government revenue fell by 8 per cent between 2008 and 2009 20.

Over 80 per cent of the fall in total Scottish non-North Sea tax receipts between 2007-08 and 2009-10 is attributable to falls in income tax, corporation tax and VAT.

Corporation tax receipts grew by £538 million (18.3 per cent) in Scotland between 2005-06 and 2007-08, before falling by £875 million (25.2 per cent) over the subsequent two years. A similar trend is observed in the UK as a whole, where corporation tax receipts grew by 17.8 per cent between 2005-06 and 2007-08, before falling by 25.8 per cent between 2007-08 and 2009-10. Income tax receipts followed the same trend as corporation tax. Between 2005-06 and 2007-08 they grew by 17.3 per cent in Scotland, and 16.4 per cent in the UK. However, in the subsequent two years, they fell by 7.6 per cent in Scotland and by 7.3 per cent in the UK as a whole. VAT receipts grew by £826 million (11.6 per cent) between 2005-06 and 2007-08. As part of the UK Government's package of measures to support the economy during the recession, the standard rate of VAT was temporarily reduced from 17.5% to 15% between December 2008 and the December 2009. As a result of this tax cut, and a reduction in household consumption due to the recession, VAT receipts fell by £574 million (7.2 per cent) in Scotland between 2007-08 and 2009-10, in line with the decline across the UK as a whole.

Table 4.2: Current Revenue: Scotland and UK 2005-06 to 2009-10

(£ million)

Scotland

UK

2005-06

2006-07

2007-08

2008-09

2009-10

2005-06

2006-07

2007-08

2008-09

2009-10

Income tax

9,605

10,444

11,266

10,660

10,405

130,562

140,927

152,028

144,401

140,955

Corporation tax (excl North Sea)

2,935

3,255

3,472

2,712

2,597

34,278

37,307

40,384

32,493

29,968

Capital gains tax

175

230

305

547

174

3,041

3,812

5,267

7,851

2,504

Other taxes on income and wealth

219

258

245

245

210

2,493

2,970

2,717

2,738

2,347

National insurance contributions

6,926

7,303

7,850

7,988

7,997

85,559

90,916

95,437

96,613

96,638

VAT

7,095

7,608

7,922

7,438

7,348

81,507

87,740

89,896

85,350

83,616

Fuel duties

1,945

1,976

2,092

2,075

2,207

23,438

23,585

24,905

24,615

26,197

Stamp duties

543

709

893

595

506

10,917

13,390

14,121

8,001

7,901

Tobacco duties

1,026

967

894

894

947

7,952

8,146

8,031

8,358

8,805

Alcohol duties

725

724

749

752

816

7,876

7,914

8,215

8,598

9,246

Betting and gaming and duties

95

107

109

104

109

884

961

961

994

1,029

Air passenger duty

77

94

164

154

157

906

1,112

1,949

1,835

1,870

Insurance premium tax

198

195

194

191

190

2,347

2,304

2,302

2,271

2,262

Landfill tax

68

78

89

85

93

753

825

897

863

946

Climate change levy

65

63

65

65

61

741

696

705

711

687

Aggregates levy

46

46

53

48

42

323

324

339

321

276

Inheritance tax

198

227

269

178

146

3,276

3,618

3,890

2,931

2,431

Vehicle excise duty

389

400

425

446

446

4,950

5,139

5,412

5,602

5,584

Non-domestic rates

1,736

1,741

1,724

1,736

1,823

18,816

19,846

20,357

21,924

22,617

Council tax

1,773

1,862

1,935

1,959

1,960

21,226

22,340

23,522

24,541

25,088

Other taxes, royalties and adjustments

474

506

571

587

659

5,492

5,814

6,407

6,982

7,790

Interest and dividends

607

565

768

604

231

6,897

6,605

8,931

7,029

2,626

Gross operating surplus

2,502

2,524

2,574

2,651

2,685

21,169

22,248

23,019

23,355

23,648

Rent and other current transfers

418

390

405

417

392

1,810

1,721

1,675

1,933

1,638

Total current revenue (excluding North Sea revenue)

39,839

42,272

45,031

43,131

42,201

477,213

510,260

541,367

520,310

506,669

North Sea revenue

Per capita share

793

754

629

1,088

545

9,384

8,924

7,464

12,925

6,491

Geographical share

8,017

7,503

7,115

11,739

5,931

9,384

8,924

7,464

12,925

6,491

Total current revenue (including North Sea revenue)

Per capita share

40,632

43,026

45,661

44,219

42,747

486,597

519,184

548,831

533,235

513,160

Geographical share

47,856

49,775

52,147

54,871

48,132

486,597

519,184

548,831

533,235

513,160

Table 4.3 shows estimates of Scotland's share of UK revenue for five key taxes between 2005-06 and 2009-10. In each year during this period total non-North Sea revenue in Scotland has accounted for 8.3 per cent of UK non-North Sea revenue, broadly in line with Scotland's share of the UK population and slightly higher than a GVA share.

Table 4.3: Non-North Sea Current Revenue: Scotland/ UK Share 2005-06 to 2009-10

(per cent of UK revenue)

2005-06

2006-07

2007-08

2008-09

2009-10

Income tax

7.4%

7.4%

7.4%

7.4%

7.4%

Corporation tax (excluding North Sea revenue)

8.6%

8.7%

8.6%

8.3%

8.7%

National Insurance contributions

8.1%

8.0%

8.2%

8.3%

8.3%

Value added tax

8.7%

8.7%

8.8%

8.7%

8.8%

Local authority revenue 1

8.8%

8.5%

8.3%

8.0%

7.9%

All other revenue

9.3%

9.0%

9.1%

9.3%

9.3%

Total non-North Sea current revenue

8.3%

8.3%

8.3%

8.3%

8.3%

1. Council tax and non-domestic rates 21