Government Expenditure and Revenue in Scotland

Government Expenditure and Revenue in Scotland

SECTION 1: INTRODUCTION

BACKGROUND

This report is the fifth in the series of Scottish Office published estimates of general government expenditure and revenue flows in Scotland. It follows previous publications in April 1992, October 1995, October 1996, and November 1997¹.

The objective, as in the previous publications, is to provide a strictly factual contribution to public understanding of the budgetary issues in Scotland. The report examines existing circumstances and data, using a methodology which is analytically sound and which can be clearly explained.

In this publication, the size of the General Government Borrowing Requirement (GGBR) attributable to Scotland is fully articulated. For convenience, this is described as the "fiscal deficit", in keeping with the terminology commonly used in discussion of Scotland's expenditure and revenue flows. However, it should be recognised that, in practice, this concept has no meaning under the existing constitutional arrangements, whereby the UK is an unitary state.

The report covers the 1996-97 fiscal year. This is the latest period for which the government expenditure and revenue series are available for Scotland. Estimates of Scotland's fiscal position for subsequent years must, for the present, be treated with some caution, as much of the detailed data on actual expenditure and revenue are unavailable.

Structure of Report

The structure of this report is very similar to that adopted in the October 1996 and November 1997 publications, as is much of the text. The emphasis is on providing data for 1996-97, using the same methodology as before². Some of the detailed descriptive background contained in the previous reports is not repeated here; instead, the appropriate cross-references are made to the earlier Government Expenditure and Revenue in Scotland publications³.

Following this introduction, the report adopts the following structure:

* Section 2

This presents the latest estimates of General Government Expenditure (GGE) for the UK and discusses issues concerning definition, and the availability and sources of data for calculating GGE for Scotland.

The Section also refers to recent changes in the presentation and framework of the UK public finances. The discussion is developed further in Appendix E. The new regime has both introduced new aggregates, shifting the focus from the borrowing requirement and GGE towards net borrowing and Total Managed Expenditure, and led to changes in the control regime for public expenditure. As this report covers 1996-97 (ie pre-dates these changes), the analysis continues to be presented in terms of the former aggregates, both for continuity with previous publications and because estimates for Scotland on the new aggregates have not yet been constructed;

* Section 3

This section discusses and provides estimates of "identifiable" GGE: that is, expenditure undertaken in providing services for the benefit of the population in a particular part of the UK, in this case Scotland;

* Section 4

Here the focus is on "non-identifiable" GGE, or that expenditure which is either incurred on behalf of the UK as a whole or cannot be allocated to individual countries. The principal item is defence expenditure, which accounts for almost 60 per cent of total non-identifiable expenditure in the UK;

* Section 5

This examines "other expenditure", a category which includes general government debt interest, and a number of National Accounts adjustments which relate the public expenditure Control Total⁴ to the broader concept of GGE;

* Section 6

This section brings together the three components of GGE discussed in Sections 3-5, providing summary estimates both for Scotland and for the UK;

* Section 7

The other side of the fiscal equation - General Government Receipts (GGR) in Scotland, or tax revenues raised in Scotland - is presented in this section. On the revenue side, the available information relating to Scotland is less well-founded. Many taxes are collected centrally and their distribution by region is often unavailable. In addition, for some components of revenue, there are significant theoretical and practical difficulties in determining an appropriate share to allocate to Scotland. As a result, there is no uniquely correct way to undertake the exercise. The methodology adopted in this report is described fully;

* Section 8

With estimates of both total GGE for Scotland and total tax revenues raised in Scotland, this section derives an estimate of the Scottish GGBR in 1996-97;

* Appendices

There are six appendices, which largely replicate and, where appropriate, update background information contained in the November 1997 publication. Appendices A and B present detailed accounts of the derivation of the Scottish estimates on GGE and GGR respectively. Appendix B also provides a full list of the GGR estimates for Scotland in 1996-97. Appendix C examines the impact of tax reliefs and allowances, which are important considerations in the assessment of Scotland's contribution to UK income tax revenue. Appendix D summarises the Scottish fiscal position for the five years up to 1996-97, including revisions to estimates published in previous reports. New tables have been added giving a detailed breakdown of GGR and GGE over the period. The five-year series for the Scottish GGBR is presented in money terms (at current prices), as a percentage of GDP, and as a share of the UK GGBR. Appendix E is new, and outlines the revised format and framework for the public finances introduced by the Government in June 1998. Finally, Appendix F provides a reference list of abbreviations.

Acknowledgements

The report has been prepared by the Economics Advice and Statistics Division (EAS) of the Scottish Office Education and Industry Department. Acknowledgment is due for the help and advice received from other Departments within the Scottish Office and from Government Departments and other organisations outwith Scotland, including HM Treasury, Welsh Office, Inland Revenue, Customs and Excise, Office for National Statistics and the House of Commons Library.