Government Expenditure and Revenue in Scotland

Government Expenditure and Revenue in Scotland

SECTION 2: GENERAL GOVERNMENT EXPENDITURE

BACKGROUND

General Government Expenditure (GGE) is the combined expenditure of central government and local authorities, excluding payments between the two sectors. It includes central government's contribution (ie grants, subsidies and loans) to the financing requirements of nationalised industries and other public corporations.

The Government's fiscal policy is guided by two strict rules, first laid out in the Financial Statement and Budget Report (FSBR), July 1997:

the golden rule: over the economic cycle the Government will only borrow to invest and not to fund current expenditure; and
the sustainable investment rule: public debt as a proportion of national income will be held over the economic cycle at a stable and prudent level.

The rules require that current taxpayers pay for current spending since it is the present generation which enjoys its benefits. In addition, a stable and prudent debt ratio will ensure that fiscal policy is run in a responsible way and does not threaten the stability of the economy.

The framework within which the Government will formulate and implement fiscal policy is set out in The Code for Fiscal Stability, published in March 1998. This sets 5 key principles to fiscal management: transparency in the setting of objectives, implementation of fiscal policy, and in the public accounts; stability in the policy-making process and the way policy impacts on the economy; responsibility in managing the public finances; fairness, including between generations; and efficiency in the design, implementation and management of fiscal policy.

A further important requirement of the Code is that governments report regularly on progress in meeting their fiscal objectives. From now on, the FSBR will be supplemented each year by an Economic and Fiscal Strategy Report (EFSR). The first EFSR, published in June 1998, introduced a new format for the public accounts. The key elements of this are described in Appendix E of this report.

GGE in the United Kingdom

Traditionally, the relationship between public spending and national income has been expressed in terms of the ratio of GGE (excluding privatisation proceeds⁵) to Gross Domestic Product (GDP). For the purposes of this report, the discussion of GGE is also defined in this manner⁶. The relationship is shown in Figure 1 for the period since 1971-72, including Treasury projections for 1998-99.

Figure 1: GGE (excl. privatisation proceeds) in the UK as a per cent of money GDP (1), (2)

Notes:
(1) An adjusted money GDP series is used in the calculation of the ratio for the years up to 1989-90. For subsequent years, published GDP is used.

(2) The 1997-98 ratio is provisional, and that thereafter is a forecast.

Source: HM Treasury.

In 1996-97, UK GGE (excluding privatisation proceeds) was equivalent to 41³/₄ per cent of GDP. This compares with a peak of 49¹/₄ per cent in 1975-76. The ratio fell sharply from 47¹/₂ per cent in 1982-83 to 39¹/₄ per cent in 1988-89 (the lowest outturn ratio in the period covered in Figure 1). These were years of strong economic growth. However, this trend was reversed in the 1990-92 recession, when there was an increase in public spending, particularly in areas such as social security. Combined with a reduction in the growth of GDP relative to trend, the ratio reached a cyclical peak of 44¹/₄ per cent in 1992-93. Since then, the ratio of GGE (excluding privatisation proceeds) to GDP has fallen each year to its 1996-97 level of 41³/₄ per cent. The Treasury forecasts that it will fall to around 39³/₄ per cent in 1998-99.

System of Public Expenditure and Data Sources

In the Economic and Fiscal Strategy Report 1998, the Government introduced a new regime for the long-term control of public expenditure. As well as emphasising new aggregates (eg net borrowing and Total Managed Expenditure), the new approach to public spending is based on multi-year plans rather than an annual cycle. Appendix E provides more details.

The descriptions contained in this and the next sub-section refer to the annual Public Expenditure Survey (PES), the Control Total and the Scottish Block. These were part of the annual cycle of control which applied in the financial year 1996-97, the year under focus in this report, and those covered in previous editions of Government Expenditure and Revenue in Scotland.

The annual Public Expenditure Survey⁷ conducted between the Treasury and the main central government Departments results in expenditure being planned, in several areas, on a national rather than a territorial basis (eg the Department of Social Security administers an uniform social security system for Great Britain). In order to provide more information on the division of GGE between the four countries of the UK, an exercise is carried out by the Treasury each year. In the exercise, Departments are asked to allocate, where possible, expenditure to Scotland, Wales, Northern Ireland and England on the basis of where the benefit of the expenditure is most appropriately located. The figures for GGE therefore include, within each country, a wider coverage of expenditure than that for which the Secretaries of State for Scotland, Wales and Northern Ireland are responsible.

The expenditure data in this report are based on the latest Treasury exercise, which covers the outturn year 1996-97⁸. They divide GGE into three broad components, which are discussed in Sections 3-5 below:

Identifiable general government expenditure;
Non-identifiable general government expenditure; and
Other expenditure.

The first two components are conventionally described as "Total GGE on services". Other expenditure includes debt interest, and National Accounts adjustments (which are discussed in Section 5). Aggregate expenditure is summarised in Section 6 below, where Table 8 compares the components of GGE in Scotland with those of the UK.

The Institutional Framework for the Management of Expenditure in Scotland

Within the PES framework, the Secretary of State for Scotland's spending programmes fall into two categories: those within the Scottish "Block" and those outside it. The former are by far the bigger category. In 1996-97, the Scottish Block comprised around 96 per cent of the expenditure within the Secretary of State's responsibility⁹.

The programmes outside the Block are mainly those where there is a requirement for a standard policy across Great Britain. These cover agriculture, fisheries and food and the nationalised industries' financing limits. Planned spending outside the Block is settled programme by programme in negotiations with the Treasury.

For programmes within the Block, a different procedure holds. Under the rules which apply to the territorial Departments, Scotland (like Wales and Northern Ireland) receives a population-related proportion of changes agreed to existing provision for comparable expenditure by non-territorial or Whitehall Departments. This arrangement dates back to the late 1970s. Before then, changes to provision for Scotland were negotiated separately, and in detail, by the Secretary of State with the Chief Secretary to the Treasury.

In the case of England-only programmes, Scotland's population formula in 1996-97 was 10.66 per cent of the England figure. For comparable programmes which applied to both England and Wales (for example, law, order and protective services), Scotland's population formula in 1996-97 was 10.06 per cent. Since the publication of the first edition of Government Expenditure and Revenue in Scotland in 1992, these percentages have been changed to reflect shifts in population movement within the constituent countries of Great Britain. (The former percentages were 11.76 per cent and 11.11 per cent for England and England/Wales, respectively).

An important feature of these arrangements is that, once the size of the Scottish Block is established, the Secretary of State is able to allocate these total resources according to his perception of the needs and priorities for Scotland. He is not constrained to follow the pattern of spending in Whitehall Departments.