Government Expenditure and Revenue in Scotland

Government Expenditure and Revenue in Scotland

SECTION 8: GENERAL GOVERNMENT BORROWING REQUIREMENT

DEFINITION
The General Government Borrowing Requirement (GGBR) is the difference between General Government Expenditure (defined to exclude privatisation proceeds) and General Government Receipts (defined to exclude North Sea oil revenues). The GGBR - which for convenience will also be referred to here as the "fiscal deficit" - is an estimate of the extent to which general government spending for Scotland exceeds taxes raised in Scotland. It should be emphasised that the GGBR is the difference between two large numbers, both of which are estimates and subject to potential margins for error.

GGBR IN SCOTLAND
Given this caveat, Table 12 sets out the central estimate of the "fiscal deficit" in Scotland in 1996-97 and compares this with the UK figure.

Table 12. The "fiscal deficit" in Scotland and the UK, 1996-97

		Scotland		UK		Scotland as a % of UK

General Government Expenditure (£bn) ⁽¹⁾		31.8		314.9		10.1 ⁽⁵⁾
General Government Receipts (£bn) ⁽²⁾		24.7		283.2		8.7 ⁽⁵⁾
General Government Borrowing Requirement (£bn ) ⁽³⁾		7.1		31.7		22.5 ⁽⁵⁾
GGBR as a percentage of GDP ⁽⁴⁾		11¹/₄		4¹/₄

Notes: 1. GGE excluding privatisation proceeds.
2. GGR excluding North Sea oil revenues.
3. GGBR excludes both North Sea oil revenues and privatisation proceeds. The GGBR differs from the Public Sector Borrowing Requirement (PSBR) in that it relates only to central and local government borrowing and does not include the market and overseas borrowings of the nationalised industries and other public corporations.
4. The denominator used here is non-oil GDP in current market prices in 1996-97. The derivation of the respective figures for the UK and Scotland is given in footnote 24. Scottish GDP (excluding oil) is estimated to be £63.7 billion and the comparable UK figure at £737.6 billion.
5. Percentages based on unrounded figures.

With aggregate GGE (excluding privatisation proceeds) for Scotland in 1996-97 estimated at £31.8 billion and GGR (excluding North Sea oil revenues) estimated at £24.7 billion, Scotland had an estimated GGBR of £7.1 billion. On the same basis, the UK had a GGBR of £31.7 billion in 1996-97. Scotland's share of the UK deficit was 22.5 per cent, which is higher than in the 4 preceding years (see Appendix D, which gives the 5-year series).

In order to derive a sense of the relative orders of magnitude of these deficits, it is conventional to express them as percentages of the respective GDPs. In the case of Scotland, the "fiscal deficit" in 1996-97 was 11¹/₄per cent of GDP; the corresponding figure for the UK was 4¹/₄ per cent²⁴.

THE EFFECT OF NORTH SEA REVENUES
As noted in Section 7, the UK Continental Shelf is treated in the Regional Accounts as a separate region and, as a result, the foregoing estimates of GGR, and in turn the GGBR estimates, do not include North Sea revenues. However, following the convention of previous reports²⁵, this sub-section considers the effects on the estimated Scottish "fiscal deficit" of different assumptions on the allocation of North Sea revenues. As noted in Section 7, total North Sea revenues amounted to around £3.6 billion in 1996-97.

Some commentators have assumed that Scotland receives between two-thirds and 90 per cent of North Sea revenues. Table 13 illustrates the effects of allocating various proportions (from 0 to 100 per cent) of North sea oil revenue to Scotland. The last two lines of the table show the estimated Scottish GGBR under each scenario, when privatisation proceeds are, respectively, excluded and included. Hence, if, for example, all oil revenues were attributed to Scotland, the "fiscal deficit" would fall from the central estimate of £7.1 billion to around £3.6 billion. With the inclusion of privatisation proceeds, the equivalent figures would be £6.7 billion and £3.2 billion, respectively.

Table 13. 1996-97 "fiscal deficit" for Scotland: effect of different allocations of North Sea oil revenues ⁽¹⁾

£ million
	North Sea Revenues wholly excluded	North Sea Revenues allocated by GDP share	North Sea Revenues allocated by population	66% of North Sea Revenues included	80% of North Sea Revenues included	90% of North Sea Revenues included	All North Sea Revenues included



GGR	24,690	25,000	25,000	27,040	27,540	27,900	28,250
GGE ⁽²⁾	31,820	31,820	31,820	31,820	31,820	31,820	31,820
GGBR ⁽³⁾	7,130	6,820	6,820	4,780	4,280	3,920	3,570
GGBR ⁽⁴⁾	6,740	6,440	6,430	4,390	3,890	3,540	3,180

Notes: 1. North Sea oil revenues totalled £3.56 billion in 1996-97.
2. Excluding privatisation proceeds.
3. Excluding privatisation proceeds. Estimates are based on unrounded figures.
4. Including privatisation proceeds. Estimates are based on unrounded figures.

For consistency, when estimating the ratio of GGBR to GDP incorporating some or all oil revenues, the measure of GDP should also include the relevant proportion of output from the Continental Shelf. For example, if the assumption is made that 100 per cent of oil revenues and output are allocated to Scotland, the "fiscal deficit" would be 4 per cent of (a much larger) "Scottish" GDP figure²⁶. This compares with a ratio of 3¹/₄per cent in the UK as a whole²⁷.

THE PRINCIPAL CONCLUSIONS
The calculations required to derive a "fiscal deficit" for Scotland are subject to inevitable imprecision due to the need to estimate a number of elements of both expenditure and revenue. The calculation of GGE for Scotland (specifically the non-identifiable and other expenditure components) cannot be carried out with the same accuracy as that for the UK as a whole. Moreover, there are practical and theoretical difficulties in determining an appropriate share of UK revenues to allocate to Scotland. In addition, a variation in the choice of alternative assumptions would inevitably change the detailed arithmetic of the "fiscal deficit". As a result, the GGBR estimate presented here should be regarded as indicative rather than precise.

Nonetheless, it remains the case that the analysis of government expenditure and revenue undertaken in this report does provide a good assessment of the broad orders of magnitude in Scotland, thus enabling some important conclusions to be drawn. In particular, based on the assumptions outlined in the earlier sections of the report, the central estimate of Scotland's "fiscal deficit" in 1996-97 is £7.1 billion, or 11¹/₄ per cent of GDP (excluding oil revenues and privatisation proceeds). The comparable UK figures are respectively £31.7 billion and 4¹/₄ per cent. If, in the extreme case, all North Sea revenues and privatisation proceeds are included and the definition of "Scottish" GDP incorporates the oil and gas production of the Continental Shelf, the Scottish "fiscal deficit" would be £3.2 billion, or 4 per cent of output. This compares with a ratio of 3¹/₄ per cent in the UK as a whole (inclusive of privatisation proceeds).

These figures present a static analysis: that is, they are concerned only with the position in 1996-97, the latest year for which the government expenditure and revenue series are available for Scotland. Over time, the most important determinant of the estimated fiscal position for Scotland is that of the UK as a whole. The Treasury's Economic and Fiscal Strategy Report 1998, which provides a time-series for the Public Sector Borrowing Requirement (PSBR, now called the Public Sector Net Cash Requirement), shows that the UK fiscal stance is subject to continual change. Since its cyclical peak of 7 per cent of GDP in 1993-94, the PSBR has been on a firm downward trend brought about by higher taxation yields and restraints on public expenditure. In 1996-97 - the year under examination in this report - the PSBR was equivalent to 3 per cent of GDP and it fell again in 1997-98 to a ¹/₂ per cent. This fiscal tightening is likely to have led to a reduction in Scotland's GGBR. However, for the present, estimates of the Scottish fiscal position for the years after 1996-97 must be treated with some caution as much of the relevant data are not yet available.

The trends in Scotland's GGBR between 1992-93 and 1996-97 are shown in Appendix D. Scotland's GGBR increased up to 1993-94, before falling thereafter. The central estimate of 11¹/₄ per cent of GDP in 1996-97 compares with the cyclical peak of 15³/₄ per cent in 1993-94 and an estimated deficit of 12¹/₂ per cent of GDP in 1995-96.

SECTION 8: GENERAL GOVERNMENT BORROWING REQUIREMENT

DEFINITION

GGBR IN SCOTLAND

THE EFFECT OF NORTH SEA REVENUES

THE PRINCIPAL CONCLUSIONS