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Government Expenditure and Revenue in Scotland 2003-2004

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Section 4: Revenue

This section describes the estimates of the receipts of the public sector. As noted in Section 1, for a variety of practical and theoretical reasons, estimating revenues for the individual countries of the UK is generally more difficult than estimating expenditures.

UK national taxes cannot usually be allocated directly to a region, although HMRC can provide estimates of income tax liabilities and of inheritance tax relating to Scottish deaths. Some other taxes can be reasonably readily estimated for Scotland. For example, most taxes on products can be estimated based on Scottish shares of UK consumers' expenditure on certain goods and services. Other revenues are more difficult to apportion, either because of a lack of detailed information to form the basis of estimation, or because of conceptual difficulties. Included here are capital gains tax, and central government interest and dividend receipts.

The analysis below concentrates on five major taxes: income tax, social security contributions, VAT, local authority revenues and corporation tax. An account of the estimation techniques for the revenue series, together with detailed estimates for 2003-04, can be found in Appendix B.

The section also discusses the recent trends in North Sea revenues.

Aggregate Revenues for Scotland

Table 4.1 shows revenues in the UK in 2003-04, together with Scottish estimates. A longer run of the figures for Scotland, from 1999-2000 to 2003-04, is presented in Section 6.

The calculations for 2003-04 suggest that revenues for Scotland were £34.0 billion (excluding North Sea revenues). This is equivalent to 8.2 per cent of total UK non-oil revenues, and is equal to the Scottish GVA share in 2003.

Table 4.1 Revenue in the UK and Scotland 1, 2003-04

United Kingdom

Scotland

£ million

£ million 2

Share of UK

Income tax (after tax credits)

113,968

8,340

7.3%

Corporation tax (excluding North Sea)

24,985

2,380

9.5%

VAT

69,075

5,680

8.2%

Social Security contributions

72,457

5,790

8.0%

Local Authority revenues

37,353

3,240

8.7%

All other revenues 3

97,044

8,600

8.9%

Total receipts 4

414,882

34,030

8.2%

Sources: UK figures from ONS, HMRC and Treasury.
Notes: 1 The figures for the individual items in the table are on a cash basis; an accruals adjustment is included in all other revenues. For a list of all the taxes included under this category and an explanation of how the individual estimates were derived, see Appendix B. - 2 Rounded to the nearest £10 million. - 3 Includes adjustment deducting EU contributions with respect to VAT, customs duties, and agricultural and sugar levies. - 4 Excludes North Sea revenues.

It is estimated that, in 2003-04, non-oil revenues as a percentage of non-oil GDP were around 39 per cent for Scotland, slightly above the percentage in the UK as a whole.

Main Components of Scottish Revenues

Taken together, income tax, social security receipts, local authority revenues, VAT and corporation tax raised an estimated £25.4 billion in Scotland in 2003-04, over two-thirds of total Scottish revenues. These five components are described below.

Income Tax

The estimated Scottish share of UK income tax is derived from HMRC's Survey of Personal Incomes ( SPI). This survey is carried out annually, sampling from the HMRC's PAYE, Self-Assessment and Claims databases, and covers the income assessable for tax in each tax year. Based on these data, total Scottish income tax liabilities in 2003-04 are 7.3 per cent of the UK total, resulting in estimated receipts of £8.3 billion. As the single largest source of revenue any changes in the revenue share have a significant effect on net borrowing. For example, an increase in the revenue share by 0.1 percentage point lowers net borrowing by about £100 million. For further information on the estimate see Appendix B.

Corporation Tax

This tax is exceptionally difficult to estimate for Scotland, due to both conceptual difficulties and a lack of data. Therefore, the estimate of Scottish corporation tax should be treated with extra caution. It is obtained by attributing a share of the UK total to Scotland based on information from the UK Regional Accounts from ONS. Corporation tax is thereby estimated at around £2.4 billion for 2003-04. Specifically, the data used in this calculation are the Regional Accounts estimates of profits, a component of Gross Operating Surplus, within Gross Value Added. These are based on the ONS Annual Business Inquiry.

Value Added Tax ( VAT) Revenues

A share of the UKVAT total is allocated to Scotland on the basis of consumers' expenditure on the final goods and services affected by the tax. The Scottish share of VAT receipts is based on analyses of Scottish and UK household expenditure data from the Expenditure & Food Survey. HM Revenue and Customs carry out the calculation on behalf of the Scottish Executive. The calculations suggest that Scotland's share of UKVAT revenues was 8.2 per cent in 2003-04, amounting to £5.7 billion.

Social Security Contributions

In 2003-04, total social security contributions in the UK were £72.5 billion. The estimate of the Scottish share involves splitting the total UK receipts into employers' and employees' contributions based on the breakdown published in table 11.1 of the 2004 Blue Book, and allocating shares of these totals to Scotland separately. More information on how this has been done is given in Appendix B. This methodology gave an estimate of £5.8 billion of social security contributions from Scottish residents in 2003-04, which was 8.0 per cent of the UK total.

Local Authority Revenues

The total for Scotland of £3.2 billion in 2003-04 is the sum of council tax and non-domestic rates. This total is 8.7 per cent of the UK total of equivalent taxes, which is higher than Scotland's 8.5 per cent share of the UK population. These estimates have been obtained directly from the Scottish Executive Finance and Central Services Department, which collects the data from Local Authorities. The council tax estimate for Scotland was £1.5 billion, 8.2 per cent of the UK total. An estimated £1.7 billion was collected in non-domestic rates in Scotland, representing 9.2 per cent of the equivalent UK amount.

Other Taxes

These taxes, which are listed in Appendix B, are estimated to have amounted collectively to £8.6 billion in 2003-04, or 8.9 per cent of the UK total.

The "All other revenue" category includes a number of expenditure taxes where Scotland's share is notably higher than the UK average. This is due to Scotland's relatively high share of UK consumers' expenditure on items such as alcohol and tobacco. In addition, the category includes General Government Operating Surplus which is offset by depreciation on the public sector capital stock (as discussed in Section 3). The category also comprises a number of national accounts adjustments, such as the ESA95 treatment of the contributions made to the EU from VAT, customs duties, and agricultural and sugar levies.

North Sea Revenue

Table 4.2 shows the North Sea revenues accruing to the UK Exchequer. 6 These have been highly volatile in the last two decades. From a peak of £12 billion in 1984-85, revenues declined sharply to a trough of £1 billion in 1991-92. Revenues stood at £4.3 billion in 2003-04.

In the Regional Accounts, the UK Continental Shelf is included in a separate region of the UK (the Extra-regio territory) and is not allocated to specific geographic regions. Following this convention, North Sea revenues are excluded from the allocation of revenues to Scotland. However, previous GERS reports have shown the effect of incorporating different assumptions about the allocation of North Sea revenues on the Scottish fiscal position and this analysis is repeated in Section 5.

Table 4.2 North Sea Revenues 1

Year

£ billion

Year

£ billion

Year

£ billion

Year

£ billion

1980-81

3.7

1986-87

4.8

1992-93

1.3

1998-99

2.6

1981-82

6.5

1987-88

4.6

1993-94

1.2

1999-00

2.5

1982-83

7.8

1988-89

3.2

1994-95

1.6

2000-01

4.3

1983-84

8.8

1989-90

2.4

1995-96

2.4

2001-02

5.2

1984-85

12.0

1990-91

2.3

1996-97

3.5

2002-03

4.9

1985-86

11.3

1991-92

1.0

1997-98

3.3

2003-04

4.3

Source: ONS
Note: 1 Consists of North Sea (ring fence) corporation tax, petroleum revenue tax, supplementary charge (from April 2002), and royalties (abolished on 1 January 2003).