We have a new website go to gov.scot

Government Expenditure and Revenue Scotland 2007-2008

Listen

3 SCOTLAND'S PUBLIC SECTOR ACCOUNTS

Introduction

This chapter provides a summary of Scotland's public sector accounts for the years 2003-04 to 2007-08. It outlines the latest estimates of public sector revenue in Scotland and expenditure for Scotland, and includes:

  • Headline estimates of public sector revenue in Scotland and of expenditure for Scotland, the key aggregates for assessing the strength of public finances in Scotland;
  • Five-year estimates of current and capital expenditure for Scotland and key elements of public sector revenue in Scotland;
  • Estimates of the current budget balance and net fiscal balance of the public sector in Scotland.

As discussed in the preface, within the present constitutional arrangements, there is no formal requirement for a comprehensive compilation of UK country and regional budgetary accounts. Therefore, the results presented in this section are estimates of public sector revenue in Scotland and of expenditure for Scotland, i.e. as statistical estimates, not as precise financial accounts and should be viewed accordingly.

Current and Capital Budgets

Table 3.1 sets out estimates of public sector revenue in and expenditure for Scotland over the financial years 2003-04 to 2007-08. The figures for revenue and expenditure correspond to the estimates contained in Chapters 4, 5 and 610.

Current revenue, as defined in the UK National Accounts, is the sum of all revenue raised in a particular year by the entire public sector 11. In Scotland, this consists of the Scottish Government, the UK Government, local authorities and public corporations. The main component is tax revenues.

Public sector current expenditure is the sum of the current expenditure of general government for Scotland and certain distributive transactions (interest and dividends) payable by public corporations. Current expenditure includes items such as wages and salaries, social security payments and day to day health expenditure.

Public sector capital expenditure includes capital formation, the net acquisition of land, and net expenditure through capital grants. Net investment is public sector capital expenditure, net of capital consumption. Capital consumption represents the amount of fixed capital used up each year. It is generally calculated from a model based on assumptions about asset lives and a rolling estimate of the public sector's stock of capital assets derived from annual capital expenditure data.

The term net fiscal balance measures the difference between public sector expenditure and revenue. In Scotland, the gap between public sector revenue and expenditure is not directly reflected in borrowing (or saving) and instead, is part of the overall fiscal stance of the UK public sector.

In GERS, three estimates of Scotland's public sector accounts are presented, (i) an estimate excluding North Sea revenue, (ii) an estimate including a per capita share of North Sea revenue and (iii) an estimate including an illustrative geographical share of North Sea revenue. Chapter 5 contains a discussion of North Sea revenue and the precise definitions used here.

Table 3.1: Current and Capital Budgets: Scotland 2003-04 to 2007-08

(£ million)

2003-04

2004-05

2005-06

2006-07

2007-08

Current Budget

Current revenue

Excluding North Sea revenue

35,022

37,369

40,095

42,674

45,191

Including North Sea revenue (per capita share)

35,385

37,808

40,889

43,440

45,851

Including North Sea revenue (geographical share)

38,543

41,697

47,957

50,338

52,511

Current expenditure

39,303

40,924

43,486

45,305

48,073

Current expenditure accounting adjustment

1,741

2,136

2,220

2,529

2,746

Capital consumption

1,179

1,203

1,293

1,389

1,473

Balance on current budget (surplus is positive, deficit is negative)

Excluding North Sea revenue

-7,202

-6,894

-6,904

-6,549

-7,102

Including North Sea revenue (per capita share)

-6,838

-6,455

-6,110

-5,783

-6,441

Including North Sea revenue (geographical share)

-3,680

-2,566

957

1,114

219

Capital Budget

Capital expenditure

3,056

3,701

4,260

4,962

5,263

Capital expenditure accounting adjustment

127

156

266

272

203

Capital consumption

-1,179

-1,203

-1,293

-1,389

-1,473

Net Investment

2,004

2,654

3,233

3,844

3,992

Net Fiscal Balance (surplus is positive, deficit is negative)

Excluding North Sea revenue

-9,206

-9,548

-10,137

-10,394

-11,094

Including North Sea revenue (per capita share)

-8,843

-9,109

-9,344

-9,627

-10,433

Including North Sea revenue (geographical share)

-5,685

-5,220

-2,276

-2,730

-3,774

Box 3.1 - Current Budget Balance and Net Fiscal Balance

Scotland's current budget balance illustrates the difference between current revenue and current expenditure, including capital consumption and an accounting adjustment. It measures the degree to which current taxpayers meet the cost of paying for the public services they use and a contribution to debt interest payments. It is therefore an important indicator of intertemporal fairness and indicates the sustainability of current policies. National governments typically aim to manage current surpluses and deficits to ensure balance over the longer term and that any systematic excess of total expenditure over and above revenue is used only for capital expenditure, which will accrue benefits to future tax payers.

Tables 3.2 a - c present the estimates of Scotland's public sector accounts as a percentage of Gross Domestic Product ( GDP). Box 3.2 discusses the process used to estimate Scotland's GDP under the three sets of estimates for North Sea revenue.

Table 3.2a: Current and Capital Budgets (Excluding North Sea Revenue) % GDP: Scotland 2003-04 to 2007-08

(per cent of GDP)

2003-04

2004-05

2005-06

2006-07

2007-08

Current Budget

Current revenue

Excluding North Sea revenue

38.3

38.7

39.6

39.6

39.8

Current expenditure

43.0

42.4

42.9

42.0

42.3

Current expenditure accounting adjustment

1.9

2.2

2.2

2.3

2.4

Capital consumption

1.3

1.2

1.3

1.3

1.3

Balance on current budget (surplus is positive, deficit is negative)

Excluding North Sea revenue

-7.9

-7.1

-6.8

-6.1

-6.3

Capital Budget

Capital expenditure

3.3

3.8

4.2

4.6

4.6

Capital expenditure accounting adjustment

0.1

0.2

0.3

0.3

0.2

Capital consumption

-1.3

-1.2

-1.3

-1.3

-1.3

Net Investment

2.2

2.8

3.2

3.6

3.5

Net Fiscal Balance (surplus is positive, deficit is negative)

Excluding North Sea revenue

-10.1

-9.9

-10.0

-9.6

-9.8

Table 3.2b: Current and Capital Budgets (Per Capita Share North Sea Revenue) % GDP: Scotland 2003-04 to 2007-08

(per cent of GDP)

2003-04

2004-05

2005-06

2006-07

2007-08

Current Budget

Current revenue

Including North Sea revenue (per capita share)

38.1

38.5

39.5

39.5

39.4

Current expenditure

42.3

41.6

42.0

41.2

41.3

Current expenditure accounting adjustment

1.9

2.2

2.1

2.3

2.4

Capital consumption

1.3

1.2

1.2

1.3

1.3

Balance on current budget (surplus is positive, deficit is negative)

Including North Sea revenue (per capita share)

-7.4

-6.6

-5.9

-5.3

-5.5

Capital Budget

Capital expenditure

3.3

3.8

4.1

4.5

4.5

Capital expenditure accounting adjustment

0.1

0.2

0.3

0.2

0.2

Capital consumption

-1.3

-1.2

-1.2

-1.3

-1.3

Net Investment

2.2

2.7

3.1

3.5

3.4

Net Fiscal Balance (surplus is positive, deficit is negative)

Including North Sea revenue (per capita share)

-9.5

-9.3

-9.0

-8.8

-9.0

Table 3.2c: Current and Capital Budgets (Geographical Share North Sea Revenue) % GDP: Scotland 2003-04 to 2007-08

(per cent of GDP)

2003-04

2004-05

2005-06

2006-07

2007-08

Current Budget

Current revenue

Including North Sea revenue (geographical share)

36.4

36.8

38.8

39.1

37.1

Current expenditure

37.1

36.1

35.2

35.2

33.9

Current expenditure accounting adjustment

1.6

1.9

1.8

2.0

1.9

Capital consumption

1.1

1.1

1.0

1.1

1.0

Balance on current budget (surplus is positive, deficit is negative)

Including North Sea revenue (geographical share)

-3.5

-2.3

0.8

0.9

0.2

Capital Budget

Capital expenditure

2.9

3.3

3.4

3.9

3.7

Capital expenditure accounting adjustment

0.1

0.1

0.2

0.2

0.1

Capital consumption

-1.1

-1.1

-1.0

-1.1

-1.0

Net Investment

1.9

2.3

2.6

3.0

2.8

Net Fiscal Balance (surplus is positive, deficit is negative)

Including North Sea revenue (geographical share)

-5.4

-4.6

-1.8

-2.1

-2.7

Box 3.2: Scotland's GDP with and without North Sea GDP

When calculating Scotland's capital and current budgets as a percentage of GDP, the measure of GDP used must adopt the same assumptions made in the corresponding budget calculations.

When Scotland's public sector accounts are presented excluding North Sea revenue, they are expressed as a percentage of Scotland's GDP excluding the amount of GDP arising from North Sea activities.

When a proportion of North Sea revenue is included in the Scottish public sector revenue estimates, the same share is included in Scottish GDP. For example, if 100 per cent of North Sea revenue were included in the Scottish estimate, then 100 per cent of North Sea GDP is included in Scotland's corresponding GDP figure.

Scotland's GDP figures under the three sets of estimates presented above are reflected in the following table. Further information on the methodology used to produce GDP estimates for Scotland is provided in Scottish Economic Statistics 2008 12.

Scottish GDP Including and Excluding North Sea GDP: 2003-04 to 2007-08

(£ million)

2003-04

2004-05

2005-06

2006-07

2007-08

Scottish GDP

Excluding North Sea GDP

91,352

96,482

101,252

107,749

113,608

Including per capita share of North Sea GDP

92,989

98,313

103,640

109,985

116,277

Including geographical share of North Sea GDP

106,033

113,295

123,609

128,821

141,634

The current budget surplus is defined as current revenue (including capital taxes) less current expenditure and capital consumption.

In 2007-08, excluding North Sea revenue, current expenditure exceeded current revenue in Scotland leading to a current budget deficit of £7.1 billion (or 6.3 per cent of GDP) as presented in Table 3.2a. With a per capita share of North Sea revenue, current expenditure exceeded current revenue in Scotland by £6.4 billion (or 5.5 per cent of GDP - see Table 3.2b).

In 2007-08, including an estimated geographical share of North Sea revenue, total current revenue exceeded current expenditure for Scotland to yield a current budget surplus of £219 million (or 0.2 per cent of GDP - see Table 3.2c). In 2007-08, the UK current budget position including 100 per cent of all North Sea revenue, was a deficit of £5.3 billion (or -0.4 per cent of GDP), as published in the HM Treasury Financial Statement and Budget Report 2009.

As Tables 3.1 and 3.2 highlight, any estimate of Scotland's current balance depends on assumptions regarding the allocation of North Sea revenue. In 2005-06, 2006-07 and 2007-08, the estimated current budget balance in Scotland including a geographical share of North Sea revenue was in surplus. Under the assumption of a geographical share of North Sea revenue, the greatest surplus on the current budget over the past five years was £1.1 billion in 2006-07, with the greatest deficit £3.7 billion in 2003-04.

The 'net fiscal balance' is equal to public sector current and capital revenue less public sector current and capital expenditure. A positive figure, i.e. a surplus, in any given year is obtained if total public sector revenue in Scotland is greater than total public sector expenditure.

In 2007-08, excluding North Sea revenue, total revenue was less than total expenditure yielding an estimated negative net fiscal balance of £11.1 billion (or 9.8 per cent of GDP). With a per capita share of North Sea revenue the estimated negative net fiscal balance for Scotland was £10.4 billion (or 9.0 per cent of GDP).

Including an estimated geographical share of North Sea revenue, total revenue was less than total expenditure for Scotland to yield a negative net fiscal balance of £3.8 billion (or 2.7 per cent of GDP). In 2007-08, the equivalent UK position including 100 per cent of all North Sea revenue, referred to in the UK Budget 2009 Report as net borrowing, was a deficit of £34.6 billion (or 2.4 per cent of GDP), as published in the HM Treasury Financial Statement and Budget Report 2009.

Excluding North Sea revenue, the largest absolute gap between public sector revenue and expenditure in Scotland was observed in 2007-08 when the net fiscal balance was -£11.1 billion. With a per capita share of North Sea revenue the largest gap was also observed in 2007-08. Under the assumption of a geographical share of North Sea revenue, the largest gap between public sector revenue and expenditure in Scotland was observed in 2003-04 with an estimated deficit of £5.7 billion. This had fallen to £2.3 billion in 2005-06 before subsequently rising in 2006-07 and 2007-08. As a proportion of GDP, the largest deficit both excluding, and with a per capita or geographical share of North Sea revenue, was in 2003-04.

Expenditure

This section presents summary results of estimates of public sector expenditure for Scotland for the years 2003-04 to 2007-08. Table 3.3 provides estimates for the six largest functions of public sector expenditure. For a discussion and more detailed breakdown of expenditure, refer to Chapter 6 and Appendix B.

Table 3.3: Summary of Total Public Sector Expenditure: Scotland 2003-04 to 2007-08

(£ million)

2003-04

2004-05

2005-06

2006-07

2007-08

Social protection

14,648

15,421

15,908

16,167

17,212

Health

7,400

7,757

8,606

9,102

9,810

Education and training

5,691

6,141

6,567

7,132

7,353

General public services

3,730

3,999

4,425

4,434

4,645

Defence

2,439

2,522

2,616

2,715

2,829

Public order and safety

1,962

2,110

2,288

2,321

2,372

Other

6,490

6,675

7,336

8,396

9,114

Total

42,360

44,625

47,746

50,267

53,336

In 2007-08, total public sector expenditure was estimated to be £53.3 billion. This represented a nominal increase of 25.9 per cent from the £42.4 billion estimated for 2003-04. Health and education and training expenditure experienced the greatest relative increases, rising by approximately 32.6 per cent and 29.2 per cent respectively over these five years.

Current Revenue

This section summarises the estimates of public sector revenue in Scotland for the years 2003-04 to 2007-08. Table 3.4 provides an estimate of Scottish public sector current revenue by economic category. A fuller discussion and a more detailed breakdown of revenue is provided in Chapters 4, 5 and Appendix A.

Table 3.4: Summary of Current Revenue by Economic Category: Scotland 2003-04 to 2007-08

(£ million)

2003-04

2004-05

2005-06

2006-07

2007-08

Taxes on income and wealth

10,546

11,573

12,923

14,164

15,251

National insurance contributions

6,081

6,561

6,978

7,386

7,766

Taxes on production and imports

12,973

13,690

13,950

14,678

15,299

Other current taxes

2,117

2,225

2,369

2,485

2,595

Taxes on capital

155

164

198

228

269

Gross operating surplus

2,361

2,238

2,668

2,795

2,865

Rent and other current transfers

391

386

411

383

398

Interest and dividends from private sector and abroad

397

533

600

555

748

Total current non-North Sea revenue

35,022

37,369

40,095

42,674

45,191

North Sea revenue

Per capita share

364

439

793

766

660

Geographical share

3,522

4,329

7,861

7,664

7,320

Total current revenue (including North Sea revenue)

Per capita share

35,385

37,808

40,889

43,440

45,851

Geographical share

38,543

41,697

47,957

50,338

52,511

In 2007-08, total current revenue, excluding revenue from the North Sea was estimated to be approximately £45.2 billion. This represented a nominal increase of 29.0 per cent from the £35.0 billion estimated to have been raised in 2003-04. This was largely a consequence of increased revenue from taxes on income and wealth, national insurance contributions and taxes on production and imports.

As Table 3.4 highlights, there was a significant increase in revenue from the North Sea from 2005-06 onwards. In 2003-04, Scotland's geographical share of North Sea revenue was estimated at approximately £3.5 billion, but in 2007-08, this figure had increased to £7.3 billion. A similar relative increase was observed under a per capita apportionment though the overall impact was much smaller.

Box 3.3 - Financial Sector Interventions

Since September 2008, a number of measures to support the financial sector have been introduced. Actions have included the UK Government acquiring controlling stakes in a number of financial institutions alongside specific measures intended to support the financial system more widely, including the Credit Guarantee Scheme and the Special Liquidity Scheme.

The ONS is currently in the process of incorporating these measures into the UK Public Sector Finances. To date, the ONS have classified Northern Rock and Bradford and Bingley as public corporations and their accounts have now been incorporated into public finance data. In February 2009, the ONS announced that Royal Bank of Scotland and Lloyds Banking Group would also be classified as public corporations from 13 October 2008. Work is ongoing to incorporate data for the two banking groups into the public sector finances.

Other measures announced by the Government and Bank of England to support the financial sector include:

  • the Bank of England's Special Liquidity Scheme;
  • the Government's Credit guarantee scheme for new lending between banks; and
  • the Government's Asset Protection Scheme.

ONS is currently in the process of deciding on the classification of the institutions and transactions associated with these measures in the UK's National Accounts and Public Sector Finances. This process is set out in Annex A of the National Statistics Protocol on Statistical Integration and Classification 13. As part of this process the ONS is in consultation with Eurostat, the Statistical Office of the European Union, to ensure consistent interpretation of the international guidance.

Interventions by the public sector in the UK will have implications for future GERS reports, and in particular 2008-09. Once ONS have finalised their classification of the various financial market interventions in the UK public finances, officials in the Scottish Government will determine how best to incorporate such issues into GERS.