Government Expenditure and Revenue Scotland 2008-09

A REVENUE METHODOLOGY

This appendix outlines the methodologies used to estimate public sector revenue in Scotland. As the issue of North Sea revenue has been discussed extensively in Chapter 5, this appendix focuses on all other elements of public sector revenue.

In contrast to public sector expenditure, there is no one generic approach to estimating public sector revenue in Scotland; instead each revenue stream is estimated using a separate methodology. This appendix discusses these techniques and highlights any significant changes which have been introduced in this edition of GERS. It should be noted that, as the underlying datasets used in GERS have been subject to revision and update, estimates may differ from previous editions of GERS even if the methodology has remained unchanged.

Methodology

As highlighted in Chapter 4, the vast majority of public sector revenue raised in Scotland is collected at the UK level by HM Revenue and Customs.

In some cases, revenue figures can be obtained for Scotland directly. Examples include local government revenue and particular elements of public corporation revenue. Such revenues are the exception and separate identification of most other revenue streams for Scotland is not possible. GERS therefore uses a number of different methodologies to apportion revenue to Scotland. In doing so, there are often theoretical and practical challenges in determining an appropriate share to allocate to Scotland. In certain cases, a variety of alternative methodologies could be applied each leading to different estimates.

Obtaining an estimate of public sector revenue in Scotland is a two-stage process.

In the first stage, the UK outturn figure for each element of revenue is obtained from ONS Public Sector Finance Statistics. In the second stage, Scotland's share of the UK figure is estimated according to a specific apportionment methodology. The methodology used differs for each element of revenue. The detailed Revenue Methodology paper on the GERS website contains a discussion of the apportionment methodology used for each revenue stream and highlights the sensitivity of the results to changes in the underlying assumptions ³⁶.

UK Revenue Figures

The basis for estimating public sector revenue for Scotland is National Statistics outturn figures for UK fiscal revenue taken from ONS Public Sector Finance Statistics. The detailed components, revenue by revenue, are taken from an ONS database which is consistent with both the totals published in the Public Sector Finances and the figures published in table PSAT2 of Public Sector Accounts. PSAT2 is HM Treasury's preferred presentation of revenues, it is shown in Tables 21 and 22 of the Supplementary Material to the March 2010 UK Budget ³⁷, and underlies the main tables in the UK Budget.

These data are presented on an accruals basis and separately identify revenue attributed to central government, local government and public corporations. The international standards for National Accounts and Government Finance Statistics use the accruals basis rather than a cash approach. This is because accruals accounting reflects a more accurate picture of when revenue is due and spending occurs than the more volatile alternative of cash, which, for example, records when bills are settled rather than when the expenditure occurs.

The revenue figures used in GERS are taken from published outturns as at April 2010, consistent with those used for the UK Budget in March 2010 ³⁸.

It should be noted that the UK figures for individual revenues presented in GERS 2008-09 may differ from other publications as, on certain occasions, figures are still presented on a cash rather than an accruals basis. For example, Table C6 of the UK Budget in March 2010 shows types of tax on a cash basis. However, to be consistent with the presentation throughout GERS and international standards, the equivalent table to C6 is presented on an accruals basis.

The treatment of tax credits and EU revenue in GERS follows international standards for National Accounts and is different from Table C6 of the UK Budget in March 2010. Revenue raised for the EU (on VAT, import levies and sugar levy) is not shown as public sector revenue, instead it is considered to be paid directly to the EU, even though the UK Government may act as an intermediary in the process between the taxpayer and the EU³⁹.

The assumptions underpinning the apportionment of each revenue source are outlined below.

Summary of Changes

Table A.1 provides a summary of the apportionment methodologies used for each element of revenue and highlights whether or not the methodology has changed since the previous edition of GERS. Most of these revisions have been relatively minor.

In some instances ONS's Public Sector Finance estimates of UK revenue for some taxes have also been revised since the last edition of GERS, these changes will affect the estimates of Scottish tax revenue. In addition, there have been revisions to some of the data sources used to apportion tax revenues to Scotland. This means that the share of some UK taxes apportioned to Scotland has changed since GERS 2007-08.

More detailed information on the methodologies used and the changes introduced can be found in the Revenue Methodology paper on the GERS website.

Table A.1: Apportionment Methodologies and Sources for Public Sector Revenue in Scotland (Excluding North Sea Revenue)

Revenue	Apportionment Methodology	Source	Revised
Income tax	Scottish share of UK income tax liabilities applied to income tax gross of tax credits. Negative expenditure on tax credits estimated using Scot/ UK share of overall spend on tax credits (negative tax plus benefits)	Survey of Personal Income ( SPI): HMRC Data on overall spend on tax credits: HMRC	No
Corporation tax (excl. North Sea)	Scotland's share of profits (less holding gains) of UK corporations	Regional Accounts: ONS	No
Capital gains tax	Actual outturns for Scotland	Supplied directly by HMRC	No
Other taxes on income and wealth	Various (see web appendix)	Various (see web appendix)	No
National insurance contributions	Estimates of employer, employee, class 2 and class 3 NIC revenue in UK and Scotland	Supplied directly by HMRC	No
VAT	VAT net of LG and CG refunds: Scotland's share of UK household VAT expenditure LG refunds: Scotland's share of UKLG current expenditure on goods and services CG Refunds - MOD: Scotland/ UK populations - NHS: Scotland/ UKTES for Health - Other Gov depts: Scotland/ UK total TES (Excluding NHS/ MOD)	Expenditure and Food Survey: ONS Public Sector Finances: ONS ONS and GROS PESA PESA	Yes
Fuel duties	Scotland's share of road traffic fuel consumption	Fuel consumption statistics: DECC	No
Stamp duties	Land and property stamp duty: Actual outturns for Scotland Stocks and shares: - Scotland/ UK ratio of adults owning shares	Land and property stamp duty: HMRC Stocks and shares: Family Resources Survey ( DWP)	No
Tobacco duties	Spend on tobacco in Scotland/ UK	Expenditure and Food Survey : ONS	Yes
Alcohol duties	Spend on alcohol in Scotland/ UK	Expenditure and Food Survey : ONS	Yes
Betting and gaming duties	Spend on betting and gaming in Scotland/ UK	Expenditure and Food Survey : ONS	Yes
Air passenger duty	Scotland/ UK population	ONS and GROS	No
Insurance premium tax	Scotland/ UK population	ONS and GROS	No
Landfill tax	Scotland's share of UK tonnage of waste sent to landfill	Scottish Environment Protection Agency, Environment Agency, Dept. of Environment in Northern Ireland	No
Climate change levy	Electricity: Scotland's share of UK electricity consumption by commercial and industrial users Gas: Scotland's share of UK gas sales to commercial and industrial users Solid and other fuels: Scotland's share of UK (less extra-regio) GVA	Electricity: DECC Gas: DECC Solid and other fuels: Regional Accounts: ONS	No
Aggregates levy	Scotland's share of UK's aggregate production	United Kingdom Minerals Yearbook 2008: British Geological Survey	No
Inheritance tax	Actual outturns for Scotland	Supplied directly by HMRC	No
Vehicle excise duty	Scotland's share of total value of UK vehicle licences issued (less refunds)	DVLA	No
Non-domestic rates	Actual Data	Scottish Local Government Finance Statistics	No
Council tax	Actual Data	Scottish Local Government Finance Statistics	No
Other taxes and royalties	Various (see web appendix)	Various (see web appendix)	Yes
Interest and dividends	For PC receipts: Scotland's share of public sector UKGVA For LG and CG receipts: Scotland/ UK population	Regional Accounts: ONS	No
Gross operating surplus	CG: Scottish/ UK share of central government NMCC LG: Scottish/ UK share of local government NMCC Public corporations - individual data for Scottish PCs - data for UK-wide PCs based on relevant industry GVA - and actual data for Local Authority housing rentals	CG: ONS Regional Accounts LG: ONS Regional Accounts PC: Supplied by Public Sector Finance team: ONS, and Regional Accounts: ONS	Yes
Rent and other current transfers (excluding oil royalties and licence fees)	Various (see web appendix)	Various (see web appendix)	No
North Sea revenue	See Chapter 5	See Chapter 5

Table A.2 summarises the revisions in this edition of GERS by comparing the estimates contained in this report with last year's publication. Overall, estimated public sector revenue in Scotland has been revised downwards by between 0.5 per cent and 1.1 per cent over the years 2004-05 and 2007-08.

Table A.2: Revision to Estimates of Total Non-North Sea Public Sector Revenue: 2004-05 to 2007-08

	(£ million)
	2004-05	2005-06	2006-07	2007-08
Scotland
Estimates published in GERS 07-08	37,369	40,095	42,674	45,191
Estimates published in GERS 08-09	36,983	39,787	42,198	44,966
Revision	-386	-308	-476	-225
UK
Estimates published in GERS 07-08	447,439	477,102	510,246	540,150
Estimates published in GERS 08-09	447,326	477,149	510,059	540,621
Revision	-113	47	-187	471
Scotland/ UK ratio
Estimates published in GERS 07-08	8.4%	8.4%	8.4%	8.4%
Estimates published in GERS 08-09	8.3%	8.3%	8.3%	8.3%
Revision	-0.1%	-0.1%	-0.1%	-0.1%

Table A.3 illustrates the revisions to individual public sector revenue streams in Scotland and the UK for 2007-08, the latest year directly comparable between GERS 2007-08 and GERS 2008-09. The methodology changes summarised above, combined with revisions to the UK revenue estimates and to the underlying data used to apportion some taxes to Scotland, have resulted in minor revisions to some revenue estimates. The net effect of all of the changes has been to reduce the estimate of public sector revenue in Scotland by £225 million and to increase the estimate of UK tax revenue by £471 million.

Table A.3: Revision to Estimates of Public Sector Revenue: Scotland and UK 2007-08

	(£ million)
	Scotland	UK
Income tax	22	282
Corporation tax (excluding North Sea)	-32	0
Capital gains tax	6	0
Other taxes on income and wealth	8	0
National insurance contributions	106	-73
VAT	-89	13
Fuel duties	5	0
Stamp duties	-14	0
Tobacco duties	-27	0
Alcohol duties	32	0
Betting and gaming and duties	7	0
Air passenger duty	0	0
Insurance premium tax	-1	-9
Landfill tax	6	-1
Climate change levy	0	0
Aggregates levy	5	-1
Inheritance tax	0	0
Vehicle excise duty	0	0
Non-domestic rates	0	0
Council tax	-1	9
Other taxes and royalties	26	18
Interest and dividends	18	206
Gross operating surplus	-299	61
Rent and other current transfers	-3	-34
Revision	-225	471

The large revision to the gross operating surplus estimate for Scotland is due to a revised estimate of local government depreciation. The figures now used are consistent with those in the ONS Regional Accounts as the previous source has been discontinued. The revision has also been applied to the accounting adjustment, and so will have no impact on the current budget balance.

Sensitivity Analysis

As the figures for public sector revenue in Scotland contained in this report are estimates, it is important to obtain a sense of the impact on total revenue of any possible variation in the estimates of individual revenue streams. Table A.4 illustrates the effect a 1 per cent variation in the estimate of each revenue stream would have on total non-North Sea revenue in Scotland for 2008-09.

The largest source of non-North Sea revenue in Scotland is income tax. A 1 per cent variation in the estimate of income tax would revise income tax in Scotland by £107 million, which is equivalent to 0.2 per cent of total non-North Sea revenue.

Table A.4: Effect of a 1% Change in Revenue (Excluding North Sea Revenue): Scotland 2008-09

	Impact of 1% variation
	(+/- £ million)	As % of total non-North Sea revenue (+/- %)
Income tax	107	0.2%
Corporation tax (excluding North Sea)	28	0.1%
Capital gains tax	5	0.0%
Other taxes on income and wealth	3	0.0%
National insurance contributions	80	0.2%
VAT	75	0.2%
Fuel duties	21	0.0%
Stamp duties	6	0.0%
Tobacco duties	9	0.0%
Alcohol duties	8	0.0%
Betting and gaming and duties	1	0.0%
Air passenger duty	2	0.0%
Insurance premium tax	2	0.0%
Landfill tax	1	0.0%
Climate change levy	1	0.0%
Aggregates levy	1	0.0%
Inheritance tax	2	0.0%
Vehicle excise duty	4	0.0%
Non-domestic rates	17	0.0%
Council tax	20	0.0%
Other taxes and royalties	7	0.0%
Interest and dividends	7	0.0%
Gross operating surplus	26	0.1%
Rent and other current transfers (excluding oil royalties and licence fees)	4	0.0%
Total	435	1.0%