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Appendix A: Methodology for Producing Estimates of Scottish Expenditure
PESA 2005 provides information on total expenditure on services ( TES). For the purposes of the exercise, this is broken down into two components:
- Identifiable expenditure by country and region of the UK; and
- Non-identifiable expenditure, that is expenditure that cannot be identified as benefiting a particular country or region of the UK.
The definition of TES was changed for PESA 2004 as part of the changes to measure spending on functions in line with the United Nations Classification of Functions of Government ( COFOG). It includes:
- Payments of debt interest to the private sector and the rest of the world; and
- Payments of unfunded public service pensions on the same basis as in total managed expenditure ( TME), that is: pensions in payment less receipts of employer and employee pensions contributions (the payment of employer pension contributions scores as part of pay under the relevant functional heading).
Expenditure on services covers most expenditure by the public sector. Adding accounting adjustments gives total managed expenditure. TME is the current and capital expenditure of the public sector, on a national accounts basis. TES represents much the same, with minor divergences. The divergences reflect mainly the difficulty of attributing some data to functions, and consequent differences to maintain consistency between functions. TES accounts for about 95 per cent of TME.
Identifiable Expenditure
PESA 2005 provides an analysis of expenditure on a "who benefits" basis. This identifies, where possible, the country or region within the UK to which the expenditure is attributed. The full range of programmes is shown in Section 3.
Non-identifiable Expenditure
This mainly comprises items such as expenditure on defence and overseas services where the entire population of the UK benefits, regardless of where funds are spent. Scottish non-identifiable expenditure for 2003-04 on "Science and technology", "Transport" and "Environment protection" was allocated using Scotland's share of UK total GVA, excluding the Extra-regio territory. 10
Non-identifiable expenditure on "Agriculture, fisheries and forestry" was allocated according to the Scottish share of UKGVA in agriculture, hunting, forestry and fishing. 11
Non-identifiable expenditure on "General public services", "International services", "Defence", "Public order and safety", "Enterprise and economic development", "Health", and "Recreation, culture and religion" is allocated according to UK population shares.
PESA includes data on identifiable expenditure outside the UK. GERS includes this category within non-identifiable expenditure, both for the UK and Scotland. This treatment is consistent with the view that expenditure outside the UK is non-identifiable from the perspective of the UK's constituent countries, as the benefits are shared between them. In order to make Scottish and UK data comparable, this part of identifiable expenditure is also included in UK non-identifiable expenditure.
At present, HM Treasury is planning to consult with departments to discuss methods for further breaking down non-identifiable expenditure, where this expenditure is not for the benefit of all UK residents. Greater precision in these source data will also lead to improvements in future estimates of expenditure in GERS.
Debt interest payments
Local Authority debt interest payments have been taken directly from Scottish Executive estimates of interest payments by Scottish local authorities to bodies other than the Public Works loan board (£55 million in 2003-04). Central Government and public corporation gross debt interest, as reported in PESA 2005 (table 3.6), has been allocated on the basis of Scotland's share of UKGVA (£1.9 billion in 2003-04).
The Treatment of EU Transactions
Following the national accounting practice of the European System of Accounts ( ESA95), the national accounts treat most payments made by the UK to the institutions of the European Communities as taxes paid directly to the EC by households and enterprises ( VAT, agricultural and sugar levies, and customs duties - which are deducted in revenue adjustments). Only the GNI-based, so-called "4 th resource" contribution (less abatement, collection costs and attributed aid) count as UK government contributions (classified by PESA as " EU transactions" in identifiable expenditure outside the UK).
Similarly, most payments to households and enterprises that are funded by the EC are treated in national accounts as direct payments to them by the EC, even if they pass through the Government's books. TES includes EU-funded payments within functional expenditure of government, for instance on agriculture, that the national accounts score as direct payments from the EU to enterprises and households. Therefore TES includes a deduction for EU receipts (as " EU transactions" in non-identifiable expenditure), thus bringing the total into line with TME.
The Scottish share of EU 4 th resource contributions and abatement (£171 million in 2003-04) is based on its GVA share. Receipts from the EC (from the Agricultural Guarantee and Guidance Funds, the Structural Fund, and the Regional Development Fund) are based on Scottish Executive data (totalling £613 million in 2003-04). The Scottish EU transaction line shows the difference between these two figures (-£442 million). It is negative because Scotland received more from the EC through payments from the agricultural and structural funds than its estimated share of the 4 th resource contribution. Thus, Total Managed Expenditure is reduced by £442 million.
Accounting adjustments
Accounting adjustments are necessary to bring expenditure on services into line with Total Managed Expenditure.
General Government Non-Trading Capital Consumption ( NTCC)
This is an adjustment item to offset the General Government Gross Operating Surplus (for estimation and more details see Appendix B).
Other adjustments
These cover a range of items such as certain income tax credits, as well as the timing reconciliation item. The Scottish share has been allocated on the basis of TES.
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