Centre for International Public Health Policy

1. Centre for International Public Health Policy Seminar 4: Government Expenditure and Revenues in Scotland (GERS) Margaret and Jim Cuthbert 23rd April 2007

2. Government Expenditure and Revenues in Scotland (GERS) What we intend to do in this talk • Make positive suggestions on how GERS could be improved • Suggest how GERS could be a useful tool – and what for • Raise the level of debate in GERS What we are not doing is aiming for any target “deficit” figure

3. Route Map • A little background • Our GERS journey over the past ten years • Conclusions • Recommendations

4. References • A critique of GERS: Government expenditure and revenue in Scotland: Fraser of Allander Institute Quarterly Economic Commentary, vol 24, no.1 (1998) • The Treasury funding statements as a tool in monitoring the devolution settlement: QEC, vol 27, no 4 (2002) • A Constructive Critique of the Treasury’s Country and Regional Analysis of Public Expenditure: QEC, Vol 30, No.3, (2005) • An open letter to Wendy Alexander, M.S.P., dated 24 March 2007 • Website: www.cuthbert1.pwp.blueyonder.co.uk

5. GERS Background, 1 • GERS first produced in 1992. • “The primary objective is to create accounts for the inflows of fiscal resources to Scotland and the outflows of resources from Scotland that are directed through the UK Government’s budgetary process.” • Headline “fiscal deficit” or “general government borrowing requirement” is difference between government revenues attributed to Scotland, and government expenditure made on behalf of Scotland.

6. GERS Background, 2 Expenditure covered (major source: PESA) • Identifiable expenditure: incurred for the benefit of a particular country/region. • Non-identifiable expenditure: share of expenditure incurred on behalf of the UK as a whole. • Accounting and Timing Adjustments.

7. GERS Background, 3 Revenue Covered (major source: ONS: Treasury Budget receipts) • Tax revenues: sometimes known directly sometimes estimated. • Other Revenues: Gross Trading Surplus and rents, government depreciation: EU Balance. Note that GERS treats Scotland as a NUTS 3 region and excludes oil and gas revenues.

8. GERS Background, 4 Latest GERS Figures: (2004-05) Expenditure £47,662 million Revenues £36,439 million Net borrowing £11,223 million (excl oil) Net borrowing £6,540 million (including 90% oil revenues)

9. EU Transactions Goes back to start of our GERS journey: this is just one point from our initial paper. • GERS adopted net treatment, as used in FSBR for UK • But apportioning net treatment gave nonsense results: gross basis should have been used. • Effect: GERS overstated “deficit” by £350 million.

10. Lessons • Major errors can lurk in very plausible detail. • Official reaction was instructive: defensive, and verging on the personal. • But handling of EU receipts was quietly changed.

11. The Major Breakthrough on Expenditure • In 2005, the Freedom of Information Act opened up possibility of obtaining the detailed Treasury PESA database. • We obtained this from the Treasury in 3 tranches: (it took 3 FOI requests). • Incredibly, no-one, not even Government departments outside Treasury, had had access to this before.

12. Our approach to analysing the PESA database Data consists of some17,000 expenditure cells categorised by dept., function, sub-function, sub-programme, spending authority, capital/current: identifiable/non-identifiable: and, if identifiable, by country/region. Our approach • Computer programme to select, eyeball and aggregate data. • Ideally, we wanted to cross relate each item with devolved/reserved classification in Treasury Funding Statement.

13. Devolved: Non-identifiable • We found 82 cells, comprising £4.4 billion, (now £5.2 billion), of English expenditure on areas such as prisons, nature protection, judicial salaries etc, which was classed in PESA as non-identifiable. • Corresponding expenditure in Scotland is identifiable. • So in GERS Scotland gets its own exp. plus share of English: effect on GERS deficit officially acknowledged to be £440 million. But GERS not corrected.

14. Lessons • Confirms value of checking PESA detail, and relating to TFS: but manual cross referring to TFS very difficult. • Illustrates how difficult it is to get change: uncorrected GERS has now been published twice since error identified: Treasury very reluctant to correct PESA. • Demonstrates need for Scottish Executive to take full ownership: error is acknowledged and quantified, but since Treasury has not changed PESA yet, SE has not changed GERS.

15. Devolved: Identifiable Expenditure on services which are devolved, identified to Scotland by Whitehall Departments. • Some is legitimate (e.g., Criminal Injury Compensation). • Some is legitimate, but handled asymmetrically: (museums and galleries). • Some is just wrong: e.g., £59 million European funding attributed to Scotland by DWP.

16. Classification of Expenditure on Reserved Functions We identified a number of problems: e.g. • UKAEA expenditure on decommissioning.( Prima facie case that identifiability rules breached.) • DCMS expenditure on Tourism, and DTI support for export promotion and inward investment. (In both cases, id/non.id classification does not reflect Departments’ actual responsibilities.)

17. Lessons • Again confirms value of detail, and linking with TFS. • It is also very important to establish what a Department actually does, particularly where this is at the interface between devolved and reserved responsibilities: but this can be a problem. • Conceptual issues on identifiability can be difficult: these issues need to be exposed, so they can be debated.

18. Expenditure on Employment • Published PESA figures on employment policies in 2003-04 stated that expenditure per head was £148 in Scotland, and £55 in UK as a whole. • Scrutiny of PESA detail revealed major errors and other problems: e.g., all Scottish Enterprise exp classed under employment, including expenditure on enterprise. But no HIE exp classed under employment. • Once errors corrected for, front line spend on employment in Scotland probably only a third of headline PESA figure.

19. Lessons. • This is not a GERS problem as such. But this example does illustrate how errors in PESA can result in figures which could give a quite misleading policy steer- and so impact on the actual efficiency of services on the ground. • Also again illustrates difficulty of correcting errors: PESA database still uncorrected for this error.

20. The Journey Continued: Our “Open Letter” Work This Year. In January this year, we obtained the latest PESA database, which now contains 5 years time series data. Examination of this and other material revealed:- • That some departments are using rule of thumb methods for allocating id. expenditure to Scotland. • That the GERS methodology does not take adequate account of the fact that water in England is privatised: leading to an overstatement of the gross GERS deficit for Scotland by at least £320 million.

21. Open Letter Findings: cont’d • That there is no basis for the high factor used to apportion the depreciation of central government and local authorities to Scotland in GERS. Depreciation for Scotland is probably overstated by £850 million as a result. • That there are problems with the allocation of the residual accounting adjustment in GERS. • That the surplus on the housing revenue account is double counted in the gross trading surplus in GERS.

22. An Important Presentational Issue • The overall GERS borrowing requirement is not affected by central and local government depreciation, since this comes in on both the expenditure and revenue sides. • Importantly, the FSBR splits the overall UK borrowing requirement into the current deficit, (that is, revenue - current expenditure - depreciation), and borrowing to fund net investment (that is, gross investment - depreciation). Both components depend on depreciation. • The current deficit is used to assess the “golden rule”.

23. Lessons • Every area we have looked at in detail in GERS has yielded major errors or problems: given we have only looked at a sample of areas, we cannot be at all confident that, even when the identified issues have been addressed, that is the end of the story. • GERS should move on to a FSBR type decomposition of the gross deficit: particularly since uninformed commentators commonly compare the GERS gross deficit with the FSBR current deficit.

24. Conclusions, 1 GERS as it stands is not up to the weight it is asked to carry in the current political debate:- • There are many uncorrected errors, and identified but unaddressed issues: (not all of these point in the same direction: but the probable effect of the issues we have identified is to overstate the current deficit for Scotland by more than £1.5 billion.) • There are many areas which have not been thoroughly scrutinised yet.

25. Conclusions, 2 • Much of the potential value of GERS/PESA lies in the unpublished, (and previously inaccessible) detail. There is a requirement to publish the detailed PESA database in an accessible and useful way.

26. Conclusions, 3 But to unlock the full value of PESA, it is required:- • To align PESA and TFS, bringing codes for reserved/devolved status into the PESA database. • To improve the basic quality of the underlying PESA data, particularly in respect of LA data. • To improve the quality of the identifiable expenditure attributions made by departments: in particular, the Treasury needs to take a grip here. • To address conceptual issues underlying certain important identifiable/non identifiable decisions.

27. Conclusions, 4 • GERS itself needs to have a much more clearly defined managerial focus, with the Scottish Executive taking responsibility, and not just accepting dubious data from the Treasury and ONS without scrutiny. • The Scottish Executive should be willing to challenge Treasury/ONS assumptions, and over-ride these if necessary. • The Executive should also attach more presentational caveats, and be willing to challenge inappropriate political use of GERS.

28. Conclusions, 5 Presentational issues in GERS need to be addressed:- • At the micro level, more detail should be published, showing at the sub-programme level what factors have been used in attributing that expenditure to Scotland. • At the macro level, GERS should move away from the commonly misinterpreted gross presentation, to the current deficit/net investment decomposition used in the FSBR.

29. Conclusions, 6 • Oil revenues should be brought explicitly into GERS. GERS will inevitably be used in a political context: but once GERS is used politically, then the rationale for restricting GERS to the ESA 95 conventions for handling regional accounts immediately disappears.

30. Conclusions, 7 • GERS needs to be supplemented with a series, as in the FSBR at the UK level, which shows the net worth attributed to the public sector in Scotland. • If these changes were made, then GERS and its associated PESA database would tell us a lot about the quality of the management of Scotland’s economy, and of its public sector. • But even an improved GERS will not say much about the economy of an independent Scotland.

31. Conclusions, 8 But GERS deals with only one of the key financial flows into and out of the Scottish economy. We need to have a much better understanding of the full picture. This involves setting up an integrated set of accounts showing trade flows, (both non-oil, and oil related): and flows of private capital. This would include, for example, a complete revamp of the current input/output model, which excludes oil.