Transcript Government Expenditure and Revenues in Scotland (GERS)

Centre for International Public Health
Policy
Seminar 4: Government Expenditure
and Revenues in Scotland (GERS)
Margaret and Jim Cuthbert
23rd April 2007
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
Route Map
•
•
•
•
A little background
Our GERS journey over the past ten years
Conclusions
Recommendations
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
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.
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.
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.
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)
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.
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.
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.
Our approach to analysing the
PESA database
Data consists of some17,000 expenditure cells
categorised by dept., function, sub-function, subprogramme, 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.
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.
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.
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.
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.)
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.
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.
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.
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.
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.
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”.
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.
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.
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.
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.
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 override these if necessary.
• The Executive should also attach more
presentational caveats, and be willing to challenge
inappropriate political use of GERS.
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.
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.
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.
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.