4.  Core Regional Analysis

4.1     Introduction

4.1.1        This chapter presents the main findings from the balanced 2003 SAM, highlighting changes that have taken place in the Western Isles since the previous 1997 regional accounts study. In addition to standard performance indicators such as Gross Regional Domestic Product in the base year, the SAM provides a basis for analysing the relative importance of different sectors in the economy, as well as the pattern of trade, household income and expenditure patterns, and transfer payments.

4.2     Gross Regional Domestic Product and Expenditure

4.2.1             Gross Regional Domestic Product (GRDP) is a measure of the total economic activity within a region, and corresponds to GDP at national level. It represents the sum of all value added earned by the production of goods and services within a certain territory over a certain period of time, where value added is defined as income less intermediate costs. Per capita GRDP is often used as an indicator of economic welfare of a region, with comparisons of GRDP across regions indicating different living standards. Over time, changes in GRDP will indicate the extent to which an economy has been either growing or declining although, unless expressed in constant prices, changes also reflect the effects of inflation. GDP is measured in the SAM at basic prices (that is net of taxes on expenditure less subsidies) it is thus equivalent to the Gross Value Added measures of economic performance produced on a regional basis by the ONS. 

4.2.2             Table 4.1 presents the estimation of the Western Isles GRDP derived from the 2003 regional SAM. Two approaches to measuring GRDP are given: the expenditure measure and the income measure. In accordance with the accounting identities inherent to the economy, both approaches produce the same value for GRDP, £263 million (£263m). Since the total resident population of the Western Isles on 30 June 2003 was 26,100 (General Register Office for Scotland, 2005), GDRP per head in that year is estimated at £10,078. 

Table 4.1         Western Isles Gross Regional Domestic Product, 2003

Expenditure Approach	Source in SAM	£’000
Household expenditure	Note 1	200,349
+ Local government expenditure	Note 2	86,588
+ Central government expenditure	Note 3	96,135
+ Gross fixed capital formation	column sum	34,179
+ Change in the value of stocks	column sum	-22
+ Tourist expenditure	column sum	41,084
+ Exports	Note 4	133,910
- Imports	sum of row totals	297,308
- Net taxes & subsidies on expenditure (indirect taxes)		31,883
= GRDP at factor cost		263,032
Income Approach		£’000
Income from employment	row sum	218,315
+ gross profits and other trading income	row sum	44,717
= GRDP at factor cost		263,032
= GRDP per head (£)	(population 26, 100)	10,078

 

 

Notes:

1.       Household expenditure on Western Isles goods and services (£81,937k) plus expenditure on imports (£100,089k) plus indirect (expenditure) taxes (£18,323).

2.       Local government income (£91,181k) less internal transfers (£1,238k) and surplus (in capital account) (£3,355k).

3.       Central government transfers for public services (£81,864k) plus expenditure on Western Isles goods and services (£9,679k) plus expenditure on imports (£4,593k).

4.       Sum of column totals for (all) exports (£141,662) less transfers to households from out-with the region (£7,752k)

 

4.2.3             Table 4.2 shows how the total and per head estimates of Western Isles GRDP in 2003 compares with those found in other regions. Western Isles GRDP per head in 2003 is estimated at 66% of the equivalent UK GDP per head of £16,383 and 78% of the EU-25 average. It is also lower than that estimated for the whole Highlands and Islands area from the most recent ONS statistics.

 

 

 

Table 4.2         Western Isles GRDP compared with estimates for other regions

Region	Source	Year of data	GRDP/ GRVA (£m)	GRDP/GVA per head (£)	GDP/ GVA per head Indices (UK=100)
Western Isles	2003 Regional SAM	2003	263	10,078	66
Highlands and Islands	ONS, 2004	2003	3,874	10,524	69
Scotland	ONS, 2004	2003	77,929	15,409	96
UK	ONS, 2004	2003	976,148	16,383	100
EU - 25	Eurostat *	2003	-	-	84

 Notes:  EU-25 Index is based on an estimated value of UK GDP per capita in PPS.  The GVA per head indices published by the ONS relate the regional estimates to UK GVA after having allowed for the compensation of employees and gross operating surplus which cannot be assigned to regions. Thus the indices are (slightly) higher than a comparison of the GVA values would suggest. The Western Isles index is calculated relative to the Highlands and Islands index value on the basis that no additional adjustment is required at this geographical scale.

 

4.2.4             Table 4.3 compares the estimated GRDP from the 2003 SAM to the most recent estimates of regional GVA produced by the ONS which relates to calendar year 2002.  The SAM estimate is slightly (2%) lower that the updated the ONS estimate for 2003[1] but the two are much closer than was the case for the previous 1997 study[2].

Table 4.3         Alternative estimates of Western Isles GRDP

Source	Year	GRDP (£m)	GDP per head (£)
Regional SAM  (this report)	2003	263	10,078
Regional Gross Value Added (ONS, 2004)	2002	261	9,961
Inflated ONS 2004 estimate	2003	269	10,250

 

4.2.5             In relation to changes over time, the estimate of GRDP from the 2003 SAM is higher than that from the 1997 study of the region as shown in Table 4.4. Allowing for price inflation equal to that experienced in the UK as a whole[3], the updated 1997 study would estimate a Western Isles GRDP of £256.5m, compared to the £263m figure found in the current study. However the implied real growth in the economy over the six year period of 2.5% is considerably less than that experienced in the UK as a whole.

Table 4.4         Composition of Western Isles GRDP, 1997 and 2003

	1997 regional accounts (£’000)	Updated to 2003 at UK rates  (£’000)	Shares of GRDP (%)	2003 regional accounts (£’000)	Shares of GRDP (%)
Household expenditure	167770	194,721	75.9	200,349	76.2
+ Local government expenditure	68149	79,097	30.8	86,588	32.9
+ Central govt. expenditure	50152	58,209	22.7	96,135	36.5
+ Gross fixed capital formation	23187	26,912	10.5	34,179	13.0
+ Change in the value of stocks	-67	-78	0.0	-22	0.0
+ Tourist expenditure	31715	36,810	14.3	41,084	15.6
+ Exports	122222	141,856	55.3	133,910	50.9
- Imports	220211	255,587	99.6	297,308	113.0
- Net taxes on expenditure	21893	25,410	9.9	31,883	12.1
= GRDP	221023	256,529	100.0	263,032	100.0

 

 

4.2.6             Table 4.4 also shows how the components of GRDP have changed between 1997 and 2003. The previous regional accounts study highlighted the growing significance of tourism for the economy and Table 4.4 confirms that this trend has been continued with tourism contributing 15.6% to GRDP as compared to 14.3% in 1997 and only 4% in 1988/89. The economy appears to have become more reliant on local and central government funded activity with the latter increasing significantly from its 1997 level. Dependence on imports has also increased suggesting the economy has become more open to economic influences outside its territory.

4.2.7             Table 4.5 focuses on real changes in per capita GRDP while, for comparative purposes, Table 4.6 shows the growth rates observed in other regions. The relatively strong growth rate in per capita GRDP in the region is primarily due to a fall in population.  If the population had remained at 1997 levels (28,240), per capita GRDP would hardly have changed at all in real terms.  However, given the population decline, the growth rate is far better than that observed in Orkney or the Shetlands and in the Highlands and Islands as a whole although it remains lower than growth rates in the UK over the period.

Table 4.5         Changes in per capita GRDP, 1997 and 2003

	1997 regional accounts (£’000)	Updated to 2003 at UK rates (£’000)	2003 regional accounts (£’000)	% change in real terms
Total GRDP (£’000)	221,023	256,529	263,032	2.54
Population base (no.)	28,240	-	26,100	-
GRDP per head (£)	7,827	9,084	10,078	10.94

 

 

Table 4.6         Changes in Gross Value Added (GVA) per head, 1997 to 2003:

                                                The Western Isles (and Other Regions)

	GVA per head at current basic prices		% change in real terms
	1997	2003
Western Isles (2003)	7,827	10,078	10.94
Orkney Islands (2002)	10,966	10,716	-13.37
Shetland Islands (2002)	11,701	13,197	-0.01
Highlands and Islands	8,743	10,524	3.71
Scotland	11,980	15,409	10.82
UK	12,339	16,383	14.40

Source:  Regional Gross Value Added, ONS, December 2004.

 

 

4.2.8             An alternative indicator of economic welfare (or standard of living) in a region is the Gross Regional Domestic Expenditure (GRDE) measure. Whilst GRDP focuses on the value of economic activity within the region, GRDE is a measure of the value of expenditure of domestic residents, regardless of the source of goods and services. Table 4.7 indicates that the 2003 regional accounts estimate of total GRDE is £385.3m or £14,764 per capita. This is substantially higher than per capita GRDP reflecting the fact that there is a substantial trade deficit.

 

 

 

 

Table 4.7         Western Isles Gross Regional Domestic Expenditure, 2003

 

 

4.2.9             Table 4.8 shows how the various different contributions to GRDE have changed between 1997 and 2003. As noted above, imports have grown in importance to the economy and exports have fallen.  Income from tourist has increased by nearly 12% in real terms. However, as in the case of per capita GDRP, one of the major contributory factors accounting for the 25% growth rate of per capita GRDE over the period is the fall in population in the region.

 

Table 4.8         Changes in the contributions to GRDE, 1997 and 2003

	1997 regional accounts (£’000)	Updated to 2003 at UK rates (£’000)	2003 regional accounts (£’000)	% change in real terms
GDRP	221,023	256,529	263,032	2.53
+ Imports	220,211	255,587	297,308	16.32
- Exports	122,222	141,856	133,910	-5.60
- Tourist expenditure	31,715	36,810	41,084	11.61
GDRE	287,297	333,450	385,345	15.56
Population	28,240	-	26,100	-
GDRE per head	£10,173	£11,807	£14,764	25.04

Note: Updated per capita GDRE (second column) is the 1997 value adjusted to allow for inflation in the economy.  It is based on the assumption that the population remains at the 1997 level which in the previous study was taken as 28,240. 

 

 

 

4.3     Sectoral Analysis

4.3.1             Table 4.9 shows the sectoral contributions to Western Isles employment, value-added and output in 2003. In terms of estimated FTE employment, the five most important sectors were: Other Services (private), Construction, Distribution (i.e. retailing and most wholesaling), Health and Education. Together, these five sectors accounted for 50.5% of total Western Isles employment in terms of FTE jobs. The five most important sectors in terms of generating value added (i.e. earnings in terms of wages, profits, etc.) were Distribution (12.5% of total Western Isles GRDP), Other Public Services (10.6%), Education, Health and Other Private services. In aggregate these five sectors contributed 47.3% to total Western Isles value added.  This is less than the top five sectors accounted for in 1997, which suggests the economy has become more diverse in structure.

4.3.2             The changing production structure of the economy is illustrated in Table 4.10 which compares the employment contribution of each sector in 1997 with that found in 2003 and the value added composition for 1997 and 2003. To facilitate comparison, the number of sectors is reduced to thirteen.

4.3.3             The substantial estimated drop in Agriculture, Fishing and Fish Farming employment is due in part to an overestimate of self employment in agriculture in the 1997 study.[4]  However it also reflects the downturn that has occurred in the aquaculture sector since the end of the 1990s. Apart from this, there are various other important changes in employment structure in the region (see for example, transport), the magnitude of which is surprising given the relatively short period between studies.

Table 4.9         Sectoral contributions to employment, value added and output,

Western Isles 2003

	Sector	Employment	%	Value Added	%	Output	%
		(FTE jobs)		(£’000)		(£’000)
1	Agriculture	164	1.7	1080	0.4	10998	2.2
2,3,5	Sea fishing	339	3.4	3135	1.2	9218	1.8
4	Fish farming	287	2.9	19541	7.4	30888	6.1
6	Electricity, gas, water	104	1.1	1720	0.7	4924	1.0
7	Extraction (of ores, etc.)	123	1.2	2793	1.1	3978	0.8
8	Textiles	320	3.2	3464	1.3	8622	1.7
9	Pottery and jewellery	26	0.3	423	0.2	882	0.2
10	Food and drink manufacturing	14	0.1	174	0.1	450	0.1
11	Fish processing, wholesaling, etc.	276	2.8	12360	4.7	19908	3.9
12	Other manufacturing	338	3.4	4725	1.8	8415	1.7
13	Construction	1183	11.9	18641	7.1	39916	7.8
14	Distribution	1092	11.0	32784	12.5	55235	10.8
15	Hotels	242	2.4	5751	2.2	11369	2.2
16	Other accommodation	36	0.4	428	0.2