2.  Methodology

2.1 Introduction

2.1.1 The 1997 Regional Accounts adopted a Social Accounting Matrix (SAM) structure rather than the more traditional input-output structure adopted in the earlier 1988/89 study of the region (Scottish Office Industry Department, 1991) and in the Shetland and Orkney economic studies (McGregor et al., 1998; Gillespie et al., 1999). While innovative at the time, a SAM approach is now generally recognised as best practice for the type of study proposed since it provides detailed information not only on the production sphere of the economy but also flows of income to and from household accounts and capital accounts.  This is particularly important in rural economies such as the Western Isles where there tends to be substantial levels of transfer income into and out of the region.  Given both this and the need to be able to compare results from the updated accounts with the 1997 study, it was decided that a SAM approach should again adopted for the new study.

2.1.2 The basic approach to the construction of the tables also followed that used in the previous study in the sense that a high degree of new local data was collected and utilised in the construction process.  In particular, 102 business and 90 face-to-face household interviews were undertaken; each collecting detailed income and expenditure information.  This was essential to ensure that the accounts adequately reflect the contemporary nature of the economy. However, one key difference from the last study was the existence of a relatively recent table which could be first mechanically updated and then adjusted using survey derived information and secondary data from a variety of sources including the General Register Office of Scotland, the Annual Business Inquiry, Unemployment Claimants data, information collected by the project sponsors for other purposes and information from key informants interviewed as part of the study.  

2.1.3 This chapter describes the methods used to construct the Western Isles Regional Accounts for 2003, the chosen base year of the study. It begins by describing the structure of the accounting framework and the way in which it presents the flows of incomes and expenditures around the regional economy. Section 2.2 presents details of the surveys undertaken with Western Isles businesses, households and key informants, including sample coverage, whilst Section 2.3 briefly describes how the survey information was combined with information from other sources and processed into the format required. Technical details relating to the construction process are provided in Appendix 1 of this report.

 

2.2 Structure of the accounts

2.2.1 Figure 2.1 presents, in schematic form, the structure of the Western Isles SAM. Entries in the columns of the SAM represent expenditures; entries in the rows of the matrix represent receipts. Thus the matrix is a single entry accounting system reflecting what Pyatt (1988) refers to as “the only fundamental law of economics”, that for every income there is a corresponding outlay or expenditure.

 

2.2.2 The SAM contains five sets of accounts that are fully articulated in the sense that the basic accounting identities relating to those accounts are satisfied. These are:

§ production sector accounts, for which the total value of gross output equals the total value of gross input;

§ factor accounts, and forms of income accounts, for which the total value of factor payments from production equals the total value of factor receipts;

§ household accounts, for which total income equals total expenditure, and;

§ the local government account where total incomings equals total outlays[1].

 

 

2.2.3 The matrix also includes accounts which either make payments to (or collect payments) from the Western Isles. These relate to Central Government activity and transfers, payments to and from a capital account (GFCF), stock changes, savings, payments and receipts from visitors in the Western Isles, and finally payments to and from trade with the rest of Scotland, the UK and the rest of the world.

2.2.4 By including every type of monetary transaction that takes place, the Western Isles SAM provides a comprehensive, consistent representation of the full circular flow of income around the economy in 2003, as well as the flows to and from the Isles through imports and exports of goods and services, and governmental and non-governmental transfer payments.

Figure 2.1 Schematic Form of Western Isles SAM, 2003

	Endogenous Accounts				Exogenous Accounts
	Production sectors	Factors	Forms of Income	Households	Local Government	Central Government	GFCF	Change in stocks	WI Tourism	Rest of World	Total
Production sectors	Inter-industry transactions	-	-	Household consumption of local products	Local government consumption	Central govt. final consumption	GFCF	Change in the value of stocks	Expenditure on local products	Exports	Gross output value
Factors	Value-added payments	-	-	-		-	-	-	-	Factor income from ROW	Total Western Isles factor payments
Forms of Income	-	Distribution of factor  earnings	-	-	-	-	-	-	-	-	Total factor earnings
Households	-	-	Income allocation	Inter-household transfers	-	Social security plus other direct transfers	-	-	-	Income transfers from ROW	Total WI household income
Local Government	Business rates	-	-	Council tax	-	Revenue support grant, distributable amount (net)	-	-	-	-	Total local government income
Central Government	Indirect taxes and subsidies	-	-	Direct taxes plus commodity taxes (net)	-	*	*	*	Expenditure taxes less subsidies	*	*
Capital	-	-	-	Saving	Surplus	*	*	*		*	*
Rest of the World	Imported inputs	-	Income transfers to ROW	Household Consumption of imports	Local Government Imports	Central Government Imports	Imports relating to WI GFCF	*	Tourists expend. on imports	*	*
Total	Total gross input value	Total factor payments	Total factor earnings	Total household expenditure	Total local government expenditure	*	*	*	Total tourist expenditure	*

Note: “–“denotes sub matrices within which no transactions take place. “*” denotes sub-matrices which were not estimated as part of this study.

  GFCF = Gross Fixed Capital Formation

2.3 The classification system

2.3.1 In order to facilitate comparisons with the 1997 SAM, a similar classification system was adopted. In particular, the SAM constructed in this study includes:

 

·  26 industry sectors;

·  “factor” income from employment (occupation) and business profits etc.;

·  household income receipts separately from wages and salaries, self-employment, investments, pensions, and social security payments;

·  three separate accounts for Western Isles households, relating to those with no children, households including children, and households consisting of retirees only;

·  income and expenditure by local government, as well as flows to and from central government;

·  tourist expenditures in the Western Isles;

·  imports and (non-tourist) exports to the rest of Scotland, the rest of the UK and the rest of the world (separately).

 

2.3.2 As well as having distinctly different expenditure and income patterns, the three different household categories provide the SAM with the potential for investigating the impact on the economy of changes in the population structure through in- or out-migration.

2.3.3 In relation to the factor accounts, as in the 1997 SAM, income from self-employment is initially included within the gross profits as opposed to the income from the employment account of the matrix. It is then mapped into a separate “forms of income” account before being distributed to each of the three household categories in the matrix as appropriate. Employers’ contributions to national insurance and pensions are included within the income from employment account since they are an unavoidable cost associated with the use of labour in production activity. The total value of these contributions is then ‘leaked’ from the Western Isles via the column entries of the factor accounts to central government.

2.4 Data collection

2.4.1  Whilst the availability of the 1997 SAM was a useful starting point, a large amount of primary data collection was required to ensure changes in the economy were adequately reflected in the updated accounts. Three different surveys were involved:

·  a survey of businesses

·  a survey of households

·  a survey of key organisations and public bodies.

In addition, secondary data from a range of sources was used in the construction process. 

 

Survey of local businesses

2.4.2  A total of 102 personal interviews took place in summer 2004 with businesses either located in the Western Isles or with activities based in the Western Isles. The survey sample was drawn so as to ensure a high coverage of economic activity in the base year of the study (2003). Particular attention was paid to key local sectors, and sectors which were thought to have changed since the 1997 study.

2.4.3  Many of the particular businesses and households surveyed as part of the 1997 study were re-visited.  This was considered important in that it provides information for considering trends at the micro (firm) level thereby providing another perspective on changes in the economy.  Some of the findings from analyses of the firm-level data are presented in Chapter 7 of this report.

2.4.4  Table 2.1 indicates the employment coverage of the business survey sample.  In cases where either the number of survey returns or the employment coverage was low, information from the business survey was supplemented with data from the previous Western Isles SAM study. The overall sample coverage of 37% of total Western Isles employment compares favourably with other studies of this sort.

Table 2.1 Business survey sample and employment coverage

Sector	Title	Sample size	Sample FTE employment	Total Western Isles employment (FTEs)	% coverage
1	Agriculture and forestry	8	34	164	21
2,3,5	Sea fishing	2	5	339	2
4	Fish farming	3	203	287	71
6	Electricity, gas, water	2	94	104	91
7	Extraction (of ores, crude petroleum etc)	5	121	123	98
8	Textiles	3	104	320	33
9	Pottery and jewellery	2	15	26	56
10	Food & drink manuf. & proc’g.	5	9	14	67
11	Fish processing etc	7	276	276	100
12	Other manufacturing	5	48	338	14
13	Construction	9	426	1183	36
14	Distribution	17	331	1092	30
15	Hotels	8	105	242	43
16	Other accommodation	3	10	36	29
17	Catering	1	6	228	3
18	Land transport	6	105	293	36
19	Air transport	1	63	78	81
20	Sea transport	2	263	297	89
21	IT services & telecoms	1	1	204	0
22	Banking and insurance	0	0	136	0
23	Media	1	13	45	29
24	Education	2	120	741	16
25	Health	1	743	797	93
26,27	Other public services	1	100	689	15
28	Other services	7	303	1194	25
29	Public administration	1	208	660	32
	Total	103	3707	9908	37

  

 

Household survey

 

2.4.5  A total of 90 face-to-face household surveys were carried out from June to November 2004. This survey provided not only necessary information on the level and pattern of household expenditure, but also important control checks for the construction process. Table 2.2 indicates the population coverage of the household survey.

Table 2.2 Household survey: geographical coverage

	Household type
Location	Adults, no children	Adults with children	Retiree households	Total
Lewis	32	16	20	68
Harris	2	1	4	7
Uists and Scalpay	6	2	4	12
Benbecula and Barra	2	1	0	3
Total	42	20	28	90

 

2.4.6  Information from the 2001 population census on the composition of households in the Western Isles was used to raise the sample results up to population level. Thus it was assumed that the relative proportions of different types of households distinguished in the SAM did not change between 2001 and 2003. Whilst data suggests that there has been a 1.5 % fall in the resident population of the Western Isles between these two years (General Register Office for Scotland, 2005), this is unlikely to have had a significant impact on the pattern of household types.

 

Survey of key organisations in the Western Isles

2.4.7  Interviews were held between March 2004 and May 2005 with representatives of a range of organisations and public bodies to obtain information on key trends and issues affecting the Western Isles economy and its constituent industries, particularly over the past 5 years. Representatives of the following organisations were interviewed:

·  Comhairle nan Eilean Siar

·  Western Isles Enterprise

·  Visit Scotland – Outer Hebrides

·  Crofters Foundation

·  Crofters Commission

·  Stornoway Trust

·  Chamber of Commerce

·  Harris Tweed Association

·  Gaelic Broadcasting Commission

·  Royal Bank of Scotland

·  Scottish Agricultural College (SAC)

·  Scottish Fisheries Protection Agency

·  Scottish Executive Environment and Rural Affairs Department (SEERAD)

·  Scottish Natural Heritage

·  Stornoway Port Authority

 

2.4.8  The interviews proved useful in providing an understanding of the broader framework of the study and identifying any particular events which may have influenced the level of sectoral economic activity in 2003, the base year of the study. In addition, a large range of reports and information relating to the Western Isles were collected and reviewed, providing important background and context for the analysis to be carried out.  Of particular importance was data from the 2002 and 1999 Visitor studies carried out by Macpherson Research (Macpherson Research, 2003; Macpherson Research, 1999). 

2.5 The SAM Construction Process

2.5.1 A number of important decisions have to be made at the outset of the SAM construction process and play an important role in determining both the reliability and bearing of the accounting framework. These include decisions relating to the valuation of transactions, how to measure output, how to record foreign and capital transactions and how to balance the accounts given statistical discrepancies. The appendix to this report details the methods used in the construction process.  These are consistent with recognised SAM conventions and formats.

In addition to the SAM itself, one of the aims of the study was to generate an employment matrix to complement the economic accounts and to allow analysis of the impact of changes in economic activity on different types of employment. Information for estimating the employment matrix came from a number of sources including the 2001 population census and data collected as part of the business survey. Sector-specific information collected from the survey of key organisations was also very helpful in generating initial estimates for this matrix. Finally, the matrix was balanced mechanically using techniques described in Appendix 1.