Gross Value Added (GVA) and Scotland’s sectors

What is GVA?

Gross Value Added (GVA) is a key indicator of the state of the whole economy, an important performance measure, and helps inform economic, regional, and sector policy decisions.

GVA is a measure of the total value added by all industries in the economy, but does not include the value of taxes or subsidies on products (such as VAT and excise duties), which are paid by the consumer. In contrast, the often referenced Gross Domestic Product (GDP) includes these taxes and subsidies on products (GDP = GVA + taxes – subsidies).

What does GVA tell us about Scotland’s sectors?

Scotland’s three largest sectors in terms of GVA contribution in 2016 were:

  • real estate activities (11.6% of total Scottish GVA),
  • manufacturing (10.7%), and
  • wholesale and retail trade (10.7%).

Here it needs to be highlighted that the majority of real estate activities are “imputed rental of owner occupiers“. Owner-occupiers’ imputed rental is an estimate of the housing services consumed by households who are not actually renting their residence. It can be thought of as the value that owner-occupiers effectively pay themselves to rent their own homes. It is striking that the largest industry in the Scottish economy (as is true elsewhere in the UK) is owner-occupiers unknowingly letting their own houses to themselves.

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Broad sector GVA Scotland – 2016. Source: SPICe

The greatest industry change over the available data series (18 year period to 2016) has been the decline in the contribution of manufacturing to the economy. In 1998, manufacturing represented 17% of Scotland’s GVA, decreasing to 11% in 2016. This decline had been counterbalanced by moderate growth in the GVA contribution of a number of sectors, namely human health and social work activities, professional, scientific and technical activities, and financial and insurance activities.

Some sectors more naturally lend themselves to higher valued added activity than others.

Looking at sector turnover to GVA ratios (i.e. what every pound of sales equates to in GVA), it is clear some sectors more naturally lend themselves to higher valued added activity than others. This variation in economic value added and the industrial mix of the economy, all have knock on impacts for productivity and ultimately economic growth.

The sector with the highest turnover to GVA ratio (i.e. the highest value added) was sewerage at £1: 0.90p. However, it must be noted that sewerage is a relatively small sector with limited expansion opportunities. The lowest ratio (i.e. the lowest value added) was the wholesale and retail trade at £1:0.16p.

Other sectors on the top end of scale were legal and accounting activities (0.81p), real estate activities (0.74p), and advertising and market research (0.74). Examples of lower valued sectors were gambling and betting activities (0.18p), manufacture of coke and refined petroleum (0.27), and creative, arts and entertainment activities (0.29p).

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Turnover to GVA ratios by sector. The turnover to GVA ratios for 72 sectors have been plotted on this chart. A selection have been labelled and highlighted. The remainder are represented by the grey scaled lines due to size constraints. Source: SPICe 

What does this mean for policy?

Whilst the solution to achieving a high growth economy is not as simple as investing in the high value added sectors, GVA ratios should be borne in mind when making sector policy decisions with the objective of economic growth.

Scotland’s Economic Strategy is important in the context of GVA, especially given the objectives around regional inequalities, rebalancing the economy, business investment around the targeted growth sectors, and place and regional cohesion.

The figures explored in the associated SPICe GVA briefing, suggest that the ability of Scottish Government policy to influence GVA growth is more challenging than acknowledged in successive economic strategies

In reality, it is difficult to isolate how successive strategies may have influenced economic performance. It can take several years for policies to take full effect and numerous external factors are also at play, which impact Scotland’s economy. Some of the most recent GVA trends prompt questions about the sectors Scottish Government policy targets and the regional impact of such policies.

For more GVA information

For more information on the data analysed here, check out SPICe’s ‘Guide to GVA in Scotland’. It provides an introduction to GVA covering methodology, approaches, and sources. Building on this, it looks at how GVA relates to Scotland’s policy landscape and it then provides an overview of GVA trends in Scotland since 1998. It explores the GVA contribution of Scotland’s sectors and provides insights on the geographical spread of GVA in Scotland. Finally, it analyses the income components of GVA.

Alison O’Connor, Senior Analyst, Financial Scrutiny Unit