The Political Economy of Financing Scottish Government

The Political Economy of Financing Scottish Government

Considering a New Constitutional Settlement for Scotland

Studies in Fiscal Federalism and State–local Finance series

C. Paul Hallwood and Ronald MacDonald

Can the UK survive widespread dissatisfaction in both Scotland and England with the financing of public spending by Scotland’s parliament? This timely book explains how fiscal autonomy could raise economic growth and efficiency in Scotland – to the benefit of both Scotland and the rest of the United Kingdom. The authors discuss how other reform proposals – which amount to cutting Scotland’s block grant – would fail as they would not be seen in Scotland as legitimate. They conclude that fiscal autonomy would be accepted as it reduces Scotland’s democratic deficit in public spending, and would go a long way toward reducing vertical and horizontal imbalances in the UK.

Chapter 1: Introduction

C. Paul Hallwood and Ronald MacDonald

Subjects: economics and finance, public finance, regional economics

Extract

Since the re-establishment of a Scottish parliament in 1999, there has been considerable debate regarding the issue of the devolution of taxes, and more general revenues, raised in Scotland to the Scottish Government. This debate, prominent in the Scottish media, is usually along political lines. The case for fiscal autonomy – in essence the devolution of all taxes – is often argued to be synonymous with full political independence for Scotland, while the argument against it is generally cast as inconsistent with the political union of the UK. In this book we try to move the debate about tax devolution away from the highly contentious discussion that links it with political independence towards an economic analysis of the case for it.1 If we take it that Scotland remains in the UK, we can seek out arguments based on economic and public finance theory relating to tax devolution within the Union although these arguments, especially at the fiscal autonomy end, applies a fortiori if Scotland decides to become independent. In particular, we use the ‘traditional’ and ‘new’ fiscal federalism literatures, the optimum currency area literature, some game theory applied to Scotland’s political context within the union, and we draw on time consistency issues from the macroeconomic literature to make the case for greater tax devolution to Scotland. Tax devolution in the Union can run along a spectrum from the current Barnett formula status quo through ‘fiscal federalism’, and on to ‘fiscal autonomy’ with or without independence. By ‘fiscal federalism’ we mean the partial...