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 2: Searching for a Politically and Economically Rational Public Funding Model for Scotland

C. Paul Hallwood and Ronald MacDonald

Subjects: economics and finance, public finance, regional economics


In this chapter, we discuss some analytics of the political realities in which the allocation of public money from Westminster to Scotland came to operate, and we will use our analytical model to compare various reform proposals. We will offer explanations for why Scotland enjoys public spending per head – of course, much of it financed by a bloc grant from Westminster to the Scottish parliament – well above what it should receive on most of the standard objective criteria, such as its per capita gross domestic product relative to other regions in the UK, or social ‘needs’ (as was calculated by the Westminster government in 1979, and more recently by various formula suggested in the academic literature), although not perhaps if one factors in the North Sea oil dividend, which we return to later. It should be noted that people in the Rest of the UK have noticed the current distribution of per capita spend within the UK and have come to think of the present system as ‘very unfair’. Thus, Lord Barnett (the inventor of the formula bearing his name that largely governs changes in the size of Scotland’s bloc grant): ‘The problem is the formula is based on spending per head, rather than need. The differences in spending now are deeply unfair and unacceptable. It needs to be changed’.1 Others have argued that being awash in public money is bad for the Scottish economy and would like to see a reduction in Scotland’s bloc grant for the good of...

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