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 3: The Economic Case for Fiscal Devolution

C. Paul Hallwood and Ronald MacDonald

Subjects: economics and finance, public finance, regional economics


In this chapter we examine the standard economic case for the devolution of fiscal powers to a sub level of government: with the current constitutional settlement in the UK from Westminster to Holyrood. We believe that these arguments would apply a fortiori in terms of Scotland achieving political independence. The idea of properly aligning public spending and taxing decisions at sub-national levels of government is not a new one. Indeed, Adam Smith in 1776 (p. 250) pointed out that: those public works which are of such a nature that they cannot afford any revenue for maintaining themselves, but of which the conveniency is nearly confined to some particular place or district, are always better maintained by local or provisional revenue, under management of a local and provincial administration, than by the general revenue of the state. . . . Were the streets of London to be lighted and paved at the expense of the Treasury, is there any probability that they would be so well lighted and paved as they are at present, or even at so small an expense? Smith also questioned the fairness of having people outside a benefit area paying for benefits enjoyed by others: The expense, besides, instead of being raised by a local tax upon the inhabitants of each particular street, parish, or district in London, would, in this case, be defrayed out of the general revenue of the state, and would consequently be raised by a tax upon all the inhabitants of the kingdom, of whom the...

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