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 4: Objectives of an Effective Fiscal Federal System

C. Paul Hallwood and Ronald MacDonald

Subjects: economics and finance, public finance, regional economics


In this chapter we consider key objectives of an effective devolved fiscal system, especially its principle characteristics. Since we are discussing a devolved system, the underlying assumption here is that Scotland remains within the United Kingdom, although we fully recognize that the political economy of the devolution of fiscal powers may be crucial to the attainment of the devolution of tax and other revenues to the Scottish parliament and this is something we consider later in the book. As we noted in our introductory remarks, there is a whole spectrum of different possible forms of fiscal devolution, with the current arrangements at one end and full fiscal autonomy at the other end of the spectrum. Although our own preferred system of fiscal devolution is closer to the latter, it is nonetheless important to look at a fiscal federal system which contains a number of the ingredients of fiscal autonomy although they are only midway on the fiscal devolution spectrum. In a fiscal federalist structure the optimal system of financing subnational government will seek to achieve an ‘appropriate’ horizontally and vertically balanced financial structure; that is, to seek equity between regions in the United Kingdom, while also promoting financial and economic efficiency, and without undermining macroeconomic stabilization objectives. The principal implication for Scotland of greater tax devolution is that it possibly faces a trade-off between the amount of financing that it receives from Westminster (under the equity between the regions doctrine that underpins the Barnett formula), in favour of stimulating greater...

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