Considering a New Constitutional Settlement for Scotland
Studies in Fiscal Federalism and State–local Finance series
In this chapter we discuss the tax, public spending and economic implications for Scotland of fiscal autonomy. By ‘fiscal autonomy’ we mean that Scottish Government and parliament spending would be funded by taxes raised in Scotland or through public borrowing by a Scottish Treasury. Revenue transfers to Scotland under the Barnett, or some other bloc grant, formula would cease; or, at least, would be much reduced. Moreover, to the extent that Scotland benefited from public goods provided by Westminster, Scotland could even pay a levy to Westminster. We discuss two types of fiscal autonomy: (a) within the UK and (b) Scotland as an independent country. With independence, Scotland would gain the ability to issue its own currency, or it would have the freedom to adopt the euro and would be able to vary and have differential VAT rates, which has been used by Luxembourg to a great extent to build its financial sector; otherwise we do not believe the economic benefits of fiscal autonomy to Scotland would differ significantly between the two constitutional arrangements. We continue with the argument that the current bloc grant system is inefficient because it does not require the Scottish Government to balance the benefits of public spending against the pain of financing and it can only be used in a limited way to affect incentives of private sector agents. With deficient incentives political decision makers are unlikely to strive to increase efficiency in the provision of publicly provided goods, or to try to get the...
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