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 7: A Restatement of the Case for Scottish Fiscal Autonomy

C. Paul Hallwood and Ronald MacDonald

Subjects: economics and finance, public finance, regional economics

Extract

In this chapter we rebut the case that Ashcroft et al. (2006) make in favour of the status quo fiscal settlement in Scotland that stems from the Scotland Act 1998 and address their criticisms of our proposal for fiscal autonomy outlined in the previous chapter. Their case for Barnett is that it offers a hard budget constraint that effectively disciplines the Scottish public sector. We will show in this chapter that this belief in Barnett is based on a serious misconception of its economic consequences. Despite the fact that Barnett sets an upper limit on public spending by the Scottish Government it is by no means a hard budget constraint. Indeed, so poor is its fiscal discipline on the Executive that it is better described as a formula for a ‘Rakes Progress’. THE FLAWED CASE FOR BARNETT Ashcroft et al. (2006) provide a table in which they compare the characteristics of the Barnett formula system for financing devolved Scottish Government spending with that of fiscal autonomy of the type that we discussed in the last chapter. According to them, like fiscal autonomy, the Barnett formula offers a hard budget constraint and is efficient at handling the split of resources between the Scottish public and private sectors. They say ‘no attempt is made in this table to indicate the degree or extent to which each characteristic is present in each system’. However, they do say that: The present Barnett based system already exhibits many of the characteristics required to encourage the...

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