Considering a New Constitutional Settlement for Scotland
Studies in Fiscal Federalism and State–local Finance series
In this chapter we consider the empirical evidence on the effect of fiscal devolution on economic growth and on the size of government. The former topic has two aspects – the public and the private. The public aspect simply relates to the effect of fiscal devolution on allocative efficiency, redistribution and macroeconomic stability and the consequent impact of changes to these components on economic growth. For example, fiscal decentralization could improve allocative efficiency by releasing resources which are then more efficiently employed in the private sector, or the existing employment of resources in the public sector could be made more efficient thereby increasing economic growth. The private aspect relates to the effect that the devolution of tax levers – such as corporation tax – can have on private sector incentives and hence on economic growth. In this chapter we also look at the empirical evidence on the role of fiscal decentralization in affecting the size of the public sector. Since the debate on fiscal decentralization only really took off in the 1970s – beginning with Oates (1972), and actual decentralization only became a trend in the last two decades, it is perhaps not surprising that the empirical literature on the fiscal decentralization–economic growth relationship is relatively recent, itself being kicked off by Oates (1995). Since then there have been approximately 15 studies on the link between fiscal decentralization and economic growth. These studies rely on cross-sectional, panel and purely time-series data sets applied to groups of countries, or single country analyses. The latter...
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