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 9: Empirical Evidence: Tax Devolution and Prosperity

C. Paul Hallwood and Ronald MacDonald

Subjects: economics and finance, public finance, regional economics


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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