The Political Economy of Financing Scottish Government
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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.
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Chapter 11: Conclusion

C. Paul Hallwood and Ronald MacDonald

Extract

11. Conclusion It is widely acknowledged that public spending in Scotland is over-funded by the bloc grant from Westminster – as measured by any reasonable needs based formula.1 Moreover, much of this public spending is wasteful (for example as measured by labour productivity in comparable Scottish and English public sectors).2 Nor is Scottish public spending targeted on promoting economic growth in Scotland, and it is arguable that it crowds out private sector economic growth – which is an aspect of acknowledged Scottish long-term de-industrialization. It can and has been argued, both here and elsewhere, that this overfunding is simply an attempt to return some of the huge oil revenues generated in Scottish waters over the years to Scotland. If this is the case, one of the key themes of this book is that a bloc grant is not a good way to return this largesse. With the bloc grant settlement, it is almost as if the crafty English found a way to inoculate themselves against the ‘Dutch Disease’ – a worry sometimes voiced in the 1970s that North Sea oil would so appreciate the pound’s exchange rate, that the UK’s whole economy would be de-industrialized. One rational and economically sensible way out of this would have been to use North Sea oil tax revenues to build up overseas investments in a sovereign wealth fund, as other countries and regions have done. Another would have been to use the money to re-capitalize the British economy.3 The actual choice was to spend some of...

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