A New Fiscal Settlement for Scotland

Many commentators have criticised the strategy currently used to finance the Scottish Parliament– both the block grant system, and the small degree of fiscal autonomy devised in the Calman report and the UK government’s 2009 White Paper. Nevertheless, fiscal autonomy has now been conceded in principle.

Andrew Hughes Hallett and Drew Scott in [LINK TO WORKING PAPER] set out to identify formally what level of autonomy would be best for the Scottish economy and the institutional changes needed to support that arrangement.
The conclusions are in line with the Steel Commission: that significantly more fiscal powers need to be transferred to Scotland. But what the authors can do, which the Steel Commission could not, is to give a detailed blueprint for how this proposal might be implemented in practice.

This paper makes five new contributions:
1). It provides the intellectual case for fiscal autonomy in Scotland, and examines
explicitly how far autonomy should go. It concludes that more autonomy is better than less in terms of improving Scotland’s economic performance.
2). It provides a blueprint for how the tax system could be devolved, and explains why.
3). It details the institutional arrangements necessary to support such a regime and specifies how they might work. Specifically mechanisms that limit public debt are looked at, and provide a blueprint for how they might be implemented to ensure credible fiscal policies.
4). Fiscal autonomy trades efficiency and better economic outcomes against spreading
adverse spillovers or tax competition to other regions in the UK and a possible lack of
discipline. The work shows how fiscal autonomy can be set up in a way that is consistent with the UK macro-economic framework, and also consistent with EU rules on economic policy and state aid.
5). Given this framework, rough calculations are made of how much autonomy is
worth in terms of increased growth and jobs (every 1% of the budget transferred to
Edinburgh could potentially increase incomes per head between 1.3% and 0.6%); and
what effect income tax differentials would have on skilled in-migration (fairly small: a few thousand per 1% differential in income tax rates).

Researchers: Andrew Hughes-Hallett

Related CDMA Working Papers:

1009Andrew Hughes-Hallet (St Andrews and George Mason) and Drew Scott (Edinburgh) 'Scotland: A New Fiscal Settlement'.