Tuesday, 13 October 2009

New book advocates fiscal autonomy for Scotland

‘The Political Economy of Financing Scottish Government’ by economists Professor C Paul Hallward (University of Connecticut) and Professor Ronald MacDonald (University of Glasgow) was launched on Monday 12th October at the Royal Society of Edinburgh. Introduced by Professor Drew Scott, Co-Director of the Europa Institute, the book was praised as an important piece of work in the wider debate on the future of Scottish monetary policy.

The book comprises a of collection papers on the funding of Scottish Government. The authors argue that with soft budget constraints the Barnett formula of the bloc grant is unlikely to survive because of the UK’s budget deficit. They present alternative proposals on appropriate forms of financing for Scotland under its current status within the Union (fiscal autonomy) and outside the union if Scotland was to become independent (full fiscal autonomy).

At the launch McDonald questioned the UK’s ‘one size fits all’ monetary policy. Despite opinion polls indicating minority support for the Scottish National Party, he argued that funding from Westminster ensures that a non-Unionist majority in Scotland continues to support the status quo. The lack of fiscal autonomy means that there is no incentive among Scottish politicians to drive economic growth, given that tax revenue inevitably goes to the British exchequer.

Comparing Scottish public services to the rest of the UK, MacDonald suggested that under the current system too much emphasis is placed on equity rather than on efficiency. Hallward questioned the effectiveness of the Calman Commission’s recommendations arguing that it maintains soft budget constraints. The authors also contend that while the Commission’s report focuses to some extent on efficiency, little emphasis is placed on the private sector and not enough on the public sector.

For Hallwood and MacDonald fiscal autonomy would allow for the devolution of most tax policies with the exception of VAT, while full fiscal autonomy would enable the Scottish government to control all tax policies including VAT.

By providing hard budget constraints these proposals would address the current ‘one size fits all’ monetary policy and promote efficiency in both the public and private sectors. However the authors admit that there could be trade-offs in terms of an emphasis on efficiency over equity.

Nevertheless Hallwood concluded that these proposals would not only be beneficial for Scotland, but would also enable England to streamline its own taxation and spending policies.

The Political Economy of Financing Scottish Government: Considering a New Constitutional Settlement for Scotland by C. Paul Hallwood and Ronald MacDonald Edward Elgar Publishing £59.95 pp160

Stephen Meredith
Research Associate

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