17 February 2010: The UK Government’s proposals for the future financing of devolved government in Scotland: an economic assessment

Professor Drew Scott & Professor Andrew Hughes Hallett

This short paper offers a critical appraisal of the proposals published by the UK Government in November 2009 to reform the arrangements for funding the devolved administration in Scotland. It is, of course, in the nature of White Papers that much of the detail that will be included in any subsequent legislative proposal is absent. Nonetheless the White Paper ‘Scotland’s future in the United Kingdom: Building on ten years of Scottish devolution’1 announcing the parameters of the prospective reform to the current arrangements provides a clear sense of what is being proposed. As we argue in some detail below, our opinion is that the proposal is defective in a number of important ways, and if implemented is likely create key instabilities in the budgetary arrangements of Scotland’s government with significant ramifications for the delivery of public goods and services and, consequently, for Scotland’s economic prospects. 

In presenting this critique we are not advocating that the current Barnett regime should continue to be the basis for financing devolved government – in Scotland or elsewhere. There is a near unanimous consensus that the Barnett system is no longer an appropriate mechanism for this purpose, and that a fundamental overhaul is needed. We entirely concur with this view. Indeed the Government’s White Paper of November acknowledges also accepts this, and proposes to shift the funding model to one more closely reflective of the “needs” of the devolved territories and, perhaps, the regions of England. So while we agree that reform is needed, we do not consider the current proposals are either viable or desirable in economic terms. And while we advocate a considerably more radical shift towards fiscal autonomy for Scotland, that approach is explicitly not the benchmark against which we are assessing the current proposals. Rather we examine these proposals strictly in terms of their economic and economic policy properties. In our concluding section we offer our thoughts on how the current proposals might be amended in order to address the defects we identify.