3 June 2010: Scotland: A New Fiscal Settlement

Professor Andrew Hughes Hallet & Professor Drew Scott

In a detailed research paper, the Scottish professors Andrew Hughes Hallett and Drew Scott show that the Calman proposals are unworkable, that additional tax powers should be devolved and propose that a Scottish Treasury be set up. 

The paper contains detailed proposals of the taxes to be allocated to Scotland, and which revenues should be remitted to London. They show how this can be done without incurring deficits as large as the UK has experienced in the past, yet improve growth and employment prospects. So there are gains for both sides: the UK and Scotland.

In particular the paper makes five new contributions:  

1)  It provides the intellectual case for fiscal autonomy in Scotland, and examines explicitly how far autonomy should go. We conclude 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 we look at mechanisms that limit public debt, 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 paper 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, teh authors can make rough calculations 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).