Will the benefits of fiscal devolution outweigh the costs? Considering Scotland’s new fiscal framework

ABSTRACT

An extensive programme of fiscal devolution to the Scottish Parliament is underway. Fiscal devolution is expected to bring several benefits, including the ability to align policy more closely to preferences, and enhancing the accountability of the devolved parliament. But it can entail costs in the form of diseconomies of scale, complexity for taxpayers, and various inequities and inefficiencies. This paper reviews Scotland’s new devolved fiscal settlement and considers the extent to which it is realizing the benefits that were intended, and how these compare with the costs and risks.

KEYWORDS:

• fiscal federalism
• devolution
• Scotland

JEL:

• H71
• H72
• H77
• R50

ACKNOWLEDGEMENTS

The author is grateful to Peter McGregor and Graeme Roy for comments on an earlier version of the paper. He is also indebted to the two anonymous referees for insightful and constructive insights on previous iterations of the paper.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author.

Notes

1. This paper refers to both fiscal decentralization and fiscal devolution. ‘Fiscal decentralization’ is a generic term to refer to the shifting of some responsibility for expenditure or revenue-raising decisions to lower levels of government. ‘Fiscal devolution’ is generally characterized as a particular form of fiscal decentralization involving the transfer of fiscal powers to a subnational government which has a degree of political independence. The term ‘fiscal devolution’ tends to be used in the Scottish context, reflecting the clear constitutional and political separation between the UK and Scottish parliaments. But where previous studies have considered the broader concept of fiscal decentralization, this paper retains the use of that nomenclature.

2. In fact, the Barnett Formula predates the establishment of the Scottish Parliament, having been used to determine the Scottish budget since the 1979/80 financial year. The difference is that, since 1999, it has been used to allocate resources to the devolved Scottish government, rather than to allocate within departments of the UK government (Heald & McLeod, 2005).