Reading Note: Paul Hallwood and Ronald MacDonald’s ‘The Political Economy of Financing Scottish Government’

The debates about the financing of devolution have become deeply disjointed over the last few years.  The divisions have been between disciplines, between academics and practitioners, between ‘unionist’ and ‘nationalist’ sides of politics, and between those looking just at Scotland, and those looking at the wider context of other parts of the asymmetrically devolved UK (or all of it).  Jockeying for political advantage has not helped matters, and attempts to bridge these gaps have been limited – though the Scottish Government’s Council of Economic Advisers, established after the SNP came to office in 2007, and the ‘Independent Expert Group’ that advised the Calman Commission in 2008-09 were limited attempts at doing so.  A book like this could do much to help, by bringing together the main threads of the debate in a clear and accessible form.  The fact that much of it has already appeared in such papers and presentations needn’t be an obstacle to doing so.

Cover image (C) Edward Elgar publishers, 2009

Paul Hallwood and Ronald MacDonald conclude readily that the Barnett formula, and the funding of devolved government very largely by grant, is an inappropriate way to proceed – the chief defects being that it encourages inefficient spending, and serves only as a soft (not a hard) budget constraint.  They then consider alternatives: they survey what they call ‘fiscal federalism’, by which they mean mixed systems combining a measure of fiscal autonomy with some grant financing, and fiscal autonomy both within and outside the Union, and look briefly at systems overseas.  They find ‘fiscal federalism’ systems defective on the theoretical ground that these lack a hard enough budget constraint, but much prefer the idea that the devolved Scottish Government should collect all taxes in Scotland, and (if part of the UK) remit funds to London to cover the cost of UK-wide public services in Scotland.  This is what they mean by fiscal autonomy (some of us call that ‘full fiscal autonomy’, for clarity).  The book is therefore a strong argument, from an economic perspective and based largely on theoretical arguments, for what journalists now call ‘devolution max’ if not independence.  This is of course very similar to the position of the Scottish Government, set out in most detail in its ‘National Conversation’ paper on Fiscal Autonomy, available here – but coming from a different point of view, grounded much more in economics than politics.

I’m afraid that I don’t find the argument made here for fiscal autonomy within the Union convincing or satisfying.  (It’s an axiomatic part of Scottish independence, and the case for it in that context rolls into wider arguments about independence.)  I’m reviewing the book for Scottish Affairs, and don’t want to pre-empt here the detailed review which will appear there in due course.  But it’s one thing to formulate a powerful critique of the Barnett formula and the system of which it is a key part; it’s another to come up with a viable alternative; and it’s a third to make the case for full fiscal autonomy – which is by far the most radical of the options on offer.  The problem here is that Hallwood and MacDonald spell out why they think such autonomy might be attractive for Scotland, but they don’t discuss its wider implications for other parts of the UK and why it might therefore be appropriate for UK institutions to agree with this approach.  In particular, they don’t think through what such an approach would mean for the system of social security.  In a book of pure economics, that might be less of a problem, but in one that claims to be about political economy, and to investigate constitutional considerations, it is a major one.

This is an interesting and potentially important book about the financial aspects of the devolution debate, but sadly, it’s not as interesting or important as it might be.

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1 Comment

Filed under Devolution finance, Reading notes, Scotland

One response to “Reading Note: Paul Hallwood and Ronald MacDonald’s ‘The Political Economy of Financing Scottish Government’

  1. Pingback: Another view of fiscal autonomy for Scotland « Devolution Matters

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