Media Briefings

AFTER SCOTLAND’S REFERENDUM: Fiscal challenges under alternative constitutional arrangements

  • Published Date: April 2014

The binary choice available in September’s referendum on Scottish independence has deflected attention away from consideration of the future fiscal arrangements for the UK’s devolved administrations. In research to be presented at the Royal Economic Society’s 2014 annual conference, Professor David Bell explores the fiscal challenges whatever the outcome, including the extent to which the functions of federalism can be achieved within the UK’s existing institutional structures or whether a more comprehensive set of federal structures is required.


He notes that whether the outcome of the referendum is a yes or no to independence, there is impetus to reduce the vertical fiscal imbalance faced by the UK’s devolved administrations, achieved through the devolution of some mix of taxes (initially with the partial devolution of income tax to Scotland through the Scotland Act).


Although a number of proposals have been put forward as to the type of taxes that might be devolved, there has been little analysis to date as to how the nature of fiscal devolution and the way in which any block grants are determined might influence the type of fiscal policy that would be pursued in the UK territories – and the outcomes of this policy given factor mobility and spillovers.


Important questions remain around the extent to which moves towards a more federal approach to fiscal devolution can be balanced with respect for the principle of comparable access to public services that is often assumed to be an implicit component of ‘Union’.


Lessons from other countries suggest that the way in which any inter-regional fiscal imbalances (in either spending needs or tax base) are equalised can have profound effects on the incentives faced by devolved governments, and thus the policies that they may implement. The level of devolved government borrowing powers, and the extent to which devolved governments face ‘hard’ budget constraints, are also important in this respect. Furthermore, the level of inter-regional factor mobility can influence the effectiveness of devolved government policy due to spillovers.


The UK is characterised by substantial constitutional and size asymmetries. These asymmetries provide additional challenges in designing effective devolved government fiscal arrangements. Where English tax rates or spending are used as standards against which devolved governments can deviate, these arrangements are criticised as being counter to the spirit of devolution, giving England first-mover advantage.


But alternatives, based on averages across the four UK nations, are beset by issues of asymmetry and, for certain taxes and dependent on the nature of block grant allocation, can lead to gaming and perverse incentives (such as inefficient tax competition).


This study explores these issues from both a theoretical and an empirical perspective. From a theoretical perspective, the research models the setting of tax rates across jurisdictions in a game theoretic framework. The number of jurisdictions, their relative size, and the way in which block grants are determined combine to influence the strategic setting of the tax rate in each jurisdiction.


Empirically, the study develops a micro-simulation model of the UK economy and uses this to model the interaction of tax setting and grant allocation on devolved government total revenues. The nature of the federal model – whether more cooperative or competitive – has a strong role in influencing outcomes, as does the degree of behavioural response to tax changes. The study discusses the implications of these results in terms of the balance between fiscal autonomy and equity.





For further information, contact:

Romesh Vaitilingam:, +44 7768 661095