Growth incentives and devolved fiscal systems

This paper explores the characteristics of a range of stylized devolved fiscal systems that have been applied, or proposed, as a means of funding the devolved Scottish government. The central aim is to identify those schemes that most effectively provide incentives for the pursuit of growth-promoting policies by the regional government. Using simulations with an intertemporal, computable general equilibrium model for Scotland, it did not prove possible to uniquely rank a range of devolved fiscal systems in terms of the extent of growth incentive they provide. Moreover, rather counterintuitively, tax-sharing regimes do not necessarily improve growth incentives relative to more basic block grants.

Automated summary

This paper examines a variety of stylized devolved fiscal systems for funding the devolved Scottish government, aiming to identify schemes that provide the most effective incentives for growth-promoting policies. However, simulations using a computable general equilibrium model did not yield a clear ranking of devolved fiscal systems in terms of growth incentives. Surprisingly, tax-sharing regimes may not necessarily enhance growth incentives compared to more basic block grants.