Growth Incentives and Devolved Fiscal Systems

This paper explores the characteristics of a range of stylised devolved fiscal systems which have been applied, or proposed, as a means of funding the devolved Scottish Government. The central aim is to identify those fiscal mechanisms that most effectively incentivise the pursuit of growth promoting policies by the regional government. This implies identifying the extent to which different fiscal arrangements reinforce effective local growth policies by resulting in increased devolved budgets. Simulations using an intertemporal, computable general equilibrium model for Scotland, fail to rank uniquely a range of devolved fiscal systems on this criterion over a range of demand- and supply-side policy interventions. Moreover, rather counter-intuitively, tax-sharing regimes do not necessarily improve growth incentives relative to more basic block grants.