The Barnett formula under the Smith Reforms

Jim Cuthbert

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    Abstract

    With the implementation of the Smith Commission reforms, there will be abatements to the Scottish government’s block grant as calculated by the Barnett formula, to allow for the tax revenues which Westminster will forego. The income tax abatement will be increased through time in an arrangement known as Holtham indexation. The purpose of this paper is to model these new fiscal arrangements. The modelling implies that, other than in an unlikely special case, the system cannot run on indefinitely with fixed parameter values, without reaching relative values of per capita public expenditure in Scotland and England which would be politically unacceptable. Moreover, there is a likelihood of adverse dynamic effects which would further destabilise the system. The paper also puts forward an adjustment to the original form of Holtham indexation, to take account of relative population growth. While not answering every problem, this adjustment has strong equity arguments in its favour, and would also significantly stabilise the system. It is particularly important that the implications of this type of modelling should be taken on board by policy makers and parliamentarians just now, when the detailed legislative and other arrangements for implementing the Smith reforms are about to be finalised.
    Original languageEnglish
    Pages (from-to)98-111
    Number of pages14
    JournalFraser of Allander Economic Commentary
    Volume39
    Issue number1
    Publication statusPublished - 26 Jun 2015

    Keywords

    • Scottish economic activity
    • Fraser of Allander
    • Barnett formula
    • Smith reforms
    • tax

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