The Scotland Bill

Additional written evidence submitted by Professor Michael Keating, University of Aberdeen

The debate on fiscal autonomy

There has been a lot of controversy around the Scotland Bill on the question of whether fiscal autonomy increases economic performance or growth. The problem with this debate is not that people are giving the wrong answer but that they are asking the wrong question; or a question that cannot be answered by statistics.

Social scientists seeking explanation look for a cause (independent variable); effect (dependent variable); relevant cases for comparison; and a causal mechanism. None of these has been adequately specified.

The independent variable might be decentralization itself, or the fact that devolved governments are smaller in size. If it is decentralization, this is a complex and multidimensional factor that cannot be reduced to a single measure; it includes taxes, spending discretion, types of taxes and intergovernmental relations. These are separate variables, not reducible to a single index. For example, Scotland already has great spending discretion but little control over taxes. Of course, if Scotland were to become independent, it would not longer be decentralized, so the argument becomes irrelevant. If the argument is that small governments with fiscal autonomy, grow faster then we should be comparing Scotland with governments of the same size, whether states or devolved regions (not with ‘decentralized’ governments that could be as big as California or as small as Prince Edward Island) but in this case the comparators are even more variegated.

The dependent variable is no easier. Rates of GDP growth are a poor indicator of social welfare. Some regions are entrepôts through which goods merely flow while others have natural resources whose value does not accrue to the population. Data at the regional level are scarce and often unreliable and attributing production to a particular region is difficult. The devolved unit rarely corresponds to the economic unit.

As for the mechanism, there are two candidates. Some argue that devolved governments cut taxes to compete and thus attract investment and productive residents. Others argue that they can increase taxes to provide infrastructure, education and other public goods that promote development. We cannot say that the same factor is the ‘cause’ of both of such radically different outcomes; they are a matter of political choice. Indeed the evidence shows no general connection between levels of taxation and spending on the one hand and levels of GDP on the other at any level of government.

If we try to resolve these issues of definition and operationalisation by specifying them better, we end up with too many variables or ‘degrees of freedom’ to enable any conclusions to be drawn. This is why the international studies are inconclusive.

Finally, even if we did establish a general association between fiscal devolution and economic growth, this would have almost no relevance for Scotland. Extrapolating from aggregate findings to an individual case is known as the ‘ecological fallacy’.

These objections apply irrespective of whether we are looking at GDP levels, economic performance, or economic growth trends.

There is a strong case for more fiscal autonomy for Scotland, to bring decisions on spending and taxation into line, to allow more innovation, and to improve the quality of policy debate here. Its effect, however, will depend on what politicians do with the powers; and in a globalized world, economic performance will depend on many factors outwith the control of government at any level.

February 2011