Scotland: A New Fiscal Settlement

Executive Summary Many commentators have criticised the strategy currently used to finance the Scottish Parliament – both the block grant system, and the small degree of fiscal autonomy devised in the Calman report and the UK government’s 2009 White Paper. Nevertheless, fiscal autonomy has now been conceded in principle. This paper sets out to identify formally what level of autonomy would be best for the Scottish economy and the institutional changes needed to support that arrangement. Our conclusions are in line with the Steel Commission: that significantly more fiscal powers need to be transferred to Scotland. But what we can then do, which the Steel Commission could not, is to give a detailed blueprint for how this proposal might be implemented in practice. We face two problems. The existing block grant system can and has been criticised from such a wide variety of points of view that it effectively has no credibility left. On the other hand, the Calman proposals (and the UK government proposals that followed) are unworkable because, to function, they require information that the policy makers cannot possibly have; and because, without borrowing for current activities, they contain no mechanism to reconcile contractual spending (most of the budget) with variable revenue flows – which is to invite an eventual breakdown. But in its attempt to fix these problems, the UK White Paper introduces three further difficulties: new grounds for quarrels between the UK and Scottish governments, a long term deflation bias, and a loss of devolution.

Okun’s law – A meta analysis

This paper seeks to identify whether there is a representative empirical Okun’s Law coefficient (OLC) and to measure its size. We carry out a meta regression analysis on a sample of 269 estimates of the OLC to uncover reasons for differences in empirical results and to estimate the ‘true’ OLC. On statistical (and other) grounds, we find it appropriate to investigate two separate subsamples, using respectively (some measure of) unemployment or output as dependent variable. Our results can be summarized as follows. First, there is evidence of type II publication bias in both sub-samples, but a type I bias is present only among the papers using some measure of unemployment as the dependent variable. Second, after correction for publication bias, authentic and statistically significant OLC effects are present in both sub-samples. Third, bias-corrected estimated true OLCs are significantly lower (in absolute value) with models using some measure of unemployment as the dependent variable. Using a bivariate MRA approach, the estimated true effects are -0.25 for the unemployment sub-sample and -0.61 for the output-sub sample; with a multivariate MRA methodology, the estimated true effects are -0.40 and -1.02 for the unemployment and the output-sub samples respectively.