The Economic Case for Fiscal Federalism in Scotland

In this paper we consider the case for assigning tax revenues to Scotland, by which we mean that taxes levied on Scottish tax bases should be returned to the Scottish budget. The budget, however, would continue to be supplemented by transfers from the Westminster budget. This arrangement differs from the current situation whereby public spending is largely financed by a bloc grant from Westminster. Our suggestion falls short of full fiscal federalism for Scotland . meaning that Scotland had control over choice of tax base and of tax rates, and fiscal transfers from Westminster would be minimal. We use propositions drawn from the theory of fiscal federalism to argue for a smaller vertical imbalance between taxes retained in Scotland and public spending in Scotland. A closer matching of spending with taxes would better signal to beneficiaries the true costs of public spending in terms of taxes raised. It would also create more complete incentives for politicians to provide public goods and services in quantities and at qualities that voters are actually willing to pay for. Under the current bloc grant system, the marginal tax cost of spending does not enter into political agents. calculations as spending is out of a fixed total budget. Moreover, the Scottish electorate is hindered in signaling its desire for local public goods and services since the size of the total budget is determined by a rigid formula set by Westminster. At the present time we reject proposals for full fiscal federalism because in sharply reducing vertical imbalance in the Scottish budget, it is likely to worsen horizontal balance between Scotland and the other UK regions. Horizontal balance occurs where similarly situated regions enjoy the same per capita level of public goods and services at the same per capita tax cost. The complete removal of the bloc grant under full fiscal federalism would remove the mechanism that currently promotes horizontal equity in the UK. Variability in own-source tax revenues creates other problems with full fiscal federalism. Taxes derived from North Sea oil would constitute a large proportion of Scottish taxes, but these are known to be volatile in the face of variable oil prices and the pound-dollar exchange rate. At the present time variability in oil tax revenue is absorbed by Westminster. Scotland is insulated through the bloc grant. This risk sharing mechanism would be lost with full fiscal federalism. It is true that Scotland could turn to financial markets to tide itself over oil tax revenue downturns, but as a much smaller and less diversified financial entity than the UK as a whole it would probably have to borrow on less favorable terms than can Westminster. Scotland would have to bear this extra cost itself. Also, with full fiscal federalism it is difficult to see how the Scottish budget could be used as a macroeconomic stabilizer. At present, tax revenue downturns in Scotland - together with the steady bloc grant - are absorbed through an increase in vertical imbalance. This acts as an automatic stabilizer for the Scottish economy. No such mechanism would exist under full fiscal federalism. The borrowing alternative would still exist but on the less favorable terms - as with borrowing to finance oil tax shortfalls.

Achieving Universal Primary Education: Can Kenya Afford it?

Kenya has experienced a rapid expansion of the education system partly due to high government expenditure on education. Despite the high level of expenditure on education, primary school enrolment has been declining since early 1990s and until 2003 when gross primary school enrolment increased to 104 percent after the introduction of free primary education. However, with an estimated net primary school enrolment rate of 77 percent, the country is far from achieving universal primary education. The worrying scenario is that the allocations of resources within the education sector seems to be ineffective as the increasing expenditure on education goes to recurrent expenditure (to pay teachers salaries). Kenya's Poverty Reduction Strategy Paper (PRSP) and the Economic Recovery Strategy for wealth and Employment Creation (ERS) outlines education targets of reaching universal primary education by 2015. The Government is faced with budget constrains and therefore the available resources need to be allocated efficiently in order to realize the education targets. The paper uses Budget Negotiation Framework (BNF) to analyze the cost effective ways of resource allocation in the primary education sector to achieve universal primary education and other education targets. Budget Negotiation Framework is a tool that aims at achieving equity and efficiency in resource allocation. Results from the analysis shows that universal primary education by the year 2015 is a feasible target for Kenya. The results also show that with a more cost- effective spending of education resources - increased trained teachers, enhanced textbook supplies and subsidies targeting the poor - the country could realize higher enrolment rates than what has been achieved with free primary education.