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.

Regional Specialization in Communal Agriculture: The Shakers, 1850- 1880

When the Shakers established communal farms in the Ohio Valley, they encountered a new agricultural environment that was substantially different from the familiar soils, climates, and markets of New England and the Hudson Valley. The ways in which their response to these new conditions differed by region has not been well documented. We examine patterns of specialization among the Shakers using the manuscript schedules of the federal Agricultural Censuses from 1850 through 1880. For each Shaker unit, we also recorded a random sample of five farms in the same township (or all available farms if there were fewer than five). The sample of neighboring farms included 75 in 1850, 70 in the next two census years, and 66 in 1880. A Herfindahl-type index suggested that, although the level of specialization was less among the Shakers than their neighbors, trends in specialization by the Shakers and their neighbors were remarkably similar when considered by region. Both Eastern and Western Shakers were more heavily committed to dairy and produce than were their neighbors, while Western Shakers produced more grains than did Eastern Shakers, a pattern imitated in nearby family farms. Livestock and related production was far more important to the Eastern Shakers than to the Western Shakers, again similar to patterns in the census returns from other farms. We conclude that, despite the obvious scale and organizational differences, Shaker production decisions were based on the same comparative advantages that determined production decisions of family farms.

Regional Integration and Industrial Location in a Landlocked Spatial Economy

Regional integration proposals often require agreements between countries that differ in geographic size, resource endowments, transportation assets, technologies, and product quality. In this asymmetric setting, questions arise about the potential for mutual gains and the distribution of benefits among industries and workers in each country. This paper examines how regional integration between a small landlocked country and a large neighboring country--with a unique port facility that both nations must use to export goods--affects the wage and location decisions of firms, the allocation of labor, the welfare of each country's workers and firms, and aggregate measures of economic welfare in each country and the region. A simulated spatial labor market model is used to explore the economic effects of various stages of regional integration. Beginning with autarky as a benchmark case, we consider two forms of regional integration: partial mobility (mobile labor with geographically restricted firms); and full mobility (mobile labor and firms) with convergence of production technologies and product quality.