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Fiscal Devolution and Dependency




Public spending devolution in practice is widely seen as more appropriate for addressing varied political aspirations within state boundaries than is tax devolution. A drawback is that devolved public spending may be subject to irresistible upward pressure, as illustrated by 'formula drift' of the United Kingdom devolved administrations. By crowding out the private sector such public spending can exacerbate the problem it was originally intended to alleviate. When taxpayers do not value increases in government output at least as highly as the private goods and services they must forgo to finance them, then the public sector is too large. This paper estimates a three sector Hecksher-Ohlin model of the economy with the greatest relative rise of the public spending ratio in the United Kingdom, Wales. Simulation of the model shows a net gain in emp loyment from a one percent cut in income tax matched by a corresponding reduction in government spending. This result is consistent with the current level of intergovernmental transfers being excessive.

Suggested Citation

  • Foreman-Peck, James & Lungu, Laurian, 2005. "Fiscal Devolution and Dependency," Cardiff Economics Working Papers E2005/8, Cardiff University, Cardiff Business School, Economics Section.
  • Handle: RePEc:cdf:wpaper:2005/8

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    References listed on IDEAS

    1. Wildasin, David E., 2003. "Fiscal competition in space and time," Journal of Public Economics, Elsevier, vol. 87(11), pages 2571-2588, October.
    2. Sanguinetti, Pablo & Tommasi, Mariano, 2004. "Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline," Journal of International Economics, Elsevier, vol. 62(1), pages 149-170, January.
    3. Timothy Besley & Stephen Coate, 1999. "Centralized versus Decentralized Provision of Local Public Goods: A Political Economy Analysis," NBER Working Papers 7084, National Bureau of Economic Research, Inc.
    4. Blanchflower, David G & Oswald, Andrew J, 1994. "Estimating a Wage Curve for Britain: 1973-90," Economic Journal, Royal Economic Society, vol. 104(426), pages 1025-1043, September.
    5. Jackman, Richard & Savouri, Savvas, 1992. "Regional Migration versus Regional Commuting: The Identification of Housing and Employment Flows," Scottish Journal of Political Economy, Scottish Economic Society, vol. 39(3), pages 272-287, August.
    6. Richard Jackman & S Savouri, 1992. "Regional Migration versus Regional Commuting: The Identification of Housing and Employment Flows," CEP Discussion Papers dp0057, Centre for Economic Performance, LSE.
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    Cited by:

    1. Foreman-Peck, James & Zhou, Peng, 2016. "Migration and Tax Yields in a Devolved Economy," Cardiff Economics Working Papers E2016/7, Cardiff University, Cardiff Business School, Economics Section.

    More about this item


    Fiscal Devolution; Small Open Economy Modelling; Crowding Out;

    JEL classification:

    • R15 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Econometric and Input-Output Models; Other Methods
    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy

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