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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.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2005/8.

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Length: 31 pages
Date of creation: Dec 2005
Date of revision:
Publication status: Forthcoming in Applied Economics
Handle: RePEc:cdf:wpaper:2005/8
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  1. 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.
  2. David Wildasin, 2001. "Fiscal Competition in Space and Time," Public Economics 0112004, EconWPA.
  3. Besley, Timothy J. & Coate, Stephen, 2000. "Centralized versus Decentralized Provision of Local Public Goods: a Political Economy Analysis," CEPR Discussion Papers 2495, C.E.P.R. Discussion Papers.
  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 1025-43, September.
  5. 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.
  6. David G. Blanchflower & Andrew J. Oswald, 1994. "Estimating a Wage Curve for Britain 1973-1990," NBER Working Papers 4770, National Bureau of Economic Research, Inc.
  7. 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 272-87, August.
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