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Balanced Budget Government Spending in a Small Open Regional Economy

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  • Peter McGregor
  • Patrizio Lecca
  • Kim Swales

Abstract

Balanced Budget Government Spending in a Small Open Regional Economy P. Lecca, P.G. McGregor and J.K. Swales Department of Economics, University of Strathclyde Abstract Scotland is engaged in a lively and on-going debate on greater fiscal autonomy and independence, which is politically controversial, especially in respect of tax-varying powers. The Scottish Parliament has the power to make a balanced-budget adjustment in public expenditure by varying the basic rate of income tax. While this power has not so far been used, there is considerable pressure further to increase the fiscal powers of the Scottish Government. The object of this paper is to explore and quantify a number of typical balanced-budget government spending shocks. Here we seek to draw on lessons from recent macroeconomic analyses of fiscal policy, but we adapt them to an explicitly regional context. The regional dimension of the analysis is captured through application to a regional economy characterised by: highly open goods markets in which import and export to GDP ratios are much higher than for the national economy; highly open labour markets characterised by the presence of migration and national and regional wage bargaining institutions; financial markets that are perfectly integrated with the national economy with which the region shares a permanently fixed exchange rate. Furthermore, the macroeconomic “closures†of the model are those appropriate to a region, reflecting an institutional structure in which, for example, the system of national transfers moderates the operation of regional adjustment mechanisms. We develop an intertemporal variant of, AMOS, a computable general equilibrium (CGE) model for Scotland to explore the kinds of balanced-budget fiscal expansions that the Scottish Government could pursue. In response to a balanced budget fiscal expansion the model suggests that: an increase in current government purchase in goods and services has negative multiplier effects only if the elasticity of substitution between private and public consumption is high enough to move downward the marginal utility of private consumers; public capital expenditure crowds in consumption and investment but crowding out effects might arise in the short-run if agents are myopic. The distinctive results for public capital expenditure suggest that the current restriction on the composition of Scottish government expenditures is a very significant one. JEL Classifications: C68, D58, H71, H72, R13, R50. Key words: regional computable general equilibrium analysis, fiscal federalism, fiscal policy.

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  • Peter McGregor & Patrizio Lecca & Kim Swales, 2012. "Balanced Budget Government Spending in a Small Open Regional Economy," ERSA conference papers ersa12p1009, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa12p1009
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    Cited by:

    1. Allan, Grant & Lecca, Patrizio & McGregor, Peter & Swales, Kim, 2014. "The economic and environmental impact of a carbon tax for Scotland: A computable general equilibrium analysis," Ecological Economics, Elsevier, vol. 100(C), pages 40-50.
    2. Kristinn Hermannsson & Katerina Lisenkova & Peter G. McGregor & J. Kim Swales, 2014. "'Policy Scepticism' and the Impact of Scottish Higher Education Institutions (HEIs) on their Host Region: Accounting for Regional Budget Constraints under Devolution," Regional Studies, Taylor & Francis Journals, vol. 48(2), pages 400-417, February.
    3. Kristinn, Hermannsson & Peter G., McGregor & J. Kim, Swales, 2013. "Consumption Expenditures in Economic Impact Studies: An Application to University Students," SIRE Discussion Papers 2013-62, Scottish Institute for Research in Economics (SIRE).
    4. Hermannsson, Kristinn & Lisenkova, Katerina & McGregor, Peter G. & Swales, J. Kim, 2010. "Policy Scepticism and the Impact of Northern Irish Higher Education Institutions (HEIs) on their Host Region: Accounting for Regional Budget Constraints," SIRE Discussion Papers 2010-78, Scottish Institute for Research in Economics (SIRE).
    5. Kristinn Hermannsson & Katerina Lisenkova & Patrizio Lecca & Peter McGregor & Kim Swales, 2010. "The Importance of Graduates for the Scottish Economy: A "Micro-to-Macro" Approach," Working Papers 1026, University of Strathclyde Business School, Department of Economics.
    6. Hermannsson, Kristinn & Lisenkova, Katerina & McGregor, Peter G. & Swales, J. Kim, 2010. "Policy Scepticism and the Impact of London-based Higher Education Institutions (HEIs) on the economy of England: Accounting for Alternative Uses of Public Expenditure," SIRE Discussion Papers 2010-97, Scottish Institute for Research in Economics (SIRE).
    7. Patrizio Lecca & Grant Allan & Peter McGregor & Kim Swales, 2013. "The Impact of the Introduction of a Carbon Tax for Scotland," ERSA conference papers ersa13p501, European Regional Science Association.
    8. Kristinn Hermannsson & Katerina Lisenkova & Patrizio Lecca & J Kim Swales & Peter G McGregor, 2014. "The Regional Economic Impact of More Graduates in the Labour Market: A ‘Micro-to-Macro’ Analysis for Scotland," Environment and Planning A, , vol. 46(2), pages 471-487, February.
    9. Kristinn Hermannsson & Katerina Lisenkova & Peter G McGregor & J Kim Swales, 2013. "The Expenditure Impacts of Individual Higher Education Institutions and Their Students on the Scottish Economy under a Regional Government Budget Constraint: Homogeneity or Heterogeneity?," Environment and Planning A, , vol. 45(3), pages 710-727, March.
    10. Lisenkova, Katerina & McGregor, Peter G. & Swales, J. Kim, 2010. "Policy Scepticism and the Impact of Welsh Higher Education Institutions (HEIs) on their Host Region: Accounting for Regional Budget Constraints," SIRE Discussion Papers 2010-72, Scottish Institute for Research in Economics (SIRE).

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    More about this item

    Keywords

    regional computable general equilibrium analysis; fiscal federalism; fiscal policy.;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General

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