David Bell and David Ulph: Would greater fiscal autonomy make Scotland richer?

Earlier this week the Scottish Government produced a paper setting out its case for giving the Scottish Parliament powers over nearly all taxes and spending. The claim is that more fiscal devolution would lead to higher economic growth. Clearly, this is a very important issue. But how robust is the evidence base that might support such a claim?

The Scottish Ministers attribute to two economists - Professors Scott and Hughes Hallett - a very specific claim: '"a 1% point increase in fiscal devolution (the proportion of revenue and expenditure devolved] might be expected to raise GDP by 1.3% after five years above what it would otherwise have been". Is this true?

There are two problems with this. First it slightly misquotes the academics. In their paper ("A New Fiscal Settlement for Scotland"), they talk about the proportion of expenditure devolved. If it were true that devolving spending decisions helped economic growth - which it might - that tells us nothing about devolving taxation. Indeed, the study that is the ultimate source for the numbers on which Hughes-Hallett and Scott base their calculations finds no statistically significant impact for greater tax devolution.

But there is a bigger problem. The overall evidence base for the potential impacts of fiscal autonomy does not support robust claims in either direction.

Economic theory predicts that while greater devolution of tax and/or spending decisions could enhance economic performance, equally, there are circumstances where it might make us worse off. It depends precisely how powers are devolved and used.

Without a clear steer from the theory, economists have spent a great deal of time trying to establish from the data what the effects of varying tax and spending powers have been in practice. There have been lots of studies. But they all suffer from one or other of the following problems:

• The majority of studies rely on a single indicator of fiscal autonomy. But the complexity of the circumstances that determine whether further devolution is effective cannot be reduced to a single number.

• Moreover, the indicators that have been used are often simple ratios of tax or spending and may not capture the extent of genuine discretion available to the devolved government.

• Studies might establish correlation between growth and fiscal autonomy, but for a number of statistical reasons, that does not prove that greater fiscal autonomy causes growth. Indeed it is almost impossible to establish causation in such studies.

• Many of the published articles base their empirical analysis on a single country. There is no way of being sure that such lessons can be transferred and authors frequently caution against doing so.

It is perhaps not surprising, given these problems, that the existing studies provide a mixed and inconclusive picture. Some claim positive effects of greater spending and/or tax devolution; others find no significant effects; while one even suggest that the UK might currently be close to the optimal degree of fiscal decentralization that maximizes growth of GDP.

All this supports our view that the existing evidence base is too weak to support any reliable conclusions about the impact of greater fiscal powers on economic growth.

• David Bell is Professor of Economics at the University of Stirling. David Ulph is a Professor at the School of Economics and Finance at the University of St Andrews