1. Dr John MoffatRichard Price Building, Room F49Email: J.D.Moffat@swansea.ac.ukOffice Hours: Tuesday & Friday, 1:30-2:30pm

2. Learning Outcomes Students should be able to answer the followingquestions: Discuss the case that devolution should result in aneconomic dividend Does the Welsh Assembly and Scottish Parliament havethe necessary powers to improve economic welfare? Has the creation of the Welsh Assembly and ScottishParliament had a positive impact on economic welfare inWales and Scotland?Topic 4: Devolution 2 3. Readings Armstrong & Taylor, chapter 12 (note that this is ratheroutdated now) Welsh Government (2010), Economic Renewal: a newdirection, Available from:http://wales.gov.uk/docs/det/report/100705anewdirectionen.pdf Rodriguez-Pose, A. & Gill, N. (2005), On theEconomic Dividend of Devolution, RegionalStudies, Available from:http://rsa.informaworld.com/srsa/content~db=all~content=a747357916~frm=abslinkTopic 4: Devolution 3 4. Summary of Debate Devolution may boost: Allocative efficiency Economic growth Devolution may have a negative impact on economicwelfare because of: Principal-agency problems Inter-regional competition Inter-regional inequality Institutional burdensTopic 4: Devolution 4 5. Allocative Efficiency In a centralised system, homogenous policies areimplemented across all regions But if preferences differ across regions, homogenouspolicies will not be optimal Because devolution allows for policy differentiationacross regions, policies can be implemented thatreflect regional preferences But for devolution to raise allocative efficiency, theremust be differences in preferences across regions. Thisappears to be the case in the UK (see next slide)Topic 4: Devolution 5 6. Electoral Map of UK, 2010Topic 4: Devolution 6Source: BBC (2010) 7. Policy Innovation Policy differentiation across regions may benefitthe nation because it allows for policyexperimentation Experimentation at the regional rather than thenational level exposes the nation to less risk If policy experiments are successful, other regionscan imitate the new policiesTopic 4: Devolution 7 8. Accountability and InformationCollection By reducing the distance between politicians and theirelectorate, devolution can increase transparency andaccountability Devolved governments may also have advantages overcentral governments in terms of informationcollection Greater accountability and better information shouldimprove the design and implementation of policyTopic 4: Devolution 8 9. Economic Growth Because devolution allows for policy innovation, increasesaccountability and improves information collection, it maylead to higher rates of growth On the other hand, a devolved parliament that betterreflects the wishes of its electorate (i.e. improves allocativeefficiency) may implement policies that have a negativeimpact on growth A recent review of the empirical literature on the linkbetween fiscal decentralisation and growth concludes thatat best the jury is out on this issue, and at worst theevidence suggests no clear, precise relationship (Harris etal. 2011)Topic 4: Devolution 9 10. Principal-Agency Problems In the UK, the central government is responsible for raisingmost of the money that the devolved governments spend Because politicians do not have incentives to reduceexpenditure, devolved governments may spend too muchand, if they can borrow, run up sub-optimally large debts Furthermore, it is argued that they lack adequateincentives to pursue growth because the amount of taxraised in their region does not directly determine theamount of money they can spendTopic 4: Devolution 10 11. Inter-Regional Competition If regions compete for foreign direct investment(FDI), the total gain to the nation is the sameregardless of which region secures the FDI However, the costs of competition between differentregions/local governments in the form of taxallowances, grants, marketing and favourable loanconditions may be significant These costs represent a deadweight loss at the nationallevelTopic 4: Devolution 11 12. Inter-Regional Inequality Devolution may increase regional inequality if richerregions have more influence and are able to get a greatershare of funding from central government than poorerregions The extent to which this is a problem will depend upon: The strength of the central government The method used to allocate funding across regions If poorer regions are unable to get a sufficiently large shareof expenditure, they will struggle to compete with richerregions because of poorer infrastructure, less access tofinancial markets, smaller output markets, etc.Topic 4: Devolution 12 13. Institutional Burdens Devolution may increase the cost of providing basicservices because regional governments are unable tobenefit from economies of scale that the nationalgovernment could obtain Institutional confusion may arise if the responsibilities ofdifferent tiers of government are not clearly defined The creation of devolved governments may lead tolobbying of central government for additional resources.The costs of such lobbying are a deadweight loss to theentire country Local politicians may be more corrupt than nationalpoliticiansTopic 4: Devolution 13 14. Devolution in Wales 1997 - Wales votes infavour of creating aNational Assembly in areferendum 1999 - The NationalAssembly starts work 2007 The NationalAssembly gains powers tomake laws for Wales indefined areas 2011 - Wales votes in favourof giving the NationalAssembly further lawmaking powers Source: Mark ChatterleyTopic 4: Devolution 14 15. Devolution in Scotland 1997 Scotland votes infavour of creating a ScottishParliament with the ability tovary the basic rate of incometax by 3p in a referendum 1999 - The ScottishParliament starts work 2011 The Scottish NationalParty gains a majority in theScottish Parliament 2014 Scotland will vote in areferendum on whether itshould become independent Source: Bernt RostadTopic 4: Devolution 15 16. Do the devolved administrations havethe necessary powers to boost growth? In a speech given at the London School of Economics, AlexSalmond, the leader of the Scottish National Party said:What independence would give Scotland is the ability to setour own fiscal and economic policy, within the context of astable monetary policy. It would give us the flexibility toprovide specifically Scottish policies for specific challenges.And above all, it would allow us to promote sustainableeconomic growth This implies that the Scottish Parliament (and, byimplication, the Welsh Assembly which has fewer powers)does not currently have the powers necessary to boostgrowthTopic 4: Devolution 16 17. Devolution in WalesToday, the Welsh Assembly has powers in the following areas: Agriculture, fisheries, forestry and rural development Ancient monuments and historic buildings Culture Economic development Education and training Environment Fire and rescue services and promotion of fire safety Food Health and health services Highways and transport Housing Local government Public administration Social welfare Sport and recreation Tourism Town and country planning Water and flood defence Welsh languageAreas likely to have adirect impact on growthTopic 4: Devolution 17 18. Devolution in ScotlandThe Scottish Parliament has powers in the following areas: Agriculture, forestry and fishing Culture and the arts Economic development Education and training Environment Health Housing Local government Most aspects of criminal and civil law and criminal justice Police and fire services Public Transport particular to Scotland Social work Sport TourismTopic 4: Devolution 18Areas likely to have adirect impact on growth 19. Devolution in Wales The Welsh government (broadly defined) is also responsible forspending the bulk of the money spent in WalesGeneralpublicservicesDefencePublic orderand safetyEconomicaffairsEnvironmentprotectionHousingandcommunityamenitiesHealthRecreation,culture andreligionEducationSocialprotectionTotalExpenditureon ServicesWelsh AssemblyGovernment415 18 1,473 144 351 6,050 127 1,399 117 10,094Wales Office 5 5Welsh localgovernment309 4 883 581 386 373 325 2,824 2,513 8,198Local governmentpublic corporations 3 3UK governmentdepartments62 0 592 626 79 3 15 152 32 10,045 11,605Total identifiableexpenditure inWales792 4 1,494 2,683 608 727 6,065 603 4,255 12,675 29,906Welsh government(broadly defined) asproportion of total91% 100% 60% 77% 87% 100% 100% 75% 99% 21% 61%Source: PESA (2011)Topic 4: DevolutionWelsh government(broadly defined)19Areas likely to have adirect impact on growth 20. Devolution in ScotlandTopic 4: Devolution 20GeneralpublicservicesDefencePublic orderand safetyEconomicaffairsEnvironmentprotectionHousingandcommunityamenitiesHealthRecreation,culture andreligionEducationSocialprotectionTotalExpenditureon ServicesScottish AssemblyGovernment442 4 1,141 3,036 314 1,598 10,772 240 2,613 234 20,393Scottish Office 17 17Scottish localgovernment617 5 1,302 1,478 738 175 882 5,417 4,930 15,544Local governmentpublic corporations 5 5UK governmentdepartments63 0 123 876 326 49 91 20 15,577 17,125Total identifiableexpenditure inScottish1,140 9 2,566 5,394 1,378 1,773 10,821 1,213 8,049 20,741 53,085Scottish government(broadly defined) asproportion of total93% 100% 95% 84% 76% 100% 100% 92% 100% 25% 68%Scottishgovernment(broadly defined)Source: PESA (2011) The Scottish government (broadly defined) is responsible forspending the bulk of the money spent in ScotlandAreas likely to have adirect impact on growth 21. Devolution in Wales The Welsh Government (2010) has a vision of:a Welsh economy built upon the strengths and skillsof its people and natural environment; recognised athome and abroad as confident, creative andambitious; a great place to live and work To achieve this vision, it will: Invest in high quality and sustainable infrastructure Broaden and deepen the skills base Encourage innovation Target the business support offeredTopic 4: Devolution 21 22. Devolution in Scotland The Scottish Government (2007) wants:to focus the Government and public services on creating a more successfulcountry, with opportunities for all of Scotland to flourish, through increasingsustainable economic growth The Scottish Government has seven purpose targets. The economic ones are: Economic Growth To raise the GDP growth rate to the UK level by 2011 To match the GDP growth rate of the small independent EU countries by 2017 Productivity To rank in the top quartile for productivity against key trading partners in the OECD by 2017 Participation To maintain our position on labour market participation as the top performing UK country To close the gap with the top five OECD economies by 2017 Population To match average European (EU15) population growth over the period from 2007 to 2017 Supported by increased healthy life expectancy in Scotland over the period from 2007 to 2017Topic 4: Devolution 22 23. The Future of Devolution The Silk and Calman commissions were set up to investigate whetherfurther powers should be devolved to the Welsh Assembly and ScottishParliament respectively Their economic recommendations of the two commissions were verysimilar and included: Cutting the basic rate of income tax levied by the UK Government by 10p inthe pound, with a corresponding reduction in the block grant received fromWestminster through the Barnett formula (see next lecture) Giving the Scottish Parliament/Welsh Assembly the power to set incometax rates. A 10p rate would replace the reduction in the block grant Devolving Stamp Duty Land Tax, Landfill Tax, Air Passenger Duty and theAggregates Levy paid on mineral extraction Giving the Scottish Parliament/Welsh Assembly additional borrowingpowersTopic 4: Devolution 23 24. Assessing the Impact of Devolution As shown in the Summary of Debate slide, devolutioncan improve economic welfare through improvingallocative efficiency and raising economic growth However, it is difficult to say whether devolution hashad a positive impact on allocative efficiency becauseof the difficulty of measuring this concept The evidence presented in the following two slides istherefore only an imperfect attempt to assess theimpact of devolution on allocative efficiencyTopic 4: Devolution 24 25. Allocative Efficiency Devolution has led to policy differentiation across the UKwhich suggests there may have been improvements inallocative efficiency A good example of policy differentiation is the differentapproaches taken towards university tuition fees:Topic 4: Devolution 25Domicile of student Location of institutionEngland Scotland Wales NIEngland Up to 9,000 Up to 9,000 Up to 9,000 Up to 9,000Scotland Up to 9,000 No fee Up to 9,000 Up to 9,000Wales Up to 3,575 Up to 3,575 Up to 3,575 Up to 3,575N. Ireland Up to 9,000 Up to 9,000 Up to 9,000 Up to 3,575EU Up to 9,000 No fee Up to 3,575 Up to 3,575Other international Variable Variable Variable VariableSource: UCAS (2012) 26. Allocative EfficiencyTopic 4: Devolution 26 There are differences in the composition ofexpenditure across the UK which also impliespolicy differences However, such differences are not necessarilythe consequence of devolutionSource: PESA (2011) 27. Economic Growth GVA per head has risen relative to England in Scotlandbut fallen in Wales and Northern Ireland sincedevolution (see next slide) Unemployment is roughly the same as it was whendevolution was introduced in all three of the devolvedregions But we must be careful about attributing recent trendsin these indicators to devolution because it isimpossible to be sure about what would havehappened without devolutionTopic 4: Devolution 27 28. Relative GVA Per Head, 1997-2011Topic 4: DevolutionSource: ONS (2011) 2860657075808590951001051997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Wales Scotland Northern Ireland England 29. 0.02.04.06.08.010.012.01992.M31992.M91993.M31993.M91994.M31994.M91995.M31995.M91996.M31996.M91997.M31997.M91998.M31998.M91999.M31999.M92000.M32000.M92001.M32001.M92002.M32002.M92003.M32003.M92004.M32004.M92005.M32005.M92006.M32006.M92007.M32007.M92008.M32008.M92009.M32009.M92010.M32010.M92011.M32011.M92012.M32012.M9Wales Scotland Northern Ireland EnglandUnemployment Rates, 1992-2012 (%)Topic 4: Devolution 29Source: ONS (2012) 30. Summary There are arguments for and against the devolution ofpower to regional/local government The Welsh Assembly and Scottish Parliament havesubstantial powers to improve economic welfarealthough both currently lack powers to raise revenue Since devolution, the economic performance of Waleshas deteriorated while the performance of the Scottisheconomy has improvedTopic 4: Devolution 30 31. Next topic:REGIONALFUNDINGTopic 4: Devolution 31