NIESR Press Release: Real devolution means the power to borrow: for Scotland, Wales, Northern Ireland and within England
In the event of a "No" vote in the Scottish referendum, both Government and Opposition parties have committed to a major further devolution of powers on tax and spending to Scotland. In a research paper published yesterday, NIESR's Dr Angus Armstrong and Dr Monique Ebell argue that devolution can only be meaningful if Scotland - and, crucially, Wales, Northern Ireland and local government in England - have the power to borrow on their own account. Contrary to received Whitehall and Westminster wisdom, such borrowing powers are both feasible and desirable.
Real devolution within the UK must mean that Scotland makes its own decisions on economic policy, leaving monetary policy aside, and that it can succeed or fail. That in turn must mean that, just as with states and municipalities in many other countries, it should be able to borrow and be responsible for that borrowing. Only then will local representatives be responsible for their actions and then be held to account by the electorate. The difficulty for the UK is the deep-seated doubt about devolving borrowing powers away from the centre of government. The paper shows why this doubt is unfounded and how borrowing powers can be devolved without putting sensible economic management at risk.
The paper argues that, given the respective size of Scotland and the UK, the latter would have both the incentive and the ability to bail-out Scotland if it faced either a funding crisis or even threatened to default on its obligations, whatever the political or legal constraints. The result is moral hazard, since Scotland would have an incentive to borrow imprudently. A Scotland-only solution to the borrowing problem would be risky and unstable.
This can only an only be tackled by addressing ‘the elephant in the room’ - devolution of more powers, including powers to borrow freely, to other levels of government in the UK. Because England is large relative to the rest of the Union, a key task is determining the right level of regional government to devolve borrowing powers to. With 353 local councils in England divided between nine regions (and 22 councils in Wales), new arrangements could devolve economic decision-making, including decisions on and responsibility for borrowing, to regional or local level. The result would be far more diversity, a far less powerful central government, and both the ability and incentive for central government to bail out sub-national borrowers would be far less.
Scotland's borrowing costs, as estimated in Scotland's Currency Options by Armstrong and Ebell (2013, NIESR Discussion Paper No. 416) are likely to be higher than for the UK, due to liquidity and the volatility of tax revenues, as our research has shown. However, within the existing currency union there is no currency risk premium which may be required if Scotland is outside of the currency union. This means Scotland could have the capacity to borrow, as we argue - real devolved power, but without the higher borrowing costs of being outside of a currency union.
These would be dramatic changes in UK constitutional arrangements indeed: but the current crisis of confidence in those arrangements revealed by the Scottish referendum could be the catalyst for real change.
Dr Armstrong said:
"Meaningful devolution of economic power to Scotland means letting Scotland borrow freely - without any prospect of a bailout from Westminster if things go wrong. That is both feasible and desirable - but, politically and economically, it will only work if the same powers are available to local authorities and regions in the UK."
"We show how borrowing powers can be devolved without putting sensible UK economic management at risk. This involves solving ‘inflation bias’ and 'bail-out bias' problem, much feared in the Treasury and indeed Brussels and Frankfurt. These are solved within a political union by maintaining an expert monetary policy committee and addressing the 'elephant in the room' devolution in England and Wales as well as Scotland."
"Full borrowing powers could be devolved to the Scottish Government in the short term. This would be real local economic responsibility and accountability. Moreover, because Scotland would be within the existing currency union it would not face an additional currency risk premium and higher borrowing costs that would arise outside of the existing currency union."
The research paper is entitled “Real Devolution: the Power to Borrow”.
For a full copy of this paper, please see the publications section of the NIESR website, or contact the NIESR Press Office:
Brooke Hollingshead on 0207 654 1923 / email@example.com
To discuss the article, please contact:
- Angus Armstrong: firstname.lastname@example.org or 020 7654 1925, or
- Monique Ebell: email@example.com or 020 7654 1926
Dr Angus Armstrong is Director of Macroeconomics at NIESR. Dr Monique Ebell is a Research Fellow at NIESR. The authors have published numerous papers on the macroeconomic and financial implications of Scottish independence, and they are available here:http://niesr.ac.uk/research-theme/economics-scotland
We also created an animation which we hope introduces the main ideas to as wide as possible audience http://www.youtube.com/watch?v=mBC0mLFz91o
NIESR aims to promote, through quantitative and qualitative research, a deeper understanding of the interaction of economic and social forces that affect people's lives, and the ways in which policies can improve them.
Latest News from
Civitas - Anti-racism industry creating a dependency upon race experts in which ‘racial divisions are becoming ever more firmly entrenched’, says think-tank report08/04/2021 10:35:00
The anti-racism industry ‘creates a dependency’ upon a race discourse that sows division, finds a new Civitas report. ‘The tragic consequence’, the report finds, ‘is that racial divisions are becoming ever more firmly entrenched’.
The King’s Fund response to The Commission on Race and Ethnic Disparities report02/04/2021 09:10:00
Richard Murray, Chief Executive of The King’s Fund, commented on the report of the Commission on Race and Ethnic Disparities
UK economy will likely bounce back “more strongly than many expect,” says IEA expert01/04/2021 14:35:00
Julian Jessop, Economics Fellow at the free market think tank the Institute of Economic Affairs, responded to the latest GDP data from the Office for National Statistics
Civitas - ‘Nurturing Britain’s high-tech capabilities’ and ‘safeguarding critical industries’ should be central to managing potential risks of economic dependence on China, think-tank report finds01/04/2021 13:35:00
‘British policymakers should think carefully about the degree of economic reliance on China that it is wise to tolerate where critical infrastructure is concerned’, a new think-tank paper suggests.
Commit to new deal for healthcare workers or risk ‘deadly exodus’, IPPR warns government01/04/2021 12:35:00
As many as one in four healthcare workers – equivalent to 330,000 staff - say they are more likely to leave the NHS due to a year of unprecedented pressure, according to new polling by IPPR/YouGov. The figure - which includes the equivalent of 100,000 nurses and 8,000 midwives – adds pressure to a workforce that was experiencing a crisis of unfilled vacancies even before the pandemic.
UK right to call for WTO reform, says IEA expert01/04/2021 11:35:00
Mark Littlewood, Director General at free market think tank the Institute of Economic Affairs, responded to the news that Britain it to use its G7 presidency to press for reform of the World Trade Organization (WTO)
IFS - Scottish Government funding per person is over 30% higher than equivalent English funding. But it has still chosen to use temporary COVID funding to pay for some new permanent spending commitments.01/04/2021 10:35:00
Real-terms funding for the Scottish Government’s day-to-day (or resource) spending in 2021-22 is still set to be 2% lower per person than in 2010-11, after excluding temporary COVID-19 related funding, and adjusting for new responsibilities.
Financial Ombudsman Service needs “major reform,” says new research01/04/2021 09:35:00
A new report from the Institute of Economic Affairs, written by IEA Head of Regulatory Affairs Victoria Hewson, draws attention to the shortcomings of the Financial Ombudsman Service (FOS).