Guy Lodge of IPPR and I have an article in today’s Scotsman, about the right lessons to learn for devolution finance from the problems of sub-state borrowing in southern Europe. The article can be found here. Below is the original copy we filed, with some hyperlinks added.
DEBT AND FISCAL DEVOLUTION: LEARNING FROM CLUB MED
It was inevitable that the eurozone crisis would cast a shadow over the debates about Scotland’s constitutional future. The SNP have already been forced to rethink their commitment to take an independent Scotland into the euro, opting instead to stick with sterling for the foreseeable future. Developments in Italy and Spain mean the spotlight has now turned on those who support further enhancing the powers of the Scottish Parliament instead of independence. For many the case for handing Scotland greater tax and borrowing powers has been badly damaged by the sight of Valencia, Catalonia and most lately Andalucia – Spain’s indebted autonomous communities – queuing up for bail-outs from the Spanish government. Does the UK really want to replicate the situation in Italy where the central government has been forced to take over the finances of a fiscally autonomous but bankrupt Sicily?
The Treasury – which has just ended a consultation on Scottish borrowing – is clearly looking hard at Club Med’s problems. It no doubt thinks the UK has dodged a bullet by ensuring that devolved governments cannot run up similar debts. But that would be to draw the wrong lesson, getting both the politics and the economics wrong.
In fact, there are two lessons that can be better learned from southern Europe’s current travails. The first is that hard budget constraints – that devolved budgets cannot be open to politically convenient top-ups from central government – are vital. The problem with the Spanish regime for financing the autonomous communities is that regional and central state finances are hopelessly entangled, which means that bailouts are regarded as being on offer, and (outside the Basque Country) powers to set tax rates have never been used to depart from the rates set years ago before the taxes were devolved. Spanish fiscal devolution has involved a slow, incremental deconcentration of tax powers, without ever fully separating the finances or tax powers of each government. Worse, overlaps in functions and political choices by the central government may have driven up borrowing. Catalonia regularly complains that the central state has deliberately under-invested in central government infrastructure functions in Catalonia, using the money saved (much of it generated by Catalan taxpayers) to spend elsewhere. Consequently some Catalan regional spending is needed to fill that gap (it is therefore over-simplistic to regard the problem as ‘regional overspending’ – the central state is also partly responsible for the perilous state of the autonomous communities’ finances).
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