1. Dr John Moffat
Richard Price Building, Room F49
Email: J.D.Moffat@swansea.ac.uk
Office Hours: Tuesday & Friday, 1:30-2:30pm

2. Learning Outcomes
 Students should be able to answer the following
questions:
 Discuss the case that devolution should result in an
‘economic dividend’
 Does the Welsh Assembly and Scottish Parliament have
the necessary powers to improve economic welfare?
 Has the creation of the Welsh Assembly and Scottish
Parliament had a positive impact on economic welfare in
Wales and Scotland?
Topic 4: Devolution 2

3. Readings
 Armstrong & Taylor, chapter 12 (note that this is rather
outdated now)
 Welsh Government (2010), Economic Renewal: a new
direction, Available from:
http://wales.gov.uk/docs/det/report/100705anewdirec
tionen.pdf
 Rodriguez-Pose, A. & Gill, N. (2005), ‘On the
‘Economic Dividend’ of Devolution,’ Regional
Studies, Available from:
http://rsa.informaworld.com/srsa/content~db=all~co
ntent=a747357916~frm=abslink
Topic 4: Devolution 3

4. Summary of Debate
 Devolution may boost:
 Allocative efficiency
 Economic growth
 Devolution may have a negative impact on economic
welfare because of:
 Principal-agency problems
 Inter-regional competition
 Inter-regional inequality
 Institutional burdens
Topic 4: Devolution 4

5. Allocative Efficiency
 In a centralised system, homogenous policies are
implemented across all regions
 But if preferences differ across regions, homogenous
policies will not be optimal
 Because devolution allows for policy differentiation
across regions, policies can be implemented that
reflect regional preferences
 But for devolution to raise allocative efficiency, there
must be differences in preferences across regions. This
appears to be the case in the UK (see next slide)
Topic 4: Devolution 5

6. Electoral Map of UK, 2010
Topic 4: Devolution 6
Source: BBC (2010)

7. Policy Innovation
 Policy differentiation across regions may benefit
the nation because it allows for policy
experimentation
 Experimentation at the regional rather than the
national level exposes the nation to less risk
 If policy experiments are successful, other regions
can imitate the new policies
Topic 4: Devolution 7

8. Accountability and Information
Collection
 By reducing the distance between politicians and their
electorate, devolution can increase transparency and
accountability
 Devolved governments may also have advantages over
central governments in terms of information
collection
 Greater accountability and better information should
improve the design and implementation of policy
Topic 4: Devolution 8

9. Economic Growth
 Because devolution allows for policy innovation, increases
accountability and improves information collection, it may
lead to higher rates of growth
 On the other hand, a devolved parliament that better
reflects the wishes of its electorate (i.e. improves allocative
efficiency) may implement policies that have a negative
impact on growth
 A recent review of the empirical literature on the link
between fiscal decentralisation and growth concludes that
‘at best the jury is ‘out’ on this issue, and at worst the
evidence suggests no clear, precise relationship’ (Harris et
al. 2011)
Topic 4: Devolution 9

10. Principal-Agency Problems
 In the UK, the central government is responsible for raising
most of the money that the devolved governments spend
 Because politicians do not have incentives to reduce
expenditure, devolved governments may spend too much
and, if they can borrow, run up sub-optimally large debts
 Furthermore, it is argued that they lack adequate
incentives to pursue growth because the amount of tax
raised in their region does not directly determine the
amount of money they can spend
Topic 4: Devolution 10

11. Inter-Regional Competition
 If regions compete for foreign direct investment
(FDI), the total gain to the nation is the same
regardless of which region secures the FDI
 However, the costs of competition between different
regions/local governments in the form of tax
allowances, grants, marketing and favourable loan
conditions may be significant
 These costs represent a deadweight loss at the national
level
Topic 4: Devolution 11

12. Inter-Regional Inequality
 Devolution may increase regional inequality if richer
regions have more influence and are able to get a greater
share of funding from central government than poorer
regions
 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 share
of expenditure, they will struggle to compete with richer
regions because of poorer infrastructure, less access to
financial markets, smaller output markets, etc.
Topic 4: Devolution 12

13. Institutional Burdens
 Devolution may increase the cost of providing basic
services because regional governments are unable to
benefit from economies of scale that the national
government could obtain
 Institutional confusion may arise if the responsibilities of
different tiers of government are not clearly defined
 The creation of devolved governments may lead to
lobbying of central government for additional resources.
The costs of such lobbying are a deadweight loss to the
entire country
 Local politicians may be more corrupt than national
politicians
Topic 4: Devolution 13

14. Devolution in Wales
 1997 - Wales votes in
favour of creating a
National Assembly in a
referendum
 1999 - The National
Assembly starts work
 2007 – The National
Assembly gains powers to
make laws for Wales in
defined areas
 2011 - Wales votes in favour
of giving the National
Assembly further law
making powers Source: Mark Chatterley
Topic 4: Devolution 14

15. Devolution in Scotland
 1997 – Scotland votes in
favour of creating a Scottish
Parliament with the ability to
vary the basic rate of income
tax by 3p in a referendum
 1999 - The Scottish
Parliament starts work
 2011 – The Scottish National
Party gains a majority in the
Scottish Parliament
 2014 – Scotland will vote in a
referendum on whether it
should become independent Source: Bernt Rostad
Topic 4: Devolution 15

16. Do the devolved administrations have
the necessary powers to boost growth?
 In a speech given at the London School of Economics, Alex
Salmond, the leader of the Scottish National Party said:
‘What independence would give Scotland is the ability to set
our own fiscal and economic policy, within the context of a
stable monetary policy. It would give us the flexibility to
provide specifically Scottish policies for specific challenges.
And above all, it would allow us to promote sustainable
economic growth’
 This implies that the Scottish Parliament (and, by
implication, the Welsh Assembly which has fewer powers)
does not currently have the powers necessary to boost
growth
Topic 4: Devolution 16

17. Devolution in Wales
Today, 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 language
Areas likely to have a
direct impact on growth
Topic 4: Devolution 17

18. Devolution in Scotland
The 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
 Tourism
Topic 4: Devolution 18
Areas likely to have a
direct impact on growth

19. Devolution in Wales
• The Welsh government (broadly defined) is also responsible for
spending the bulk of the money spent in Wales
General
public
services
Defence
Public order
and safety
Economic
affairs
Environment
protection
Housing
and
community
amenities
Health
Recreation,
culture and
religion
Education
Social
protection
Total
Expenditure
on Services
Welsh Assembly
Government
415 – 18 1,473 144 351 6,050 127 1,399 117 10,094
Wales Office 5 – – – – – – – – – 5
Welsh local
government
309 4 883 581 386 373 – 325 2,824 2,513 8,198
Local government
public corporations
– – – 3 – – – – – – 3
UK government
departments
62 0 592 626 79 3 15 152 32 10,045 11,605
Total identifiable
expenditure in
Wales
792 4 1,494 2,683 608 727 6,065 603 4,255 12,675 29,906
Welsh government
(broadly defined) as
proportion of total
91% 100% 60% 77% 87% 100% 100% 75% 99% 21% 61%
Source: PESA (2011)Topic 4: Devolution
Welsh government
(broadly defined)
19
Areas likely to have a
direct impact on growth

20. Devolution in Scotland
Topic 4: Devolution 20
General
public
services
Defence
Public order
and safety
Economic
affairs
Environment
protection
Housing
and
community
amenities
Health
Recreation,
culture and
religion
Education
Social
protection
Total
Expenditure
on Services
Scottish Assembly
Government
442 4 1,141 3,036 314 1,598 10,772 240 2,613 234 20,393
Scottish Office 17 – – – – – – – – – 17
Scottish local
government
617 5 1,302 1,478 738 175 – 882 5,417 4,930 15,544
Local government
public corporations
– – – 5 – – – – – – 5
UK government
departments
63 0 123 876 326 – 49 91 20 15,577 17,125
Total identifiable
expenditure in
Scottish
1,140 9 2,566 5,394 1,378 1,773 10,821 1,213 8,049 20,741 53,085
Scottish government
(broadly defined) as
proportion of total
93% 100% 95% 84% 76% 100% 100% 92% 100% 25% 68%
Scottish
government
(broadly defined)
Source: PESA (2011)
• The Scottish government (broadly defined) is responsible for
spending the bulk of the money spent in Scotland
Areas likely to have a
direct impact on growth

21. Devolution in Wales
 The Welsh Government (2010) has a vision of:
‘a Welsh economy built upon the strengths and skills
of its people and natural environment; recognised at
home and abroad as confident, creative and
ambitious; 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 offered
Topic 4: Devolution 21

22. Devolution in Scotland
 The Scottish Government (2007) wants:
‘to focus the Government and public services on creating a more successful
country, with opportunities for all of Scotland to flourish, through increasing
sustainable 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 2017
Topic 4: Devolution 22

23. The Future of Devolution
 The Silk and Calman commissions were set up to investigate whether
further powers should be devolved to the Welsh Assembly and Scottish
Parliament respectively
 Their economic recommendations of the two commissions were very
similar and included:
 Cutting the basic rate of income tax levied by the UK Government by 10p in
the pound, with a corresponding reduction in the block grant received from
Westminster through the Barnett formula (see next lecture)
 Giving the Scottish Parliament/Welsh Assembly the power to set income
tax rates. A 10p rate would replace the reduction in the block grant
 Devolving Stamp Duty Land Tax, Landfill Tax, Air Passenger Duty and the
Aggregates Levy paid on mineral extraction
 Giving the Scottish Parliament/Welsh Assembly additional borrowing
powers
Topic 4: Devolution 23

24. Assessing the Impact of Devolution
 As shown in the ‘Summary of Debate’ slide, devolution
can improve economic welfare through improving
allocative efficiency and raising economic growth
 However, it is difficult to say whether devolution has
had a positive impact on allocative efficiency because
of the difficulty of measuring this concept
 The evidence presented in the following two slides is
therefore only an imperfect attempt to assess the
impact of devolution on allocative efficiency
Topic 4: Devolution 24

25. Allocative Efficiency
 Devolution has led to policy differentiation across the UK
which suggests there may have been improvements in
allocative efficiency
 A good example of policy differentiation is the different
approaches taken towards university tuition fees:
Topic 4: Devolution 25
Domicile of student Location of institution
England Scotland Wales NI
England Up to £9,000 Up to £9,000 Up to £9,000 Up to £9,000
Scotland Up to £9,000 No fee Up to £9,000 Up to £9,000
Wales Up to £3,575 Up to £3,575 Up to £3,575 Up to £3,575
N. Ireland Up to £9,000 Up to £9,000 Up to £9,000 Up to £3,575
EU Up to £9,000 No fee Up to £3,575 Up to £3,575
Other international Variable Variable Variable Variable
Source: UCAS (2012)

26. Allocative Efficiency
Topic 4: Devolution 26
• There are differences in the composition of
expenditure across the UK which also implies
policy differences
• However, such differences are not necessarily
the consequence of devolution
Source: PESA (2011)

27. Economic Growth
 GVA per head has risen relative to England in Scotland
but fallen in Wales and Northern Ireland since
devolution (see next slide)
 Unemployment is roughly the same as it was when
devolution was introduced in all three of the devolved
regions
 But we must be careful about attributing recent trends
in these indicators to devolution because it is
impossible to be sure about what would have
happened without devolution
Topic 4: Devolution 27

28. Relative GVA Per Head, 1997-2011
Topic 4: Devolution
Source: ONS (2011) 28
60
65
70
75
80
85
90
95
100
105
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Wales Scotland Northern Ireland England

29. 0.0
2.0
4.0
6.0
8.0
10.0
12.0
1992.M3
1992.M9
1993.M3
1993.M9
1994.M3
1994.M9
1995.M3
1995.M9
1996.M3
1996.M9
1997.M3
1997.M9
1998.M3
1998.M9
1999.M3
1999.M9
2000.M3
2000.M9
2001.M3
2001.M9
2002.M3
2002.M9
2003.M3
2003.M9
2004.M3
2004.M9
2005.M3
2005.M9
2006.M3
2006.M9
2007.M3
2007.M9
2008.M3
2008.M9
2009.M3
2009.M9
2010.M3
2010.M9
2011.M3
2011.M9
2012.M3
2012.M9
Wales Scotland Northern Ireland England
Unemployment Rates, 1992-2012 (%)
Topic 4: Devolution 29
Source: ONS (2012)

30. Summary
 There are arguments for and against the devolution of
power to regional/local government
 The Welsh Assembly and Scottish Parliament have
substantial powers to improve economic welfare
although both currently lack powers to raise revenue
 Since devolution, the economic performance of Wales
has deteriorated while the performance of the Scottish
economy has improved
Topic 4: Devolution 30

31. Next topic:
REGIONAL
FUNDING
Topic 4: Devolution 31