The Economic Implications of Devolution and Decentralisation

TheCityUK has launched its new report on The Economic Implications of Devolution and Decentralisation, which was written in conjunction with PWC.

With the Government outlining a set of proposals which will shift the future constitutional balance between Westminster, the devolved administrations and local government, it is important to understand the repercussions of such policies. This study analyses the potential economic implications of further fiscal devolution and decentralisation in the UK in terms of GDP, jobs and the Exchequer. The analysis focuses on the implications of a range of changes to tax, spending and borrowing powers using a dynamic economic model of the nations of the UK.

Key findings from the report suggests that over the next decade:

  • A 1% reduction in the rate of Corporation Tax over three years – funded by a cut in public spending – is estimated to raise GDP by 0.1%-0.3% across the devolved nations
  • A 1% increase in all rates of Income Tax – matched by an increase in public spending – could reduce GDP by 0.01%-0.02% in Scotland and Wales
  • Halving the rates of Air Passenger Duty in Scotland would increase GDP by an estimated 0.01%
  • Spending the expected revenue from a 1% increase in all rates of Income Tax on skills and infrastructure would increase GDP in Scotland by 0.15% and 0.13% respectively: the effect of equivalent changes in the use of revenue from Income Tax changes would be similar in other devolved nations.
  • Fiscal devolution will potentially have other adverse economic effects if it adds more distortive taxes which undermine the integrated UK market in financial services or adds to uncertainty.

The analysis suggests that the overall impact of devolution of powers to set the rates of Corporation Tax, Income Tax and Air Passenger Duty would be relatively small. The financial and related professional services sector, however, is expected to be impacted disproportionately.