Inequality in the 21st Century

For a long time in economics it was believed that issues of distribution could be considered separately from issues of economic growth. As far as welfare was concerned, the consensus was that growth was of first order importance and the inequality in the distribution of the benefits of this growth was a relatively minor second order concern. Indeed, following Kuznets (1955) it was believed that while the process of development might initially lead to an increase in inequality, as societies developed it appeared that the forces for convergence in the distribution, such as the diffusion of knowledge and skills, became stronger. It looked as if equality was a normal good which societies would increasingly choose as they became wealthier. This belief was underpinned by the observation of high levels of inequality prior to World War I, and lower levels of inequality in the period from 1950 – 1980.

However, since 1980 inequality has been rising again in advanced economies, and this issue exploded from a relatively minor issue in the economic literature to the top of the best sellers lists with the publication of Piketty (2014) “Capital in the Twenty-First Century”. Continue reading

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How will the general election result and new tax powers affect the Scottish budget?

With all the recent discussion about the Smith Commission and devolved taxation, it’s perhaps easy to forget that the block grant from Westminster will continue to account for the major part of the Scottish budget for the next few years at least. But how will the spending plans of the next UK Government affect the size of the Scottish grant and therefore the Scottish budget? And to what extent will Scotland’s new tax powers enable the Scottish Parliament to vary its budget further? Continue reading

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The distribution of wealth

At Scottish Fiscal and Economic Studies, we have, and are continuing to develop, a microsimulation model of UK and Scottish households which we can use for distributional analysis. For example we can say what a particular change in fiscal policy means for net household income for those households in the bottom decile and for those households in the top decile. Analysis of this sort underlies the paper we published last year, Constitutional change and inequality in Scotland, which investigated the distributional impacts of the various policy levers associated with different degrees of devolution and autonomy. There are many microsimulation modes which can analyse income distributions, but most, due to a lack of data availability, do not allow for the analysis of wealth distributions. The ScotFES model will be developed to include such capability in a model based on the Understanding Society dataset, complemented by a microfounded life-cycle economic model, calibrated to the Office for National Statistics Wealth in Great Britain data releases. In this post I outline the data available, and discuss why wealth is a particularly interesting topic from a Scottish point of view. Continue reading

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How different has Scotland’s recession and recovery been from the UK’s?

Compared to the recessions of the 1970s, 80s and 90s, the recent crisis in the UK has been characterised by several distinguishing features:

  • The fall in output has been more prolonged; the level of GDP did not recover its pre-recession level until the second half of 2013, some five years after the start of the recession.
  • However, employment (and total hours worked) have fallen less than the fall in output, and the labour market recovered much more quickly than output has done; employment had returned to its pre-recession level by early 2012.
  • Wages on the other hand have fallen by as much as 10% in real terms, and are yet to show any significant sign of increase.

The fact that output has fallen by more than employment (and hours worked) means that productivity has fallen, measured either as output per worker or output per hour worked. Continue reading

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Scotland’s 1%

There has been a lot of recent media attention on the top 1% of income earners. But what are the characteristics of Scotland’s top 1%?

The latest good data we have on incomes is for 2009/10 (the data is from HMRC and based on taxpayer returns; it includes income from a variety of sources, including bonuses). In that year there were around 4.32m adults in Scotland, so by definition when we talk about the top 1% we are talking about 43,000 people.

To be in this group in 2009/10 you had to have gross income (from all sources) of £93,500 or over. Continue reading

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The LBTT Revision

On 18th January 2015, the Cabinet Secretary for Finance, John Swinney, announced that he is revising the residential tax element of the land and building transaction tax (LBTT). Mr Swinney had  announced the rates for LBBT in his draft budget in October 2014. These are shown below:

Residential transactions Non-residential transactions Non-residential leases
Rate Rate Rate
Up to £135,000 nil Up to £150,000 Nil Up to £150,000 nil
£135,001 to £250,000 2.0% £150,001 to £350,000 3.0% Over £150,000 1.0%
£250,001 to £1,000,000 10.0% Over £350,000 4.5%
Over £1,000,000 12.0%

Source: Scottish Government

In December 2014, the Chancellor of the Exchequer announced new rates and a new structure for Stamp Duty Land Tax (SDLT) in the rest of the UK. This new structure was introduced from December 4, 2014. Its rates are shown below:

Continue reading

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The Scottish Budget under the Smith Proposals

David Bell and David Eiser

The Smith Commission proposals seek to increase the powers of the Scottish Parliament and to secure a corresponding increase in the Parliament’s accountability and responsibility for the effects of its decisions and their resulting benefits or costs.

How has this ambition been translated into concrete proposals for fiscal responsibility? On the spending side, the Scottish Parliament will control benefits associated with long-term disability and sickness, along with some relatively small benefits for older people, and the Work Programme – the UK Government’s key programme for supporting people into work. In total, this will transfer benefits worth around £2.5bn to the Scottish Parliament (in addition the Scottish Parliament would gain some limited ability to vary the housing cost elements of Universal Credit, and top-up other benefits).

On the revenue side, the Scottish Parliament will gain the ability to vary income tax rates and thresholds (but not the personal allowance). Half of VAT revenues raised in Scotland will be assigned to the Scottish Parliament (the VAT rate and exemptions cannot be varied). And Air Passenger Duty (APD) and the Aggregates Levy will be fully devolved. Continue reading

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How should the Barnett Formula be adjusted to reflect devolved taxes? A question of allocating risk (wonkish)

David Bell and David Eiser

The UK parties have committed to retaining the Barnett Formula to allocate grant to Scotland. The way in which the Barnett Formula is adjusted to reflect devolved taxes will have important implications for the budgetary risks facing the Scottish and UK Parliaments. This blog discusses two possible approaches to adjusting the Barnett Formula. It shows that the adjustment approach proposed in relation to the Scotland Act powers exposes Scotland to a different set of risks on the spending side relative to the revenue side which seems inconsistent. This approach also exposes Scotland to UK policy decisions, and these could affect Scotland positively or negatively. An alternative approach is discussed which overcomes these problems, but exposes Scotland to a higher rate of convergence in per capita spending with rUK. Continue reading

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Submission to Smith Commission, 2

Many people have interpreted Gordon Brown’s comments prior to the referendum, as well as the so called “Vow” made in the Daily Record, as some commitment so “Devo Max”. My submission to The Smith Commission on further devolution for Scotland assumes that we are indeed aiming for the maximum level of devolution possible, and asks where this must fall short of the common understanding of Devo Max.

Devo Max is usually interpreted to mean full Home Rule for Scotland within the UK, so that the only governmental functions for Scotland that remain at the UK level are defence, foreign affairs, as well as a single currency and free trade area. Scotland would raise all its own taxes and pay the UK government for the services it provides, such as defence.

However, this framework runs into many of the same criticisms that afflicted the proposals for an independent Scotland sharing the pound Sterling with the rest of the UK. The question now is different, since it is unambiguously the case that enhanced devolution for Scotland will mean retaining a common currency area with the rest of the UK: so Scotland WILL be sharing the pound. However, to make a success of divergent polities within a common currency area, it is a requirement that we learn the lessons of the Eurozone crisis and seriously consider the constraints imposed on these divergent polities by the need to maintain macroeconomic stability.

My submission argues that whilst devolution can be extended greatly from its current form, an automatic, formulaic system needs to be built that responds to business cycle fluctuations and asymmetric shocks. Such a system is necessarily “less devolved” than Devo Max.

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Submission to Smith Commission

Our submission to the Smith Commission is available here: Smith submission Final

Desire to increase the tax and spending powers of the Scottish Parliament is often driven by an aim to improve the accountability of the parliament to the electorate. The submission discusses what might be meant by accountability in this context, and the extent to which different powers – and the way they are exercised – can be said to improve the accountability of the parliament. It also discusses the inevitable trade-offs between accountability and budgetary risks and uncertainty.

The submission argues that in a first best world, the Scottish Parliament’s revenue control would match its spending responsibilities, but that this is unlikely to be achievable because many taxes are not appropriate for devolution for practical, legal or institutional reasons. Therefore the advantages of tax devolution for Scotland (greater accountability) have to be weighed against the disadvantage for Scotland (the risk of a potentially less generous or more volatile budget in the longer-term) and the risk to the UK and Scotland that tax devolution might lead to tax competition that is in the interests of neither.

There may also be a case for devolving aspects of welfare spending to the Scottish Parliament, but this should be underpinned by a set of clear principles, consistently applied.

The submission also argues that control over minimum wages would also increase the accountability of the Scottish Parliament.

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