Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83962
Authors: 
Foreman-Peck, James
Lungu, Laurian
Year of Publication: 
2005
Series/Report no.: 
Cardiff Economics Working Papers E2005/8
Abstract: 
Public spending devolution in practice is widely seen as more appropriate for addressing varied political aspirations within state boundaries than is tax devolution. A drawback is that devolved public spending may be subject to irresistible upward pressure, as illustrated by 'formula drift' of the United Kingdom devolved administrations. By crowding out the private sector such public spending can exacerbate the problem it was originally intended to alleviate. When taxpayers do not value increases in government output at least as highly as the private goods and services they must forgo to finance them, then the public sector is too large. This paper estimates a three sector Hecksher-Ohlin model of the economy with the greatest relative rise of the public spending ratio in the United Kingdom, Wales. Simulation of the model shows a net gain in emp loyment from a one percent cut in income tax matched by a corresponding reduction in government spending. This result is consistent with the current level of intergovernmental transfers being excessive.
Subjects: 
Fiscal Devolution
Small Open Economy Modelling
Crowding Out
JEL: 
R15
R58
Document Type: 
Working Paper

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