Inverted Haavelmo Effects in a General Equilibrium Analysis of the Impact of Implementing the Scottish Variable Rate of Income Tax

Patrizio Lecca, Peter McGregor, John Swales () and Ya Ping Yin

No 2010-47, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: The Scottish Parliament has the authority to make a balanced-budget expansion or contraction in public expenditure, funded by corresponding local changes in the basic rate of income tax of up to 3p in the pound. This fiscal adjustment is known as the Scottish Variable Rate of income tax, though it has never, as yet, been used. In this paper we attempt to identify the impact on aggregate economic activity in Scotland of implementing these devolved fiscal powers. This is achieved through theoretical analysis and simulation using a Computable General Equilibrium (CGE) model for Scotland. This analysis generalises the conventional Keynesian model so that negative balanced-budget multipliers values are possible, reflecting a regional inverted Haavelmo effect. Key parameters determining the aggregate economic impact are the extent to which the Scottish Government create local amenities valuable to the Scottish population and the extent to which this is incorporated into local wage bargaining.

Keywords: Fiscal federalism; devolution; regional wage bargaining and migration; Scotland; regional computable general equilibrium analysis (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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Working Paper: Inverted Haavelmo Effects in a General Equilibrium Analysis of the Impact of Implementing the Scottish Variable Rate of Income Tax (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:184

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