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The impact of changing tax rates and welfare spending in a devolved context: the case of Scotland and the Smith Commission powers

The delivery of the Smith Commission’s recommendations for the Scottish Parliament (Smith 2014) mark the next major step in the process of devolution within the UK.

This scholarship – part of 2 PhD studentships in the Fraser of Allander under this overarching theme – will help inform our understanding of the economic implications of greater devolution within the UK and the challenges and opportunities that this brings.

The project will be in two parts.  Firstly, the technical element will be to develop new methods to assess the impact of changes in devolved policy on key economic behaviours, including labour market responses. 

Secondly, you will then use these new techniques to undertake analysis to illustrate the likely economic and fiscal implications of different policy choices and undertake policy recommendations.

The project will be undertaken within the Fraser of Allander Institute (FAI) within the Department of Economics. The FAI is Scotland’s leading applied economic research institute and has built an established international reputation for economic modelling.

  • Number of scholarships 1
  • Value £14,296 (pa for 3 years)
  • Opens 4 March 2016
  • Deadline 31 May 2016
  • Help with Tuition fees, Living costs
  • Duration 36 months

Eligibility

  • An excellent undergraduate degree with Honours in Economics.
  • A Postgraduate degree (or equivalent) in Economics (or a related subject).
  • Students may also have other relevant experience or skills which are relevant to this project – including experience of working with data and undertaking statistical and/or modelling analysis.
  • All applications must be accompanied by a cover letter indicating the candidate's relevant experience and motivation for contributing to this research, as well as a CV and relevant qualification transcripts.
  • Students must be available to commence their academic studies in the UK by the start of the academic year in September/October 2016
  • Two references will be required.

Project Details

Over the next few years, the Scottish Parliament’s powers will be extended with the transfer of significant new responsibilities over tax and welfare to complement existing areas such as in health, education, justice, the environment and economic development.

At the same time, a new Fiscal Framework means that the manner in which the Scottish budget will be determined will change fundamentally with investment in public services in Scotland increasingly tied to the relative performance of the Scottish economy and to tax and borrowing decisions taken in Holyrood.

Together with the changes already underway, this will result in Scotland having one of the most powerful devolved Governments in the world, in terms of its control over both taxation and public expenditure. But there is still much debate over the effectiveness of these new powers, how best to use them, and the implications of this new framework of devolution for the economies and public finances of both Scotland and the other nations of the UK.

The speed at which these powers have been transferred has meant that there has been very little analysis over how to use these new powers once transferred. Similarly, the new funding framework whilst untested has led to one of the most asymmetrical devolved systems within any developed country. 

This project aims to fill this gap.  The two key questions that it will explore are –

  • What types of households (including by income group) are most likely to be affected by the Scottish Parliament using its new tax and benefit powers?
  • What will the economic effects be (including work incentives) of changing these tax and benefit powers?

 

Whilst there is a well-developed literature on the behavioural responses of workers and households to tax and benefit changes at a national level, the literature is much less developed at a devolved or local level. Indeed there is virtually no consideration of this in the current UK devolved context or the interaction between devolved (i.e. Scottish) and central (i.e. UK) policies (and the commitment to the concept of ‘no-detriment’).  

Specific questions which the PhD will examine include the potential impact of setting a more progressive/regressive income tax system in Scotland relative to the rest of the UK or the scope to use new welfare powers to tackle inequality.

The PhD cluster will draw on the development of a new microsimulation model of the Scottish economy being developed within the FAI (see IFS 1995). These models use micro-data on individuals (or households) and simulate the effect of changes in policy (or other changes) on each of these units. Differences before and after the change can be analysed at the micro-level or aggregated to show the overall effect of the change.

This work will directly complement the existing suite of FAI macro models. Therefore, one important technical aspect of the PhD will be to explore the link between the disaggregation of households in Scotland via the microsimulation model and the FAI’s existing suite of macroeconomic models. This will open up new research opportunities to assess the impact of alternative policy choices upon the long-term dynamics of the economy, household incomes and competitiveness.

This research will make a direct contribution both to the international literature on public finances and the role of devolved/state/local governments as well as offering insight into a key policy debate in Scotland (and across the UK) on the future of devolved governments.

You will be expected to produce from your thesis a number of academic papers discussing the techniques applied alongside more descriptive articles focussing on the economic applications, conclusions and recommendations that follow.

In addition, given the nature of the work and the focus on public policy, you will have the opportunity to gain experience in writing complementary non-technical papers, and policy briefings, which summarises their research in an accessible way for non-economists.   

Useful References

IFS, 1995, “TAXBEN: The IFS microsimulation tax and benefit model”, www.ifs.org.uk/publications/572

Lecca, P., McGregor, P.G. and Swales, J.K. (2013), “Forward-looking and myopic regional computable general equilibrium models: How significant is the distinction?”, Economic Modelling, Vol. 31, p. 160-176.

Lecca, P., McGregor, P.G., Swales, J.K. and Yin, Y.P. (2014,c), “Balanced budget multipliers for small open regions within a federal system: evidence from the Scottish variable rate of income tax”, Journal of Regional Science, Vol. 54, p. 402-421.

Lecca, P., McGregor, P.G. and Swales, J.K. (2015), “Scotland: no detriment, no danger: the interregional impact of a balanced budget fiscal expansion”, IPPI Occasional Paper.

OECD, 2013, “Decentralisation and Economic Growth – Parts 1-3”, June 2013. Available here http://www.oecd-ilibrary.org/taxation/oecd-working-papers-on-fiscal-federalism_22265848;jsessionid=d04da9ugh2h6.x-oecd-live-02

Smith, 2014, “Final Report of the (Lord) Smith Commission”, November 2014. Available herehttps://www.smith-commission.scot/

Further Information

This PhD studentship is part of a new ‘cluster’ of Phd and research activity within the Fraser of Allander in the area of devolved economic and fiscal analysis.

In addition to the benefits that the students will receive as part of an Economics PhD at the University of Strathclyde (outlined below), the students will benefit greatly from being part of this new cluster.

Graeme Roy will be lead supervisor. Graeme will join the FAI as Director Designate in April. He is currently head of the First Minister’s Policy Unit in the Scottish Government. Prior to that he was a Senior Economic Adviser and Head of the Office of the Chief Economic Adviser (OCEA) – the central economics unit in the Scottish Government.

Professor Julia Darby will be the second supervisor and is a leading expert on macroeconomics, fiscal policy and devolved public finances, and was a member of the expert panel advising the Calman Commission.

Alongside fellow early-stage and PhD researchers, you will become part of a core team of experienced academics and applied economists in the FAI (and wider Department of Economics). This research cluster will provide you with a strong support and peer review network.

You will also benefit from in-house training courses including classes which will lead to a PgC in Research Methods during the first year of PhD study. At the same time, since the Department of Economics participates in the Scottish Graduate Programme in Economics, you will also have access to classes, workshops and training courses that will offer the opportunity to deepen your knowledge in specific areas relevant to the PhD.

You will also have an opportunity to present your research as it progresses including at the Department’s annual PhD Away Day.

 

Approximate Timetable

PhD Title: The impact of changing tax rates and welfare spending in a devolved context: the case of Scotland and the Smith Commission powers 

Activity

Time

Induction, initial training & literature review

0 – 6 months

Development of theoretical models of household responses & estimation of empirical responses

6 – 18 months

Linking to Microsimulation modelling

18 – 30 months

Running policy simulations and writing up the results

24 – 36 months