The Barnett Formula’s Impact on the Scottish Economy: Likely Direction of Effects
Impact of shifting to a Barnett equilibrium on the Scottish economy?
- Levels of nominal government expenditure rise, but less than in England
- Aggregate demand rises more in England than Scotland (pure demand shock)
- Implies a kind of “real resource” squeeze, as Scotland (and other peripheral regions) lose labour to England through a market-induced migration process (and capital loss too)
In Scotland in the short-run (fixed populations and capital stocks):
- Relative reduction in aggregate demand in Scotland
- Wage and employment rates fall (if element of regional bargaining) and unemployment rates rise
- Reduction in economic activity in Scotland relative to England
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In longer-run - even with fixed population weights in Barnett, matters worse:
- Since wage and unemployment rates fallen relatively outmigration is induced
- Short run relative demand loss implies loss of profitability, capital decumulation here
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If population weights up-dated worse still: induce further reductions in expenditure