ࡱ> VWUܥhc e Ч(8j~NRhhhhhhhjjjjjjX@`jhJLhhhhjhhNhhhhhhh=.thhhhCan Fiscal Autonomy Improve a Devolved Scotlands Economic Prospects? Jim Cuthbert and Margaret Cuthbert( Introduction Our focus in this article is primarily economic: in particular, we are interested in the question of whether some suitably designed scheme of fiscal autonomy might offer the key to bringing about an improvement in Scotlands long-term economic under-performance. Our conclusions are that appropriate fiscal measures are likely to be an essential factor in successfully tackling Scotlands economic problems: however, there would be substantial problems in implementing such measures within a system which would conventionally be described as fiscal autonomy. By conventional fiscal autonomy, loosely defined, we mean a scheme where Scotland has greater responsibility for setting taxes, and for funding public expenditure from its own resources. We believe that it is important to move the debate on to consider other fiscal arrangements, and we conclude the paper by suggesting that if some of the current orthodoxies surrounding UK fiscal management were questioned, then this could open up other options for consideration. We should make it clear at the outset that, in line with the theme of the Symposium, we consider in this paper issues firmly within the context of Scotland being a devolved part of the UK. In other words, we do not consider the question of independence: that would be a topic for another forum. In that sense, our focus may be regarded as narrow. However, in another sense we take a broad focus: and in particular, one of the points we wish to make is that the debate about fiscal autonomy for Scotland within the UK has distinct resonance with the debate about the UKs position within Europe particularly in the context of possible UK entry into the European Monetary Union (EMU). We start by considering the contrast between the UK governments position on fiscal autonomy for the UK within Europe and its position on fiscal autonomy for the constituent parts of the UK. The UK Governments Position on Fiscal Autonomy in Europe and within the UK The UK Government has been consistent in its position that it should retain a substantial measure of fiscal autonomy for the UK in the European context, and regards this as being of paramount importance in steering and managing the economy. In other words, it has argued that it should retain control over major tax instruments: witness, for example, the Chancellor of the Exchequers resistance to the possible harmonisation of the tax on commercial diesel (BBC News Online 1999), and the position he has taken on the withholding tax. As a government spokesman stated in July 2002, It remains our view that tax policy is the sole responsibility of the member states (Lomas 2002). This stance makes a great deal of sense, from a UK point of view, particularly in the context of the present Governments stated position that, if the economic tests were met, it would favour UK entry into EMU. In this situation, monetary policy would be determined by the European Central Bank on the basis of pan-European considerations. If, at the same time, fiscal policy were harmonised within the EU, with a consequent loss of UK fiscal powers, then the UK government would have limited policy levers to achieve its economic and social objectives. Contrast the UK governments position as regards Europe with the stance it has taken on taxation within the UK. Here, its policy is very much that of the level playing field. Central government determines what the taxes are, and has taken the position that the major taxes should apply uniformly throughout the UK, with no major differentials in taxation between different areas. The exceptions are relatively minor, and relate in Scotland, for example, to council tax, Non Domestic Rates, and the power of the Scottish Parliament to vary the basic rate of income tax by up to 3p in the pound. Is this position consistent with the aspirations of the different countries and regions within the UK to increase their competitiveness, and share, on some reasonably equal basis, in the growth of the economy as a whole? We argue that it is not, and look in some detail at Scotlands economic performance to explain why not. We first consider key symptoms illustrating that Scotland has chronically under-performed economically: then we argue that there is an underlying mechanism explaining a large part of this under-performance, and that this relates to the way the UK monetary union has operated. Scotlands Economic Performance: Symptoms and Possible Causes There are a large number of indicators, both economic and demographic, which illustrate that Scotlands economy tends to under-perform relative to the UK as a whole, and that this has been the case for decades: as regards GDP growth, the annual average rate of growth of the Scottish economy over the 25 years from 1973 was 1.6 %, compared with around 1.9 % for the UK economy as a whole: as noted by the Scottish Executive (2000), this annual average difference of 0.3 % implies that the UK grew by about 8% more than Scotland over the 25 year period. in terms of unemployment, the annual average claimant count unemployment rate in Scotland was consistently above the GB rate throughout the period 1965 to 2001, apart from 1992 and 1993, when the Scottish rate was marginally lower. For most years the difference in unemployment rates was at least 1 percentage point, rising to over 3 percentage points on occasion (Office for National Statistics 2002a). in terms of demographic change, population growth in England has exceeded that in Scotland for many years: population growth was higher in England compared to Scotland by 0.55 percentage points a year on average during the 1960s; by 0.2 percentage points a year in the 1970s; by 0.43 percentage points a year in the 1980s; while during the 1990s, the excess rate of population growth in England was lowest in 1994 at 0.13 percentage points, increasing to 0.56 percentage points in 1996. A similar pattern holds over a much longer time period: so that, over the period from 1901 to the present, the population of Scotland has grown by about 14%, while that of England has grown by almost 80% (Office for National Statistics 2000, p. 26). expenditure on research and development (R&D) performed by businesses in Scotland has for long been well below Scotlands pro rata share of the UK total: for example, in 1999, Scotland had a 3.86% share of the UK total of R&D performed by businesses, compared with Scotlands population share of over 8% (Office of Science and Technology 2001). This chronic economic under-performance has occurred despite substantial government actions to improve Scotlands economic position. These efforts involved specific policies and initiatives, such as regional selective assistance and the creation of the enterprise bodies (Scottish Enterprise and Highlands and Islands Enterprise) and, indeed, of their predecessor bodies. They have also taken place against a background where public expenditure in Scotland has been substantially higher per head than for the UK as a whole. Moreover, this higher level of public expenditure has not just been targeted at alleviating greater social need, or higher morbidity, but has enabled social policies to be put in place which would have been expected to have direct economic benefits. Thus, expenditure on education per head in Scotland is almost 25% higher than for the UK as a whole (Treasury 2002a, Table 8.6b). While differences in educational performance are due to cultural and institutional factors as well, nevertheless, this funding has underpinned a situation where the Age Participation Index of young Scots in higher education is now around 50%, compared with between 32% to 34% for GB as a whole (Office for National Statistics 2002b; Scottish Executive 2002a, Table 6). There is no simple explanation for Scotlands economic under-performance. However, its persistent nature, despite the efforts outlined in the previous paragraph, suggests that the underlying processes at work need to be examined in greater detail. We will argue that the performance of the Scottish economy is intimately bound up with Scotland being part of the UK monetary union. To develop our argument, we need to consider some aspects of the general theory of monetary unions. A major contribution to the theory of how monetary unions operate was made by the American economist Abba Lerner. In particular, Lerner (1946) outlined the adjustment mechanisms which would take place if a country experienced an economic setback, as might arise, for example, from a failure to innovate, poor labour relations or an adverse change in the terms of trade. In these circumstances, Lerner argued that either the country would, by lowering prices, manage to regain competitiveness and hence restore equilibrium, or there would be a flow of the factors of production (both capital and labour) to more advantaged countries. However, within a monetary union, the required downward price adjustment is difficult, because exchange rate flexibility is lost, and so the market will tend to respond with flows of labour and capital. Indeed, substantial flows of labour and capital are observed within monetary unions such as the USA. Lerner identified the importance of capital and labour flows within a monetary union. Arguably, however, he was mistaken in regarding these flows as being equilibrating: that is, that these flows would operate in such a way as to bring about a new equilibrium between the countries involved. In fact, a strong argument can be made for regarding the outflow of labour in particular as being destabilising for the disadvantaged country. This happens because labour is not a homogeneous commodity. When a country begins to lose labour, those who leave tend to be drawn disproportionately from the enterprising, the well-qualified, and the skilled, hence lowering the productivity of the population remaining in the country. Further, not only does the outflow of skilled labour reduce productivity: because of the outflow of entrepreneurial talent, the economy is less able to rise to new challenges. This is likely to result in a self-perpetuating spiral of decline from which it is very difficult to escape. Our hypothesis is that this type of mechanism has been operating within the UK monetary union for many decades, with Scotland as a disadvantaged area. It is interesting to note that some other authors have taken a similar view: for example, Connolly (1995) dates the onset of Scotlands relative economic decline to the extension of the Bank Charter Act to Scotland in 1845. He argued that between 1750 and 1845, Scotland had a stable free banking system with private money issue, whereas the dominant role of the Bank of England inhibited commerce in England. The Bank Charter Act of 1844 enshrined the role of the Bank of England in England, and was extended to Scotland in 1845. This ended the Scottish banks free note issue and reduced their ability to offer cheap credit: this marked, in effect, the completion of the UK monetary union. It is also interesting that, from a non-economists perspective, the poet and writer Edwin Muir was well aware, in 1935, of the effects on Scotland of chronic out-migration of skill and talent: Scotland is gradually being emptied of its population, its spirit, its wealth, industry, art, intellect and innate character If a country exports its most enterprising spirits and best minds year after year, for fifty or a hundred or two hundred years, some result will inevitably follow. [Scotland is] a country which is becoming lost to history (Edwin Muir, quoted in Scott 1998, p. 22). We are not arguing, of course, that Scotland is the only disadvantaged area in the UK: a good case could be advanced that a similar mechanism has been operating in, for example, Wales and the North East of England. It also seems likely that a similar process can operate at a much smaller geographical level than that of an individual country or region. For example, such a process probably plays a part in the creation and persistence of areas of urban deprivation in otherwise prosperous cities (although it is likely that different solutions are appropriate when the problem manifests itself at local level). Our concern here, however, is at country level, and specifically with Scotland. This focus is justified because as Bell and Christie (2002) note, it is clear that there is strong adherence to the notion of a shared identity within Scotland. The Importance of Fiscal Policy It is unlikely that the mechanism we have hypothesised represents the only cause of Scotlands economic under-performance, nor that it points the way to any simplistic solution. As we have noted above, the causes are complex. But if our hypothesis is correct, then any solution to the problems of Scotland, or any other similarly disadvantaged area, would have to involve a significant stimulus to competitiveness to break out of the cycle. We argue in this section that, without the use of fiscal policy in order to lower tax rates strategically in the country or region to be stimulated, actions designed to boost that areas economy out of a cycle of continuing relative decline are unlikely to be successful. Let us consider the different types of policy that a government could attempt to use for this purpose. A traditional response when one area in a monetary union suffers a relative economic setback has been for central government to arrange a compensating stimulus in public expenditure in the affected area, to buoy up the economy. This, indeed, is one way of viewing the historically high levels of public expenditure in Scotland, even though the way governments overtly rationalise high public expenditure in Scotland is in terms of greater need for services. There are, however, a number of reasons why such a public expenditure transfer is unlikely to solve the problem of long-run comparative decline: indeed, there are some reasons to expect that such transfers may actually make a long-run solution more difficult. In particular, long-run dependence on high public expenditure transfers is likely to encourage a subsidy mentality, inconsistent with enterprise. It is likely to be associated with a relatively large public sector, again arguably inconsistent with an enterprise culture, and a large public sector may insulate wage rates in the economy from market forces, so limiting downward wage flexibility. Not all of these effects are in themselves necessarily bad things, and we are certainly not suggesting that high levels of public expenditure should be cut to stimulate the economy in a disadvantaged area this would probably exacerbate the problem of factor loss and relative decline. But what we are arguing is that high public expenditure, while it may be a palliative, is unlikely to be a solution in itself, and may make finding a solution more difficult. The use of fiscal transfers to stimulate the economy of relatively disadvantaged areas is an aspect that is often neglected in discussion of the determination of public expenditure levels in Scotland, and on the future of the Barnett formula. There are exceptions: for example, Ashcroft (1999) discusses the effect of the Barnett squeeze as a contributory factor in Scotlands GDP performance. Traditionally, however, debate on Barnett is couched in terms of need for public services. We suggest that the debate on Barnett requires to be broadened, to consider not just social need for public services, but the macroeconomic impact of public expenditure transfers. This is an aspect that should not be ignored, even though public expenditure transfers will not in themselves provide a long-run solution to Scotlands problems. In particular, any future needs assessment exercise as a precursor to the replacement of the Barnett formula should cover both the need for public services, and the need for expenditure to stimulate the economy; a similar point is made by Ferguson et al. (2002). As we will argue later, however, one tool (ie public expenditure) is unlikely to deliver on both requirements. Another possible response to relative economic disadvantage is to attempt to use education and training to improve the skills base of the labour force, and hence increase productivity and competitiveness. This, again, is a policy into which considerable effort has been put in Scotland. Education and training are extremely important. There are, however, difficulties in using these instruments to achieve a step change in competitiveness. The effect on the productivity level of the economy is at best likely to be slow and cumulative, while the effect on the individual is likely to be an immediate boost in marketability and mobility. It may well be, therefore, that a significant proportion of the newly trained members of the labour force leave the area before they can be utilised in the local economy, so the increase in productivity in the local economy may be much less than hoped for. It is relevant to note, for example, that over 10% of Scots-domiciled graduates from Scottish universities have their first employment outside Scotland (Scottish Executive 2002b, Table 6). Another traditional response to the problems of an economically disadvantaged area is to use state aid to encourage the re-location of industry to the area, in effect, by providing a subsidy. This, again, is an approach that has been used in Scotland. Experience, however, has been disappointing, with many of the industrial units which located in Scotland, like the car plants at Linwood and Bathgate and the aluminium smelter at Invergordon, failing to put down long-term roots, and ultimately disappearing. This is not surprising. Since the provision of a subsidy is unlikely to have any impact on long-term competitive disadvantage, units that re-locate on the basis of a subsidy are unlikely to survive long after the effects of the subsidy are no longer felt. Consistent with this view are, for example, the findings of a House of Commons Library Research Paper (Edmonds 2000) which notes that the benefits of new companies, attracted to locate in Scotland by public money, have been less than hoped for in reviving and stimulating indigenous business. The conclusion we draw is that any action designed to counter long-term decline successfully is likely to involve not just a package of measures, but a package which is capable of delivering a significant and sustainable step change in the competitiveness of the areas economy. There are very few policy levers that are capable of delivering such a step change in competitiveness. Two possible levers for a country not in a monetary union are action on exchange rates, or relative interest rates, but both of these are ruled out for an area within a monetary union. Just about the only other feasible lever which would have a large enough potential impact would be direct action on the level of key taxes particularly a tax like corporation tax, which acts directly on the profitability of companies. Thus, we argue that direct action to reduce key tax rates is likely to be essential if Scotland, or any chronically disadvantaged area within a monetary union, is to break out of relative decline. The Implications of Fiscal Autonomy for Scotland We have argued that if an area such as Scotland is to address its long-term economic problems successfully, within the context of a monetary union, action on relative tax rates, and possibly on tax structures, is likely to be required. But can we then make the leap, and conclude directly that what is required is fiscal autonomy for Scotland. This direct leap appears too facile. What we can do, in the light of the argument above, is to consider the characteristics that a scheme of fiscal autonomy would have to possess, if it were going to help to transform Scotlands economic performance. We conclude that there would be significant problems about implementing such a scheme. In this section of the paper, we are in a sense turning the conventional approach on its head. Instead of looking at different possible schemes of fiscal autonomy, and considering what the implications would be, we are doing the opposite. If we want to use fiscal autonomy as a tool for transforming Scotlands economy, what type of fiscal autonomy scheme would be required? We concentrate on three main implications: the scale of change that would have to be possible under such a scheme; the nature of the changes that would have to be made; and the transitional issues that would arise. Firstly, we consider the question of scale. If our underlying hypothesis is correct, then another way of looking at the problem is that, effectively, Scotland requires to achieve an increment to its competitiveness equivalent to a significant devaluation relative to sterling. To achieve such an impact by means of tax reductions implies that the scale of these reductions must be large. In other words, unless the particular fiscal autonomy package being implemented involves the transfer of powers which would potentially enable significant changes in major taxes, then the hoped for positive impact on Scotlands economic competitiveness is unlikely to be realisable. Secondly, we wish to examine the nature of the powers in the fiscal autonomy package. In discussing the tax-changing powers which might be covered by fiscal autonomy, some authorities take the view that there would be advantages in restricting the tax-changing powers to taxation of relatively immobile entities, like property: the intention being to limit the possibility of tax competition between different areas, and the possibility of fiscal autonomy initiating substantial labour or capital flows. We take precisely the opposite view. If the underlying problem is that Scotland has become locked in to an inherently uncompetitive position, and has been suffering adverse migration of labour and enterprise, then, in order to counter this, the powers available under fiscal autonomy should open up the possibility of directly influencing these factor flows. In other words, the powers to be covered under fiscal autonomy should include the ability to alter those taxes, like corporation tax and income tax, which potentially have most direct influence on labour and capital. Thirdly, we consider two transitional aspects. The first aspect is the implications of Scotlands current fiscal deficit. Estimates of this deficit are published in the annual Government Expenditure and Revenue in Scotland (GERS) exercise (Scottish Executive 2001, and previous editions; Goudie 2002, in this issue). We have, elsewhere, published a detailed critique of GERS, in particular arguing that GERS cannot be regarded as making a fundamental statement about Scotlands inherent fiscal condition, but, rather, should be regarded as conditional upon the current constitutional arrangements (Cuthbert and Cuthbert 1998). This point is indeed also implicit in our hypothesis about the reasons for Scotlands chronic economic under-performance. Nevertheless, although GERS can be criticised, Scotlands current fiscal deficit would pose real transitional problems in implementing fiscal autonomy. In particular, Scotlands high public expenditure and fiscal deficit could force a Scottish Executive to raise taxes, rather than lower them, as fiscal autonomy was introduced. Scotland could then become locked in a cycle of relatively high taxes, even faster economic decline, reducing tax base, faster factor outflows, and so on. In other words, unless transitional arrangements which cater for Scotlands fiscal deficit are in place, there is a risk of fiscal autonomy giving a further twist to Scotlands economic decline, rather than having the potential to correct it. The second transitional implication relates to the other measures that would have to be implemented as fiscal autonomy was introduced, if a significant improvement in Scotlands economic competitiveness were indeed to be achieved. We have argued that fiscal autonomy might open up the potential for an improvement in Scotlands competitiveness equivalent to a significant devaluation relative to sterling. But devaluation alone as an economic tool is rarely successful. For countries which have transformed their competitive positions successfully, such as Ireland after it left the sterling peg, devaluation is only one instrument that needs to be accompanied by a whole package of measures encouraging enterprise and improving skills, and also action to restrain costs. Unless a Scottish Executive was in a position to implement a similar package as fiscal autonomy was introduced, it is unlikely that fiscal autonomy itself could achieve a transformation in Scotlands economic competitiveness. In particular, given that almost 80% of the Department of Trade and Industrys budget covers matters which are reserved to Westminster (Treasury 2002b) and that this expenditure covers programmes which are crucial to the development of the knowledge economy (widely accepted as underpinning successful economic development), substantial further devolution of powers in this area would be essential. The implication of the above is that there would be considerable difficulties involved in implementing a scheme of fiscal autonomy capable of playing a significant role in curing Scotlands long-term economic decline. For one thing, the scale and nature of the tax-changing powers which would be required would be such that there would be a real danger of sparking tax competition with other parts of the UK, particularly if other areas had been granted similar broad powers. In addition, the transitional problems in implementing such a scheme of fiscal autonomy would be formidable, with the real danger of a Scottish Executive being pushed, by initial deficit pressures, towards having to increase taxes which would have precisely the wrong effect on Scottish competitiveness. Are There Alternatives to Fiscal Autonomy? Where does this leave us? Does it mean that Scotland has to continue to look forward to chronic economic under-performance within the UK, or is there some other approach, within the UK context, which would enable the tax changes that we have argued are necessary to be made, but without the problems associated with fiscal autonomy? We argue that there is indeed another possibility, but that this is one which involves questioning the fundamental level playing field on tax tenet of current UK economic management. Consider the following scenario. The UK central government retains control of taxation, but abandons its policy of uniform UK wide tax rates. Instead, it uses differential area-based tax rates on major taxes like income tax or corporation tax, specifically with the objective of equalising economic pressure in different parts of the UK. It continues to allocate public expenditure to the different parts of the UK on grounds of need for public services. We suggest such an approach would have four significant advantages: It avoids the uncontrolled tax competition which would be a danger if the radical tax changing powers were devolved which, as we have argued, would be required to make a significant impact on Scotlands economic prospects. It avoids the transitional problems that are likely to be encountered with any scheme of fiscal autonomy implemented from the starting point of a fiscal deficit. It means that the UK government is tackling what is, in effect, a two-dimensional optimisation problem (the need to achieve a satisfactory balance between areas both in economic pressure, and provision of public services relative to need), with two major and independent control variables (ie control of regional tax rates, and regional allocation of public expenditure). It therefore in principle stands a chance of success. At present, tackling a two dimensional problem with only one control variable, it stands virtually no chance of success. It is quite likely that, if such an approach were successful in equalising the level of economic activity between different areas, the current differential need for public expenditure between different areas might be much reduced, and an area like Scotland might move much closer to fiscal balance with the rest of the UK. We are equally conscious, however, that there are potential problems with this approach, which would have to be considered more deeply before it could be regarded as a practical proposition. In particular: there could be problems about implementing such a regime under current EU initiatives designed to limit measures which are seen as anti-competitive. In particular, the Code of Conduct on Business Taxation (Code of Conduct Group (Business Taxation) 1999), which has been adopted by the European Finance Ministers, requires member states to agree not to introduce new tax measures that are harmful under the code. Paragraph B of the Code includes among potentially harmful measures those that provide for a significantly lower effective level of business taxation than those that generally apply in the member state in question. Hence variation of corporation tax, or other business taxes, of the kind we have suggested, would probably be caught by the terms of the Code. there would be administrative problems involved in running a system of differential tax rates between areas, and this is only likely to be possible for certain taxes: there would also be problems about policing avoidance. there would be issues about public acceptability of such a scheme, particularly in areas where taxes became relatively higher. However, given the diseconomies associated with the overheated economy in the South East of England (such as overcrowding, high property prices, commuting, and an inadequate infrastructure), it is possible that public resistance to a scheme ultimately designed to reduce this type of distortion could be overcome. We are not, therefore, advancing the scenario outlined above as a fully formed solution to the problem of countering the chronic under-performance of Scotland and other similar areas. What we are suggesting, however, is that attempts to address the problem within the current framework of government policy have failed, and will continue to fail, if our hypothesis about the underlying mechanism at work is correct. We are also suggesting that, while significant fiscal change is likely to be an essential part of any solution, it would be difficult to implement such change under a scheme of fiscal autonomy. The implication is that, if a solution is to be looked for within the context of a UK which remains politically unified, then radical thinking is required, and that one aspect of this radical thinking must be to challenge the current orthodoxy of the tax level playing field within the UK. Finally, we end this paper where we started, with the contrast between the UK governments stance on fiscal autonomy for the UK within Europe, with its restrictive view on the need for a tax level playing field within the UK. The problems of achieving balance between the constituent parts of the UK monetary union are unlikely to be materially different from the problems of achieving balance between the constituent countries of EMU. We therefore suggest that the UK government should seek to achieve greater consistency in its policies at these two different levels. There is another implication for the UK government. We have argued that fiscal autonomy is not likely to be a feasible option within the UK, given the danger of tax competition arising with any scheme of fiscal autonomy that devolved sufficient powers to tackle Scotlands economic problems. The same conclusion is likely to hold at European level. This implies that the UK government will probably have to accept that, if it is committed to Europe, then it has to concede greater control of tax setting to Brussels than it might like. The required corollary is that Brussels would have to abandon the principles of harmonisation of tax rates, between countries, in favour of centrally determined but differential average tax rates for countries, designed to achieve economic balance across the EU. References Ashcroft, B (1999) Outlook and appraisal, Fraser of Allander Quarterly Economic Commentary, 24(4), pp i-iv. BBC News Online (1999) Anger as UK Blocks EU Tax, 29 November, http://news.bbc.co.uk/hi/english/business/newsid_541000/541502.stm Bell, D and Christie, A (2002) A new fiscal settlement for Scotland? Scottish Affairs, 41 Connolly, B (1995) The Rotten Heart of Europe, London: Faber and Faber. Code of Conduct Group (Business Taxation) (1999) Report to Ecofin Council, 29 November 1999. Cuthbert, J R and Cuthbert, M (1998) A critique of GERS: Government Expenditure and Revenue in Scotland, Fraser of Allander Quarterly Economic Commentary, 24(1), pp 49-58. Edmonds, T (2000) Regional Competitiveness & the Role of the Knowledge Economy, Research Paper 00/73, London: House of Commons Library. Ferguson et al (2002) The Impact of the Barnett Formula on the Scottish Economy: A General Equilibrium Analysis, British and Irish Regional Science Association Conference, August 2002. Goudie, A (2002) Fiscal autonomy and GERS, Scottish Affairs, 41 Lerner, A P (1946) The Economics of Control, New York: Macmillan. Lomas, U (2002) UK to Fight EUs Diesel Tax Plans, 26 July, http://www.tax-news.com/asp/story/story.asp?storyname=8914 Office for National Statistics (2000) Annual Abstract of Statistics, London: Stationery Office. Office for National Statistics (2002a) Regional Claimant Count Rates, via http://www.statistics.gov.uk/statbase/TSDtimezone.asp Office for National Statistics (2002b) UK in Figures 2002, Education and Training Table, statistics.gov.uk/ukinfigs/education.asp Office of Science and Technology (2001), SET Statistics 2001, http://www.dti.gov.uk/ost/setstats/htm#4 Scott, P H (1998) Still in Bed with an Elephant, Edinburgh: Saltire Society. Scottish Executive (2000) Scottish Economic Statistics 2000, Part B, Chapter One: Economic Accounts, http://www.scotland.gov.uk/stats/ses2000/secs-00.asp Scottish Executive (2001) Government Expenditure & Revenue in Scotland, SE/2001/294, Edinburgh: Scottish Executive (this is an annual publication). Scottish Executive (2002a) Students in Higher Education in Scotland: 2000-01, http://www.scotland.gov.uk/stats/bulletins/00171-06.asp Scottish Executive (2002b) First Destination of Graduates and Diplomates in Scotland: 1999-00, http://www.scotland.gov.uk/stats/bulletins/00124-06.asp Treasury (1979) Needs assessment study: the report of an Interdepartmental Study coordinated by H.M. Treasury on the relative public expenditure needs in England, Scotland, Wales and Northern Ireland, London: HMSO. Treasury (2002a) Public Expenditure: Statistical Analyses 2002-03, Cm 5401, London: Stationery Office. Treasury (2002b) Funding the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly, Third edition, London: HM Treasury. Jim Cuthbert is a former Chief Statistician at the Scottish Office, and Margaret Cuthbert is an economist.  For Scotland, this is defined as the number of young Scots (aged under 21) who enter full time higher education as a percentage of the population in Scotland aged 17. For GB it is defined as the number of home domiciled, young (aged less than 21) initial entrants to full time and sandwich undergraduate higher education as a proportion of the averaged 18-19 year old population. There is thus a slight difference in the definitions in terms of the age group used as the base, but this will not account for the difference in participation rates observed.  For example, Treasury (1979, para 2.9) refers to the long established principle that all areas of the United Kingdom are entitled to broadly the same level of public services and that expenditure on them should be allocated according to their relative needs.  In commenting on the relatively slow growth of the service sector in Scotland compared with the UK, Ashcroft (1999) notes that the service sector is responsible for 21% of GDP in Scotland, and that, within that sector, public administration was performing relatively poorly as the Barnett formula was more stringently applied. 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