Balanced budget multipliers for small open regions within a federal system : evidence from the Scottish variable rate of income tax

Abstract

This paper explores the impact on aggregate economic activity in a small, open region of an income tax funded expansion in public consumption that has no direct supply-side effects. The conventional balanced budget multiplier produces an unambiguously positive macroeconomic stimulus, but the incorporation of negative competitiveness elements, through the operation of the local labor market, renders this positive outcome less certain. Simulation using a single-region Computable General Equilibrium (CGE) model for Scotland demonstrates that the creation of local amenity effects, and the extent to which these are incorporated into local wage bargaining, is central to the analysis.