• The world economy will grow by 3.0 per cent in 2015 – the slowest rate since the crisis – and 3.5 per cent in 2016.

• Emerging market economies have slowed, while recoveries remain hesitant in most developed countries.

• Growth may be boosted by delayed effects of lower oil prices, as well as by accommodative monetary policy and slower fiscal consolidation, but considerable risks remain.

• We still expect the US Federal Reserve to lead the turn in official policy rates in September, with the Bank of England following in February 2016.

• Growth will be 2.5 per cent this year, and will remain close to this rate throughout the forecast period.

• The Bank of England will begin to raise rates in early 2016.

• The key domestic unknown for the UK economy over the next few years is the future path of productivity growth.

The production of this forecast is supported by the Institute's Corporate Members: Bank of England, HM Treasury, Mizuho Research Institute Ltd, Office for National Statistics, Santander (UK) plc and by the members of the NiGEM users group.

This article describes the centralised nature of the UK, briefly describes the changes now under way in Scotland and Wales and then analyses differences in output per head as between nations and regions. It then considers the scope for devolution, including fiscal devolution within England. The United Kingdom today is one of the most fiscally-centralised of all OECD countries, but there will soon be reform in Scotland and Wales, with significant devolution of tax-raising powers to Edinburgh and Cardiff. In England, there is currently no ‘state’ or ‘regional’ tier of government. There have been significant differences in GDP/GVA per head of the nations and regions of the UK for many decades. Efforts to ‘rebalance’ the GDP/GVA totals shown above have involved public expenditure and investment programmes over several decades. The results of the UK's centralised distribution of resources, if any, on changes in regional and sub-regional performance are little studied. A highly-centralised system of taxation and public expenditure is not, it would appear, a guarantee of territorial economic equalisation. In a potentially radical policy departure, George Osborne has moved further than any minister in recent times towards a form of city-regional devolution within England. In the first instance, any devolved power is likely to be over public expenditure, though in the longer term fiscal devolution may become possible. The move towards a quasi-federal UK is now well under way.

This article reflects upon a comparative analysis of the 28 ‘City Deals’ agreed between UK government, Scottish government and city-regional groupings in England and Scotland since 2011. The City Deals have sought to incentivise local actors to identify and prioritise ‘asks’ of UK and devolved governments, fund, finance and deliver infrastructure and other economic development interventions, and to reform city/city-region governance structures to ‘unlock’ urban growth. Our analysis is based upon 32 in-depth interviews with lead actors in the City Deals, including elected officials from local government, central government officials and policy specialists from think tanks, as well as a secondary literature review. We find that City Deals are reworking the role of the UK state internally and through changed central-local and intra-local (city-regional) relations. Regional and urban public policy is being recast as a process of deal-making founded upon territorial competition and negotiation between central national and local actors unequally endowed with information and resources, leading to highly imbalanced and inequitable outcomes across the UK. As a template for public policymaking in an emergent and decentralising context, deal-making raises substantive and unresolved issues for governance in the UK that are especially pertinent as the new Conservative government at Westminster pledges to widen and broaden this approach as a central component of its future devolution strategy and policy.

This paper examines the background to calls for further fiscal decentralisation in Scotland in the light of theories of fiscal federalism. In particular, it examines whether spatial differences in preferences, which are central to ‘first generation’ theories of fiscal federalism can be argued to play a central role in the case for granting Scotland further tax and spending powers. ‘Second generation’ theories of fiscal federalism draw attention to the political economy of allocating tax powers to different levels of government. Some of the authors in this strand of theory argue that the case for allocating tax powers to subnational governments can be made in terms of ‘accountability’ – the notion that local politicians can be better held to account for the outcomes of policy actions. Our empirical analysis suggests that there is no clear difference in preferences between Scotland and the rest of the UK along a number of key political dimensions. However, the Scottish parliament enjoys substantially higher levels of trust among the Scottish electorate than does the UK parliament.

The Scotland Bill 2015–16 would make the Scottish government one of the most powerful sub-central governments in the OECD in terms of its control over spending and taxation. The UK government has also announced plans to introduce ‘English Votes for English Laws’ (EVEL), where the support of a majority of English MPs would be necessary to pass legislation deemed to impact on England only. The objective of this paper is to examine the potential for spillovers to arise in monetary unions of asymmetric nations where fiscal policy choices are taken locally. We extend a model of Chari and Kehoe (2008) to show the sub-optimal consequences of devolved fiscal policy in a moneteary union with a dominant member state. Because England is so much larger than the other constituent nations of the UK, its fiscal policy choices will have a commensurately stronger impact on UK monetary policy. As a result, UK monetary policy might be inappropriate for the smaller nations, calling into question the economic efficiency of EVEL. This is a general result which arises from the asymmetry of nations rather than specific UK funding arrangements or behavioural responses.