Options for Fiscal Consolidation in the United Kingdom

Author/Editor:

Dennis P Botman ; Keiko Honjo

Publication Date:

March 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines the macroeconomic effects of different timing and composition of fiscal adjustment in the United Kingdom using the IMF’s Global Fiscal Model. Early consolidation dampens aggregate demand in the short term, but increases output in the long term as smaller primary surpluses are needed as a result of lower interest payments. Reducing government transfers or current government spending provides larger gains than increasing taxes, in particular compared to raising corporate or personal income taxes. We show that these conclusions are robust under alternative behavioral assumptions and parameterizations. A reduction in global saving would make early consolidation more urgent from both cyclical and long-term perspectives. Finally, we show that tax reform aimed at increasing incentives to save could provide support to fiscal consolidation measures.

Series:

Working Paper No. 2006/089

Subject:

Expenditure Fiscal consolidation Labor taxes Personal income tax Public debt

English

Publication Date:

March 1, 2006

ISBN/ISSN:

9781451863499/1018-5941

Stock No:

WPIEA2006089

Pages:

24

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