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Options for Fiscal Consolidation in the United Kingdom
Author:
Mr. Dennis P Botman
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and
Ms. Keiko Honjo
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Series:
IMF Working Papers
Volume/Issue:
Volume 2006: Issue 089
Language:
English
Publication Date:
01 Mar 2006
DOI:
https://doi.org/10.5089/9781451863499.001
ISBN:
9781451863499
ISSN:
1018-5941
Pages:
24
Keywords:
WP; debt; fiscal policy; personal income; consumer; aggregate demand
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund