Options for Fiscal Consolidation in the United Kingdom

Abstract

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.Fiscal consolidation;Fiscal reforms;Government expenditures;Public debt;Savings promotion;Tax increases;Tax reforms;income taxes, tax reform, fiscal adjustment, corporate income taxes, taxation, government spending, fiscal policy, capital accumulation, personal income taxes, aggregate demand, tax rates, fiscal rules, fiscal policies, corporate income taxation, fiscal model, tax system, payroll tax, interest payments, government budget, government budget constraint, higher interest rates, government expenditure, budget constraint, corporate income tax, fiscal balance, tax increase, average tax rate, taxes on labor, fiscal variables, payroll taxes, public finances, tax returns, fiscal issues, wage taxes, tax distortions, fiscal position, fiscal affairs, sales tax, fiscal solvency, fiscal stimulus, capital stock, fiscal policy framework, tax rates on capital, corporate taxes, fiscal structure, foreign fiscal policies, tax burden, labor taxes, income tax rates, personal income tax, tax liabilities, fiscal reform, efficient tax system, fiscal affairs department, debt service, tax cuts, fiscal framework