Options for Fiscal Consolidation in the United Kingdom, Issues 2006-2089
International Monetary Fund, European Department and Fiscal Affairs Department, Mar 1, 2006 - Fiscal policy - 24 pages
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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The Model and Calibration
Macroeconomic Effects of Alternative Forms of Fiscal Consolidation
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Options for Fiscal Consolidation in the United Kingdom
Dennis P. J. Botman,Ms. Keiko Honjo
Limited preview - 2006
accounting profits aggregate demand baseline delayed consolidation baseline value benefits of early Botman capital accumulation Consolidation through Lower consolidation via higher corporate income taxes Deviation from baseline early consolidation financial markets fiscal consolidation fiscal policy fiscal rules global savings government Higher payroll higher corporate income Higher corporate spending higher labor income Higher payroll Higher Higher payroll taxes Higher personal Higher IMF staff estimates income tax levied income taxation income taxes income increase in government investment Labor Effort labor income taxes longer planning horizon Lower government Higher Lower Government Spending Lower transfers Lower macroeconomic effects payroll taxes Higher percent of GDP personal Higher corporate personal income taxes Real GDP real interest rate reducing transfers reduction in global Ricardian equivalence Sensitivity Analysis spending on workers/employers taxes Higher personal taxes income taxes taxes on workers transfers Lower government transfers or government type of consolidation U.K. economy United Kingdom wealth effect workers/employers income taxes