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UK Fiscal Policy Sustainability, 1955-2006

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  • Fan, Jingwen

    ()
    (Cardiff Business School)

  • Arghyrou, Michael G

    ()
    (Cardiff Business School)

Abstract

We test for fiscal policy sustainability in the UK for the period 1955-2006. We find evidence of sustainability with three structural breaks, respectively occurring in the early 1970s, early 1980s and late 1990s. UK fiscal policy has been sustainable throughout the sample period except from 1973-1981 when a non-Ricardian regime applied. For the remaining periods correction of fiscal disequilibrium occurs through adjustments in public revenue rather than expenditure. Finally, we find evidence of non-linear fiscal adjustment, with UK authorities not reacting to relatively small deficits; but correcting exceedingly large deficits and any temporary surpluses relatively fast.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2011/9.

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Length: 26 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:cdf:wpaper:2011/9

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Keywords: Fiscal policy; Sustainability; UK; Structural breaks; Non-linear adjustment;

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  1. Bajo-Rubio, Oscar & Diaz-Roldan, Carmen & Esteve, Vicente, 2006. "Is the budget deficit sustainable when fiscal policy is non-linear? The case of Spain," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 596-608, September.
  2. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  3. Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2003. "Searching for Threshold Effects in the Evolution of Budget Deficits: An Application to the Spanish Case," Economic Working Papers at Centro de Estudios Andaluces E2003/29, Centro de Estudios Andaluces.
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Cited by:
  1. Piergallini, Alessandro & Postigliola, Michele, 2013. "Non-Linear Budgetary Policies: Evidence from 150 Years of Italian Public Finance," MPRA Paper 48922, University Library of Munich, Germany.
  2. Piergallini, Alessandro, 2012. "Non-Linear Fiscal Regimes and Interest Rate Policy," MPRA Paper 42671, University Library of Munich, Germany.

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