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Long Term Effects of Fiscal Policy on the Size and the Distribution of the Pie in the UK

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Author Info
Xavier Ramos
Oriol Roca-Sagales

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Abstract

This paper provides a joint analysis of the output and distributional long term effects of various fiscal policies in the UK, using a Vector Autoregression approach. Our findings suggest that the output effects of fiscal policies are consistent with the Keynesian paradigm for both direct and indirect taxes but not for public spending. The estimated long term impact on GDP of increasing all type of expenditure and taxes analysed is negative and especially strong in the case of current expenditure. We also find significant distributional effects associated to fiscal policies, indicating that an increase in public spending and direct taxes reduces inequality while a raise in indirect taxes increases income inequality. Finally, the relationship between inequality and output is also explored.

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Paper provided by European University Institute in its series RSCAS Working Papers with number 2007/39.

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Date of creation: 18 Dec 2007
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Handle: RePEc:rsc:rsceui:2007/39

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Related research
Keywords: Fiscal policy; inequality; UK; VAR models;

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Find related papers by JEL classification:
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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