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Options for Fiscal Consolidation in the United Kingdom

Author

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  • Dennis P Botman
  • Keiko Honjo

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.

Suggested Citation

  • Dennis P Botman & Keiko Honjo, 2006. "Options for Fiscal Consolidation in the United Kingdom," IMF Working Papers 06/89, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/89
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=19010
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    References listed on IDEAS

    as
    1. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
    2. Dirk V Muir & Douglas Laxton & Dennis P Botman & Andrei Romanov, 2006. "A New-Open-Economy Macro Model for Fiscal Policy Evaluation," IMF Working Papers 06/45, International Monetary Fund.
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    Citations

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    Cited by:

    1. Murtaza H Syed & Michael Skaarup & Tarhan Feyzioglu, 2008. "Addressing Korea’s Long-Term Fiscal Challenges," IMF Working Papers 08/27, International Monetary Fund.
    2. Dennis Botman & Philippe Karam & Douglas Laxton, 2008. "Les modèles DSGE au FMI : applications et développements récents," Economie & Prévision, La Documentation Française, vol. 0(2), pages 175-198.
    3. repec:vrs:tejoae:v:13:y:2016:i:2:p:21-29:n:4 is not listed on IDEAS
    4. Botman, Dennis & Edison, Hali & N'Diaye, Papa, 2009. "Strategies for fiscal consolidation in Japan," Japan and the World Economy, Elsevier, vol. 21(2), pages 151-160, March.

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