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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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  • Xavier Ramos
  • Oriol Roca-Sagales

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.

Suggested Citation

  • Xavier Ramos & Oriol Roca-Sagales, 2007. "Long Term Effects of Fiscal Policy on the Size and the Distribution of the Pie in the UK," RSCAS Working Papers 2007/39, European University Institute.
  • Handle: RePEc:rsc:rsceui:2007/39
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    Cited by:

    1. Leonel Muinelo‐Gallo & Oriol Roca‐Sagalés, 2011. "Economic Growth And Inequality: The Role Of Fiscal Policies," Australian Economic Papers, Wiley Blackwell, vol. 50(2-3), pages 74-97, September.
    2. repec:bla:afrdev:v:29:y:2017:i:s1:p:1-14 is not listed on IDEAS
    3. Karen Davtyan, 2016. "Interrelation among Economic Growth, Income Inequality, and Fiscal Performance: Evidence from Anglo-Saxon Countries," Hacienda Pública Española / Review of Public Economics, IEF, vol. 217(2), pages 37-66, June.
    4. Kouassi YEBOUA, 2021. "Fiscal policy and growth-inequality tradeoffs: Bayesian evidence from Cote d’Ivoire," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(1(626), S), pages 297-310, Spring.
    5. M. Hakan Berument & Zulal Denaux & Yeliz Yalcin, 2012. "Turkish monetary policy and components of aggregate demand: a VAR analysis with sign restrictions model," Applied Economics, Taylor & Francis Journals, vol. 44(36), pages 4787-4798, December.
    6. UNDP Regional Bureau for Africa & Ayodele Odusola, "undated". "Fiscal Policy, Redistribution and Inequality in Africa," UNDP Africa Policy Notes 2017-08, United Nations Development Programme, Regional Bureau for Africa.
    7. Leonel Muinelo-Gallo & Oriol Roca-Sagalés, 2017. "Long-term effects of fiscal policy in Uruguay," Documentos de Trabajo (working papers) 17-02, Instituto de Economía - IECON.
    8. Simone Salotti & Carmine Trecroci, 2018. "Cross-country evidence on the distributional impact of fiscal policy," Applied Economics, Taylor & Francis Journals, vol. 50(51), pages 5521-5542, November.
    9. Chatziantoniou, Ioannis & Duffy, David & Filis, George, 2013. "Stock market response to monetary and fiscal policy shocks: Multi-country evidence," Economic Modelling, Elsevier, vol. 30(C), pages 754-769.
    10. Muinelo-Gallo, Leonel & Roca-Sagalés, Oriol, 2013. "Joint determinants of fiscal policy, income inequality and economic growth," Economic Modelling, Elsevier, vol. 30(C), pages 814-824.
    11. Walter Cont & Alberto Porto, 2016. "Fiscal Policy and Income Distribution: Measurement for Argentina 1995 ¨C 2010," Review of Economics & Finance, Better Advances Press, Canada, vol. 6, pages 75-92, May.
    12. Kollias, Christos & Papadamou, Stephanos & Psarianos, Iacovos, 2014. "Fiscal imbalances and asymmetric adjustment under Labour and Conservative governments in the UK," Research in Economics, Elsevier, vol. 68(3), pages 208-213.
    13. Yongzheng Liu & Jorge Martinez-Vazquez, 2015. "Growth–Inequality Tradeoff in the Design of Tax Structure: Evidence from a Large Panel of Countries," Pacific Economic Review, Wiley Blackwell, vol. 20(2), pages 323-345, May.
    14. Odusola, Ayodele, 2017. "Fiscal Policy, Redistribution and Inequality in Africa," UNDP Africa Reports 267032, United Nations Development Programme (UNDP).
    15. Gunasinghe, Chandika & Selvanathan, E.A. & Naranpanawa, Athula & Forster, John, 2020. "The impact of fiscal shocks on real GDP and income inequality: What do Australian data say?," Journal of Policy Modeling, Elsevier, vol. 42(2), pages 250-270.
    16. Jeanne Terblanche & Dawie van Lill & Hylton Hollander, 2023. "Fiscal policy and dimensions of inequality in South Africa: A time-varying coefficient approach," Working Papers 05/2023, Stellenbosch University, Department of Economics.
    17. Luigi Marattin & Simone Salotti, 2014. "Consumption multipliers of different types of public spending: a structural vector error correction analysis for the UK," Empirical Economics, Springer, vol. 46(4), pages 1197-1220, June.
    18. Odusola, Ayodele, 2017. "Fiscal Space, Poverty and Inequality in Africa," UNDP Africa Economists Working Papers 268726, United Nations Development Programme (UNDP).
    19. repec:rac:ecchap:2017-08 is not listed on IDEAS
    20. repec:ira:wpaper:201405 is not listed on IDEAS

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    More about this item

    Keywords

    Fiscal policy; inequality; UK; VAR models;
    All these keywords.

    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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