The economic impacts of UK fiscal policies and their spillover effects on the energy system

The energy system and the economy are inextricably intertwined. While this interdependence is, of course, widely recognised, it has not featured prominently in assessing the likely impact of economic policies. In principle, broad fiscal policies are likely to have a significant influence on key elements of the energy system, the neglect of which may lead to inefficiencies in the design of appropriate energy and economic policies. The importance of this in practice depends on the strength of the spillover effects from fiscal policy instruments to energy policy goals. This is the focus of this paper. We employ a multi-sectoral computable general equilibrium (CGE) approach for the UK which allows us to track the impact of key fiscal policy interventions on key goals of economic and energy policies. Overall, our results suggest that a double dividend - a simultaneous stimulus to the economy and a reduction in emissions – induced by an increase in current public spending or a hike in the income tax rate seem unlikely in the UK context. Nonetheless, there are undoubted differential spillover effects on key components of the energy system from tax and public spending interventions that may prove capable of being exploited through the coordination of fiscal and energy policies. Even if it seems doubtful that fiscal policies would be formulated with a view to improved coordination with energy policies, policymakers should at least be aware of likely direction and scale of fiscal spillover effects to the energy system.