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Oxford University Centre for Business Taxation

Oxford University Centre for Business Taxation

Business tax and macroeconomic policy

Can the UK fiscal consolidation be expansionary?

This research project reviews the economic literature which has investigated empirically the conditions under which a fiscal contraction, of the kind currently in process in the UK, may be expansionary. Five factors are identified as being likely to be of significance: the size of the consolidation; the composition of the consolidation between spending cuts and tax increases; the initial level of public debt; whether interest rates are at a lower bound; and whether there is a devaluation of the exchange rate. Of these, there is more empirical support for the importance of the first two. Both of these factors are positive for the UK. Of the others, only the low interest rates point in the opposite direction. However, this optimistic position should be treated with caution for two reasons. First, there are a number of weaknesses in the empirical literature. Second, the favourable probability of the consolidation being expansionary is only relative to other consolidations. Despite the relatively good position of the UK, there must still be considerable doubt as to the eventual outcome.

Michael Devereux, Clemens Fuest, and Katarzyna Bilicka, 2011. What do we know about effects of fiscal consolidation on short-term growth? Implications for the UK. In: J. Alworth and G. Arachi, eds. Taxation and the Financial Sector. Oxford: OUP.

Automatic stabilisers and economic crisis: The US versus Europe

This paper analyses the effectiveness of the tax and transfer systems in the EU and the US to provide income insurance through automatic stabilisation in the recent economic crisis. We find that automatic stabilisers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US.  In the case of an unemployment shock, 47 per cent of the shock is absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilisation of up to 30 per cent in the EU and up to 20 per cent in the US. There is large heterogeneity within the EU. Automatic stabilisers in eastern and southern Europe are much lower than in central and northern European countries. We also investigate whether countries with weak automatic stabilisers have enacted larger fiscal stimulus programs.

Martin Dolls, Clemens Fuest and Andreas Peichl, 2011. 'Automatic stabilizers, economic crisis and income distribution in Europe'. Research in Labour Economics, 32, 227-255.