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

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 (VAR) approach. Our findings suggest that the long-term impact on GDP of increasing public spending and taxes is negative, and especially strong in the case of current expenditure. We also find significant distributional effects associated with fiscal policies, indicating that an increase in public spending reduces inequality while a rise in indirect taxes increases income inequality. Copyright (c) 2008 The Authors Journal compilation (c) Institute for Fiscal Studies, 2008.