What are the effects of increases in taxes and cuts in spending
The OBR Report suggests that the government structural budget deficit will be around 3% of GDP in 2014-15 after implementing the cuts and tax increases proposed by the Labour government.
If in response the government progressively tightens fiscal policy by a further 3% of GDP over the next two years then growth will slow, but not by much. The more the cuts fall on spending
(not public sector wages but persons employed) the bigger the impact. These changes would be in addition to the 6 percent of GDP structural improvement that the last government had already
planned to be in place by 2014-5.
The national debt stock of the UK is rising sharply as a result of the economic crisis, and equilibrium output is falling, with the capital stock contracting.
Both problems could be alleviated by the rapid introduction (but slow implementation) of a policy to extend working lives. The paper analyses a delayed extension of working
lives in the UK. A distinction is drawn between the impacts of these changes on output (GDP) and income (GNP) in open economies with capital mobility. Increasing working lives
will in equilibrium raise consumption and tax revenues and reduce pension spending. These gains by the government can be used to improve services, cut taxes or pay off debts.
Dorsett, R., Metcalf, H. and Rolfe, H. with Bewley, H., Dhudwar, A., George, A. and Hopkin, R. - The Better-off in
Work Credit, Report of research carried out by the NIESR on behalf of the Department for Work and Pensions
The current issue of the National Institute Economic Review focuses on Immigration and the economy, and was published on Wednesday, 28th July 2010.
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