UK FISCAL POLICY SUSTAINABILITY, 1955–2006*

Abstract

We test for fiscal policy sustainability in the UK over the period 1955–2006. We find evidence of sustainability with three structural breaks, respectively occurring in the early 1970s, early 1980s and late 1990s. UK fiscal policy was not sustainable between 1973 and 1981. Within the fiscal regimes correction of fiscal disequilibrium occurs through adjustments in public revenue. Changes in fiscal regimes, however, occur through shifts in public expenditure. UK authorities do not react to relatively small deficits but correct exceedingly large deficits relatively fast. Finally, the recent financial crisis may have caused a substantial deterioration of UK fiscal dynamics.