The UK deficit-reduction strategy: evidence from 1979-2012

Abstract

This paper examines the current financial crisis and the various tax-and-spend policies that affect the governments deficit-reduction strategy. The theory surrounding this is the Ricardian Equivalence Theorem, as set out by Robert Barro. The data is from various government sources between 1979 and 2017 and used in regression analysis and comparative cash analysis. The results indicate that, whilst tax and net public spending have contributed materially to levels of net borrowing and budget deficits, the most controversial issue of VAT has very little impact. The findings show that the underpinning theory does not hold in the UK under normal boom-and-bust circumstances but that this unusual financial crisis might prove the exception to the rule. The conclusion from all of the regressions run show that the key driver to reducing the deficit is economic growth, counteracting the major political parties traditional views of spending cuts or tax-and-spend policies.