UK fiscal multipliers in the postwar era: Do state dependent shocks matter?

Abstract

Front-loaded fiscal austerity since the 2008 financial crisis has meant that the UK economic experience is being viewed as a kind of test case for the proposition that contractionary fiscal policy can induce an economic expansion. The discussion has often been implicitly framed in terms of the size of the potential multiplier. Contributing to the debate, this article provides empirical estimates on the size of fiscal multipliers in the UK across various macroeconomic states during the last 50 years. The results show that since the 1980s positive government spending shocks have had a positive effect on output, with a short-run multiplier value around unity since early 2000. There is also little evidence of private consumption being crowded out. The results imply that recessions could be further aggravated if the government retrenches spending in the midst of the downturn. © The Author 2013. Published by Oxford University Press on behalf of Ifo Institute, Munich. All rights reserved.