We test for fiscal policy sustainability in the UK for 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 has been sustainable throughout the sample period except from 1973-1981 when a non-Ricardian regime applied. For the remaining periods correction of fiscal disequilibrium occurs through adjustments in public revenue rather than expenditure. Finally, we find evidence of non-linear fiscal adjustment, with UK authorities not reacting to relatively small deficits; but correcting exceedingly large deficits and any temporary surpluses relatively fast.
Fiscal policy Sustainability UK Structural breaks Non-linear adjustment