Fiscal Policy, Growth and Income Distribution in Uk

The UK economy growing annually at 2.05 percent and leading the world between 1750 and 1850 experienced a sharp rise in income inequality at the high point of the industrial revolution. A series of tax and transfer enactments from the parliament to protect workers and low income households started towards the end of the nineteenth century reversed this trend making Britain one of the most egalitarian economy in the world by 1960s. New wave of reforms in tax-transfer system and the markets in the last forty years aimed at higher economic growth have raised inequality again both in the original and the post tax income causing widespread concerns. Solutions of the multihousehold, multi-sectoral dynamic general equilibrium model show that …scal policy measures impact on growth paths, capital accumulation and investment processes across sectors and in the distribution of income among households. Greater equality does not automatically guarantee greater welfare when the economy is not growing. By taking account of the intertemporal income and substitution e¤ects this model can provide more accurate analysis of impacts of …scal policy measures on the labour-leisure and consumption decisions of households and input choices of …rms. Such analysis is helpful in setting a long-term optimal policy measures based on structural realities to maintain a balance between growth and equity in the 21st century. Keywords: growth, redistribution, …scal policy, UK JEL classi…cations: D5, E6, O4, O55 Corresponding Address: Univeristy of Hull, Business School, Cottingham Road, Hull, HU6 7RX, UK. [email protected]; Phone: 441482463207; Fax: 441482463484.