Title: Oil price shocks and the UK fiscal regime: 1990-2005
Authors: Marco Lorusso - Northumbria University (United Kingdom) [presenting]
Charles Nolan - University of Glasgow (United Kingdom)
Abstract: The aim is to study the main transmission channels of oil price fluctuations for the UK economy and the consequences of oil price changes on its public finances. Our results show that the underlying source of oil price shocks matters. Accordingly, UK public finances deteriorate in response to positive shocks to foreign oil intensity and supply that induce a fall in the oil price. In such cases, the reductions in the VAT, fuel duty and PRT tax receipts cause the rise in the government debt. Conversely, the real oil price remains almost unchanged following positive shocks to domestic oil production but, in this case, the UK public finances are positively affected because the main tax revenues increase. In contrast to existing studies we find that the variation of the UK government debt is significantly affected by changes in the PRT revenues following domestic oil production shocks. We also extend the previous literature by estimating the parameters of several fiscal policy rules related to the major UK tax rates.