Fiscal illusion and the demand for government expenditures in the UK

Abstract

This paper examines whether variables commonly used to test standard fiscal illusion arguments (that tax structure affects voters' demands for public goods) can help explain the time-series behaviour of government expenditure in the UK during 1955–1994. We modify a standard median voter model to incorporate fiscal illusion via `less visible' (indirect) taxes and deficit financing. While we find evidence that both are positively associated with increased government spending, this would appear to be consistent with both fiscal illusion and standard efficiency arguments.