Fiscal imbalances and asymmetric adjustment under Labour and Conservative governments in the UK

Abstract

This paper examines whether the political colour of an incumbent government affects the speed at which fiscal imbalances are corrected in the case of the UK. Using quarterly data, we examine whether Conservative or Labour governments are more prone to operate under a soft budget constraint and vis-à-vis i.e. to adhere to a hard budget strategy. The tests, using quarterly data, cover the period 1961–2011 and the results reported herein reveal differences in the speed at which fiscal imbalances are corrected by Labour and Conservative governments. The former are more inclined to operate under a soft budget constraint whereas the latter under a hard budget constraint.