The economic impacts of UK fiscal policies and their spillover effects on the energy system

The energy system and the economy are inextricably intertwined. Whilst
this interdependence is, of course, widely recognized, it has not featured
prominently in assessing the likely impact of economic policies. In
principle, fiscal policies are likely to have an influence on key elements
of the energy system, the neglect of which may lead to inefficiencies in
the design of appropriate energy and economic policies. The importance
of this in practice depends on the strength of the spillover effects from fiscal policy instruments to energy policy goals. This is the focus of
this chapter. We employ a multi-sectoral computable general equilibrium
approach for the United Kingdom that allows us to track the impact
of key fiscal policy interventions on goals of economic and energy
policies. We explore whether it is possible to stimulate the economy
through fiscal policy without generating an adverse impact on the
energy system. Overall, our results suggest that it is unlikely that an
increase in current public spending or a fall in the income tax rate will
generate a simultaneous increase in GDP and fall in emissions in the
United Kingdom context. Nonetheless, there are undoubted differential
spillover effects on key components of the energy system from tax
and public spending interventions that may prove capable of being
exploited through the coordination of fiscal and energy policies. Even if
it seems doubtful that fiscal policies would be formulated with a view
to improved coordination with energy policies, policymakers can benefit
from knowledge of the likely direction and scale of fiscal spillover effects
to key elements of the energy system, since this reveals, for example, the
extent of any energy policy adjustment that would be required to maintain
a given level of emissions.