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Fiscal Consolidation During a Depression Nitika Bagaria, Dawn Holland and John Van Reenen Special Paper No. 27 August 2012 Centre for Economic Performance Special Paper Nitika Bagaria is an Occasional Research Assistant with the Productivity and Innovation Programme at the Centre for Economic Performance, London School of Economics and Political Science. Dawn Holland is a Senior Research Fellow at the National Institute of Economic and Social Research, London . John Van Reenen is the Director of CEP and Professor of Economics, London School of Economics and Political Science. Abstract In 2009-10, the UKs budget deficit was about 11 per cent of GDP. A credible plan for fiscal consolidation was introduced in the UK over the fiscal years 2011-12 to 2016-17. In this paper, we assess the impact of the scale and timing of this fiscal consolidation programme on output and unemployment in the UK. During a prolonged period of depression when unemployment is well above most estimates of the NAIRU, the impact of fiscal tightening may be different from that in normal times. We contrast three scenarios: the consolidation plan implemented during a depression; the same plan, but with implementation delayed for three years when the economy has recovered; and no consolidation at all. The modelling confirms that doing nothing was not an option and would have led to unsustainable debt ratios. Under both our immediate consolidation scenario and the delayed consolidation, the necessary increases in taxes and reductions in spending reduce growth and increase unemployment, as expected. But our estimates indicate that the impact would have been substantially less, and less long-lasti