Template-Type: ReDIF-Paper 1.0
Author-Name: Spyros Lazarakis
Author-Name-First: Spyros
Author-Name-Last: Lazarakis
Author-Name: Max Schroeder
Author-Name-First: Max
Author-Name-Last: Schroeder
Title: Public Debt Consolidation under Risky Human Capital
Abstract: How should governments deleverage public debt, and who gains or loses under alternative fiscal packages? We study this question in a heterogeneous-agent general-equilibrium model with endogenous assets, labour supply, and human-capital accumulation, calibrated to the pre-pandemic United Kingdom. The government reduces the public-debt stock by an amount equal to 10 percent of initial output over 25 years. We compare front-loaded, linear, and back-loaded schedules; labour-tax, returns-tax, and transfer closures; and four uses of the fiscal capacity created by lower debt service: Government Spending, Fiscal Discipline, Additional Transfers, and Public Investment. Four results stand out. First, we find a clear ranking among the fiscal instruments: labour taxation usually creates the largest welfare losses, followed by transfer reductions, while returns taxation generates the smallest losses. Second, among workers alive when the policy is announced, back-loaded paths generally deliver higher mean welfare, but heterogeneity can create conflicts of interest that may change this ranking. Third, endogenous human capital amplifies the cost of labour-tax consolidation. Fourth, fiscal headroom is itself distributional; Fiscal Discipline protects households exposed to the chosen closure instrument; Additional Transfers build support among low-asset households, especially under returns-tax financing; and Public Investment creates broader productivity gains and can make faster deleveraging politically attractive. Debt reduction should therefore be evaluated as a package combining the debt path, the fiscal instrument, and the allocation of fiscal headroom.
Creation-Date: 2026
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2026_002.pdf
File-Format: application/pdf
Number: 442390386
Classification-JEL: 
Keywords: public debt, fiscal consolidation, heterogeneous agents, inequality, human capital
Handle: RePEc:lan:wpaper:442390386