Fiscal Report

Extract

One of the intriguing features of the UK economy's recent behaviour is that it has combined a strong exchange rate with an apparently tight public sector budgetary position. This is unusual because a strong and uncompetitive exchange rate is more commonly associated with a loose fiscal position where the public sector is using more resources than it has raised by way of taxation. In that situation, upward pressure on interest rates and the exchange rate crowd out other activity and thereby free up resources for use by the public sector. It is largely for this reason that trade groups representing firms in the manufacturing sector have been lobbying for continued restraint on public sector spending as a means of preventing further upward pressure on the exchange rate.