With the uncertainty induced by the prolonged run-up to the general election having come to an end and renewed signs that consumer and business sentiment has begun to improve, it now seems as if the economy is poised to emerge from the recession over the coming months. It may be some while before the evidence of any improvement emerges from the official statistics and it is quite possible that the various monthly sectoral and industrial surveys will continue to give conflicting signals as to the strength of the economy at the present time.

There are signs that the slowdown in major seven growth may be coming to an end in the first and second quarters of 1992. The provisional first quarter data for the US indicated that growth had been slightly stronger than we had anticipated. However there are signs of continued weakness in the Japanese economy, and output growth throughout Europe has been below capacity. We are not expecting a sharp upturn in world activity, and we do not expect capacity utilisation rates to rise substantially in the near future. Chart 1 plots past data and our forecast of output growth in the major four economies. We believe that the last quarter of 1991 was the trough of the downturn in the US, Japan and Germany, and that growth will be higher in 1992 in the US and Canada than it was in 1991. Table 1 gives a summary of our forecast. The slow improvement in capacity utilisation that is shown in chart 2 is a major factor behind the rather optimistic outlook for inflation. Inflation is expected to fall in all of the major economies in 1992, and to rise only very slightly in Japan and Canada in 1993.

The contribution of differences in the Dutch and British education and training systems to the significant Dutch advantage in manufacturing productivity levels is examined in this article. The Dutch schooling system is characterised by high standards in mathematics, the provision of vocational education at ages 14-16 for a third of all pupils, and widespread vocational education at 16+. The proportion of the Dutch work force attaining vocational qualification approaches that of Germany and is well ahead of Britain. Comparisons of productivity, machinery and skills in matched samples of British and Dutch manufacturing plants were carried out in selected branches of two industries—engineering and food-processing. Higher average levels of work force skills and knowledge in the Dutch samples were found to contribute to higher productivity through better maintenance of machinery, greater consistency of product-quality and lower manning-levels (greater work force flexibility, less learning-time on new jobs). The Dutch productivity advantage was greatest in product areas where small- or medium-sized batches are demanded by the market.

In 1977 the European Commission published the report of a Study Group which it had set up, under my Chairmanship, on ‘The Role of Public Finance in European Integration’. This is sometimes called the ‘MacDougall Report’, which does scant justice to my six European colleagues, our two consultants from the United States and Australia, and our excellent Secretariat.

The debate on European monetary union has brought the issue of European fiscal policy into public scrutiny. This note discusses the problems of fiscal policy coordination in Europe over the next decade, and analyses the evolution of debt and deficits over the 1970s and 1980s. We then look more formally at the concept of a sustainable path for public debt and report on some tests that investigate whether or not debt paths in Europe have been on a stable trajectory. The note by Barrell and In't Veld in this Review considers the importance of fiscal solvency in constructing large scale macro models, and casts further light on the issues discussed here.

This paper analyses the role of wealth in the National Institute model of the World Economy (NIGEM). It also addresses the issues of fiscal solvency and the rote of the government budget constraint. We start with a brief theoretical and empirical overview of wealth and consumption functions. We then describe the introduction of public sector blocks into the model and summarise our approach to the determination of wealth. The paper then reports on a set of diagnostic simulations using NIGEM. We analyse the effects of a permanent fiscal expansion and its implications. We also discuss the importance of solvency constraints on the government in the solution of a forward looking model without Ricardian equivalence. We then analyse the effects of a change in equity prices in one country relative to those in the rest of the world.

This paper illustrates how learning can be incorporated into an existing forward-looking macroeconomic model as an alternative to the more conventional but arguably more extreme assumption of model consistent or rational expectations. The key characteristic of the model consistent learning approach to be adopted here is that agents are assumed to know the true structure of the model but that they need to learn about some parameters of that system, for example those defining the government's policy decision rule. Importantly, models solved under this assumption retain the property that the current behaviour of economic agents can be influenced by the expected future effects of policy changes. This type of learning may be contrasted with one where economic agents may also be uncertain about some structural parameters of the true model but in addition, they do not possess sufficient information to form future expectations consistent with their estimated model. As a consequence, expectations are formed using backward-looking reduced form equations with parameters which agents continuously learn about. This approach, known as boundedly rational learning, has been adopted in Hall and Garratt (1992) who apply these techniques to a full-scale non-linear macroeconometric model.

It is likely that in the next few years a substantial amount of attention and comment will be devoted to the state of the public finances. In his budget, the Chancellor of the Exchequer, Mr. Norman Lamont, forecast that the Public Sector Borrowing Requirement (PSBR) for 1992–3 would be £28 billion or 4 1/2 per cent of GDP. This figure should be contrasted with the government's own policy of balancing the budget over the medium term and the objective set out in the Maastricht Treaty on European Union of avoiding ‘excessive budget deficits’. In this context, a topic of some interest is the likely pace and scale of any improvement in corporation tax receipts as the economy recovers from recession.