In theory the structural budget balance, which takes account of whether an economy is running above or below its potential level, provides a useful summary of a government’s fiscal position. On this basis much of the euro-zone is in a stronger fiscal position than the US or the UK. However, in practice we think that the euro-zone’s fiscal position is less healthy than this structural measure implies, largely because prospects for GDP growth in the single currency area remain poor, whereas the UK’s fiscal position is stronger than it looks. Japan’s public finances, meanwhile, remain on an unsustainable path.
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