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Attention focuses on looming fiscal squeeze

Headlines over the past month have been dominated by the steps needed to reduce the public sector deficit, with Prime Minister Gordon Brown finally uttering the “c” word and talking about cutting government spending. The public finances have continued to go from bad to worse, with tax receipts in August again falling by more than the Treasury expected. (See Chart.) We continue to think that the looming fiscal consolidation will act as a major constraint on the economic recovery, whilst ensuring that monetary policy stays exceptionally loose for a long time yet.

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