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Fiscal policy: Time for a new economic philosophy

Governments should cede control of fiscal policy.

It is time for us to thank the great men and women who made the world economy and financial markets grow over the 40 years since Euromoney began. It is time also to admit that such rapid growth will not be repeated unless we shift from the prevailing policies of governments. We need a new economic philosophy.

Broad fiscal policy is too important to be left to politicians. Most governments have already granted to central banks the power to conduct monetary policy by setting interest rates independently. That was a big step. It is time they granted the same powers on fiscal policy to bodies whose purpose is to keep the public finances stable.

Politicians will decide to retain their powers to direct government spending and levy taxes as they wish, but they should cede their powers to control the size of budget deficits and surpluses to an impartial body that is not elected and that has a sole objective, to allow each economy to grow within the budget constraints agreed at the outset.

Their models should be the Federal Reserve, the European Central Bank, the Bank of England’s MPC and the other independent bodies that are responsible to legislatures but are granted the power to make their own judgements about setting interest rates.

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