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How do you set fiscal policy? The aim is not to allow government debt to get too large relative to GDP. One obvious way is for the government to plan its expenditure over the next year or two (or beyond) and then set taxes so that projected revenues are close to expenditure.

The key problem with this is the difficulty of making projections. Projecting expenditure is fairly straightforward because it can be managed by government departments under direction from the treasury. But projecting tax revenues is a different matter. First, it requires forecasting the future path of the economy.…

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