ABSTRACT
This chapter discusses three crucial components of the new economic model. First, a new approach to macroeconomic and financial policy, where one seek to contain credit cycles as well as target price stability is discussed. Second, a new fiscal policy framework with an independent Office for Budget Responsibility to ensure that public debt is sustainable is described. And third, a supply side revolution releases the pent-up enterprise and wealth creation of the country, encourages a nation of savers, and addresses the long-term structural weaknesses that no government has ever properly tackled such as poor education and a welfare system that traps people in workless poverty. The economics profession is in broad agreement that the recovery will only be sustainable if it is accompanied by an internal and external rebalancing of the economy. Economic theory and evidence suggest that the macroeconomic policy combination most likely to encourage the market adjustment is tight fiscal policy, supportive monetary policy and counter-cyclical financial regulation.
