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Is fiscal policy more important than interest rate reductions?

There is a growing debate in economic circles as to whether the use of interest rates to control economies is as effective as the government's overall fiscal policy. Some leading financial experts have dismissed the 1.5% reduction in base rates as an irrelevance and suggested that the fiscal policy of the Labour government is more vital at this moment in time.

As rumours grow of a potential £15 billion tax cuts programme there is a suggestion that fiscal policy may take the headlines over interest rate policy in the short to medium term. Interest rate policy is a very useful tool to hit the headlines, and try to instil some kind of confidence into the consumer market, but fiscal policy, i.e. controlling what the population pay in tax and receive, does have a vital role to play.

The recession we are experiencing at the moment is of a like never seen before in the modern world and as such governments are still trying to find the best way to combat these difficulties. Interest rates and improved liquidity in the money markets have had an impact but it looks as though other avenues will have to be explored in due course.

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