...from per cent of GDP in 2005 to 2.5 per cent of GDP in 2006. The prospects for further improvement appear limited as the new government plans to cut taxes to stimulate the economy. Projections for budget deficits are very uncertain, as they are the difference between two large numbers (receipts and spending) that are difficult to predict accurately. Figures and 2 plot the errors around our budget projections for France and Germany based on stochastic simulations on NiGEM. The 95 per cent confidence limit for our forecast one year ahead is around 1 per cent of GDP around our central forecast, and uncertainty increases into the future. As we can see from figures 3 and 4, our forecast errors for France and Germany have been well within the 95 per cent bands in the past three years, except for our one year ahead forecast for Germany for 2006. The budget improved by 1.5 per cent of GDP more than we had anticipated, and this appears to have been due to unexpectedly high tax receipts, rather than to changed policy.

[FIGURES 1-4 OMITTED]

Further improvements of 0.8 per cent of GDP in the German budget position will follow from the increase in VAT in January 2007, and we anticipate that budget balance will be achieved in the near future. The improvement in the budget position in 2006 came about partly because growth was 1.7 per cent higher than we anticipted at the end of 2005, which would have increased revenues noticeably and improved the bugets by 0.9 per cent of GDP for...

NOTE: All illustrations and photos have been removed from this article.



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