Long abstract

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This Chapter discusses the challenges for monetary and fiscal policy given the government’s goal of joining the European Monetary Union in 2010. In fiscal policy, the key conclusion is that further reductions in the general government deficit have to come about through spending cuts because of the already high level of taxation. Failure to reach deficit targets have damaged credibility in the recent past and the Chapter discusses ways of providing more realistic budget targets, more transparent fiscal planning, better assessment of progress over the budget year and improved estimation of outcomes. In monetary policy, some fine-tuning of the Central Bank inflation targeting regime to help smooth euro entry is recommended, including setting inflation targets for a fixed number of quarters ahead. The Chapter also stresses that achieving the targets set in the Convergence Programme for joining the euro area will require close co-operation between fiscal and monetary policies.