Output growth of close to 4 per cent is expected in 2004, easing to around 3½ per cent in 2005 and 2006, with some reduction in the exceptionally rapid pace of export growth and a further slowdown in consumption growth. Inflation is expected to come down rapidly in the near term, as the impact from one-off increases in indirect taxes fades; it is expected to continue to fall, though at a slower pace, in 2005 and 2006, despite higher oil prices Although a substantive reduction in the government's budget deficit is expected this year, a big gap between ambitions and outcomes in fiscal policy remains, making co-ordination of macroeconomic policy more difficult and raising risk premia. The new government should switch to a more credible fiscal strategy that sets more realistic targets and backs them up with a stronger commitment to sustainable spending cuts. ...