. certainly, there are politicians, especially in europe, who believe central bankers confuse the deficits which dot the fiscal landscape with all manner of economic evils, rather as don quixote confused the windmills which dotted the landscape of la mancha with the terrible giants sent by some evil force. so i do not want to overstate the case and tilt at windmills, especially in the light of the fact that this month sees the 400th anniversary of the publication of cervantes ’ great novel. but it will clearly be important that the prudent approach to fiscal policy that has served the uk so well in recent years is continued - over the next cycle and beyond. in that way our national saving rate can be maintained or even raised. the market response to inadequate saving is higher real interest rates. since the uk is a part of an open international capital market, long - term real interest rates in this country reflect the balance between investment and saving, including the stance of fiscal policy, not just at home but throughout the world economy. surprisingly, in the light of the fall in g7 saving, uk long - term real interest rates as measured by the forward rates implied by the yields on index - linked gilts - are near their lowest levels for twenty years. us and euro - denominated rates are also low relative to past experience. there may be other factors that have offset the effect of fiscal policy on real interest rates, such as demographic developments and higher saving and more open capital markets outside the g7. but there remains a risk, as discussed in the bank ’ s recent financial stability review, of an unwinding of low long - term real interest rates as the stimulus from highly accommodative monetary policies across the g7 economies is gradually withdrawn. what do these arguments mean for monetary policy today? they imply, i believe, three main challenges for central banks. first, the factors that affect the level of real interest rates in capital markets around the world also determine whether a given official interest rate is an expansionary or restraining influence on demand. when driving a car we normally know whether our foot is on the accelerator or the brake. that is less obvious in the case of monetary policy - hence the debate among economists about the level of the so - called neutral interest rate. uncertainty about the extent to which monetary policy is applying the accelerator or the brake justifies central bankers ’ continued interest in the monetary and credit aggregates which contain information about the pace of

save too much but whether we are saving too little. the level of income that will sustain us in the future depends critically upon how much as a nation we set aside today. in other words, what is happening to the national saving rate - the proportion of the net national product that is not consumed by either the private or public sector? since the late 1960s the national saving rate has been declining fairly steadily, from over 10 % to around 5 %. although saving rates elsewhere in the g7 have also fallen, they were higher than in the uk for most of the post - war period. recently the gap between saving rates in the uk and the rest of the g7 has narrowed considerably, not as a result of higher saving in the uk but lower saving elsewhere. in large part this reflects changes in fiscal policy. there is ample empirical evidence that higher government borrowing lowers national saving. and for twenty years or more the g7, while lecturing each other and the rest of the world on the need for fiscal discipline, has continued to borrow more and more. the ratio of net public debt to gdp in the g7 has more doubled since 1980 from around 25 % to around 60 %. the uk is the only member of the g7 in which the ratio is lower than in 1980. the uk has a clear framework for fiscal policy. although rules and frameworks cannot guarantee that governments will pursue sustainable fiscal policies, as the large deficits in the early 1990s illustrated, they make deviations from medium - term sustainability more transparent. but in the rest of the g7 the absence of a clear framework, as in japan and the united states, or the lack of credibility in the stated framework, as in the failure to enforce the stability and growth pact in the euro area, has made it easier to let the fiscal position slip. as a result, the g7 fiscal deficit is now close to its 25 - year peak, and the average national saving ratio has halved. at home, the government ’ s fiscal rules constrain the path of fiscal deficits. they limit borrowing, over the economic cycle, to the level of public investment and place an upper limit on the debt to gdp ratio of 40 %. in assessing the fiscal position it is important to look forward and not just backward at the realised deficits over the past cycle. of course, it is also important to recognise the many uncertainties surrounding the future path of the public finances. central bankers probably talk too much about fiscal policy