I have developed a few simple rules for selecting variables to keep an eye on:  2  BIS central bankers’ speeches  Over time, governments cannot run an increasing deficit. To prevent the debt level from exploding, the deficit must be kept in line with nominal GDP growth. That figure is around 4 per cent annually, for most Western countries. A fiscal balance can hide important imbalances. If one sector in the economy is far too large, the taxes from this sector can contribute significantly to the fiscal budget. An example is the construction sector in some European countries in the years leading up to the crisis. In normal times, this sector is around 3–5 per cent of GDP in most countries. In Spain, housing construction was 9 per cent in 2006. In Ireland, the contribution was 11 per cent. When problems arose, construction activity decreased and tax income was reduced significantly. Therefore, one should also look at the current account. Inflation above 4 per cent might indicate that price stability is not firmly anchored. If unemployment is above 4 per cent of the labour force, it might signal a labour market out of order. Finally, the risk of running into a crisis seems to increase if the total assets of the banking sector constitute more than 4 times GDP. This table illustrates the 4 per cent rule. Many countries had negative fiscal balances through the last decade despite moderate to high economic growth.
This is not a cause for concern because it is the foreign currency value of the reserves that matters. •  Financial stability. Our financial system is sound. It will be resilient against a normalisation of global monetary conditions. But household balance sheets are a source of concern – not at the aggregate level, but a significant minority could be over-leveraged. Hence, the variety of macroprudential measures we have taken over the last three years. •  Financial supervision. We are fully compliant with international standards, and have taken strong measures to ensure we remain a clean and trusted financial centre. We have stepped up to meet enhanced global standards on information exchange and have intensified our supervision of financial institutions to ensure we keep illicit money out from our financial centre. •  Financial development. The key drivers of future growth in our financial centre are showing good promise. The asset management industry has reached a new peak. We are now clearly the insurance and reinsurance hub in a growing Asia. And we are off to a good start to building a vibrant ecosystem as an offshore RMB hub. 8  BIS central bankers’ speeches