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Economic growth is projected to remain robust, due to ongoing supportive monetary conditions, dynamic domestic demand and a rebound in financial sector activity, which will foster exports. Inflation is projected to rise as slack diminishes and wages are pushed up by the next round of indexation, due at the beginning of 2017.
Structural reforms, such as strengthening incentives to accept job offers and stricter job search obligations for recipients of unemployment benefits, would improve the use of existing skills and reduce structural unemployment. Reforms that reduce barriers to labour mobility, such as changes in housing-market and life-long learning policies, should be complemented by the provision of adequate infrastructure and public services to accommodate the needs of new residents.
The government has shifted towards an expansionary fiscal policy stance. This shift is welcome given the ample fiscal space afforded by low levels of debt and low interest rates. The new fiscal target will make room for a growth-enhancing tax reform, combining a reduction in corporate and income tax rates with higher tax credits for investors and low-income taxpayers. This will make the tax system more growth and equity-friendly. In addition, fiscal space could be used for growth-enhancing spending on R&D and infrastructure.
Economic Survey of Luxembourg (survey page)