Economic growth in 2016 and 2017 will remain anchored around 3%, supported by the strengthening cyclical position of the euro area and rebounding activity in the financial sector. Higher VAT rates and solid growth will boost inflation pressures, and the next round of backward-looking wage indexation expected in early 2016 could also boost inflation.
In order to better attain its fiscal targets, the government should introduce more effective spending control, including a spending ceiling for the general government, in the medium-term budgeting framework. The long-term sustainability of the pension system will also need to be addressed. Structural reforms should focus on increasing labour market inclusion by introducing separate income tax assessment of spouses, improving the availability of childcare, enhancing active labour market policies and reforming education to improve the attainment of students from disadvantaged backgrounds.
A key policy priority is to reduce carbon emissions, especially through further reforms of the transport sector, which accounts for more than half of the greenhouse gas emissions. Foreign drivers buy fuel in Luxembourg to take advantage of its relatively low taxes, which should be raised. Traffic flows are also influenced by other factors, such as the attractiveness of public transport for commuters. It is therefore important that Luxembourg increases the capacity of the public transport system, engaging in crossborder co-operation where appropriate.