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Economic growth is projected to stay robust at above 4% in 2017 and 2018, due to strong domestic demand and strengthening activity in the domestic financial sector, which will foster exports. Inflation is rising due to higher commodity prices and increasing wages, due to automatic wage indexation. Unemployment is falling, but, at 6%, the rate remains high.
Strong growth has created fiscal space, which is being used to reform and reduce corporate and personal income taxes. The reform has made the personal income tax more progressive and provided additional tax credits to single parents and low-income earners, making it easier for them to work while caring for young children. Financial and monetary conditions are accommodative, although persistently low interest rates may have contributed to large house price increases in recent years. The supervisory authorities should monitor the situation closely and implement additional macro-prudential measures, such as limits to loan-to-value or loan-to-income ratios, to decrease risks.
To reduce reliance on the financial industry and address the challenges of globalisation, the government has adopted a new long-term strategy focusing on digital technologies and renewable energy. This strategy is welcome and needs to be complemented by policy measures to enhance the supply of skills, such as improvements in the education system, in particular lifelong learning. A reorientation of labour market policies from supporting job creation towards training programmes for the unemployed would help workers who are displaced by economic changes to find new, good jobs.
Economic Survey of Luxembourg (survey page)