Monetary policy has been expansionary since the global financial crisis, and the reference rate has been negative since 2015, at around -0.75%. Low interest rates affect bank net interest margins as well as the returns of pension funds and life insurers. Part of banks’ sight deposits at the central bank are exempted from negative rates, reducing the burden on the banking sector; the threshold was raised in November. Lower returns lead to rising real estate exposures of financial institutions. House prices continue to outpace rents and income, and mortgage lending has picked up. Despite the recent tightening of bank self‑regulation on maximum loan-to-value ratios, a formal framework setting lending limits is needed, with enforcement on a comply-or-explain basis.
Fiscal expansion in 2020 will lower the budget surplus, as a corporate tax reform reduces tax revenues. Low public debt provides fiscal space to stimulate the economy if needed. However, population ageing will exert pressure on pension and health spending in the medium term. Equalising the statutory retirement age for both sexes at 65, and then gradually increasing it to 67 and linking it to life expectancy would support the pension system as well as growth and incomes. Shifting the tax mix towards value-added taxes and away from personal income taxes would reduce the exposure of government revenues to ageing. The planned cut in second earners’ income tax will lower work disincentives.
Skill shortages are growing, notably in IT-related fields, hampering firms’ expansion and the absorption of new technologies. Easing procedures for non-EU immigration would attenuate skill shortages. Promoting scientific and technical courses, particularly among women, would also add to supply in the medium term. Re-skilling and upgrading skills can reduce shortages and avoid workers being left behind in the digital transformation.
