Because inflation has been weaker than expected, the central bank has appropriately halted the tightening that started at the end of 2018. Monetary policy is projected to remain accommodative and start tightening again at a slow and gradual pace as inflation approaches the 3% target and labour market slack shrinks and wages accelerate.
Fiscal policy is broadly appropriate with a gradual consolidation in line with the fiscal rule. Fiscal consolidation will take place by reducing spending growth and will be aided by recent improvements to the fiscal framework with the creation of an independent fiscal council. The planned tax reform will boost investment by simplifying the tax code, accelerating depreciation and speeding up VAT reimbursements. There is still room to increase revenues and make the tax mix more progressive and growth friendly, by raising revenues from environmental, property or personal income taxes while reducing corporate taxes.
Stronger and more inclusive growth will require ambitious reforms in other areas. A comprehensive agenda to bolster the business environment by streamlining regulations and licensing procedures will be key to lifting medium-term growth. Efficient public investment, particularly in education and training, innovation, and digital and transport infrastructure, should foster productivity and more inclusive growth. Boosting skills by enhancing lifelong learning and strengthening active labour market policies is needed to spread the benefits of digitalisation more widely. The pension reform currently under discussion in Congress is expected to raise pensions currently paid out through the publicly funded solidarity pillar, increase future pensions by raising mandatory contributions to privately managed individual accounts, while enhancing competition between pension fund administrators. Aligning the retirement age of men and women and linking it to life expectancy would further improve pension sustainability.
