Monetary conditions are expansionary due to the hard peg to the euro, and rising public investment is estimated to have provided a positive impulse to growth in 2019 due to one-off expenditures on the infrastructure network and military equipment. Fiscal buffers should be adequate to deal with a deeper‑than‑expected slowdown given that public debt is low and the government plans to be close to a budget balance over 2020-21. It will be important not to underspend on the capital side and to increase public investment by more than currently planned if growth is not as strong as expected. Improving the effectiveness of government spending, particularly on education, health and pensions, will be critical to increasing potential growth, particularly given the rapidly ageing population.
High emigration and an ageing resident population have led to a shrinking labour force, which has worsened labour shortages and skills mismatches, and contributed to rapidly increasing real wages. While recent wage growth has been associated with a rising labour force, the working-age population is due to continue to shrink by about 1% a year. A critical policy agenda is to implement labour and social reforms to support increased integration in the labour force of left-behind groups: women, the elderly, the young and minorities. Reversing the slowdown in labour productivity growth will also be key to compensate for demographic developments. This will require broad structural reforms, ranging from improving skills to strengthening the environment for investment, competition and innovation.
