Ultra loose monetary conditions are expected to last. The central bank reduced its policy interest rate to ‑0.75% in September 2019 to defend the peg to the euro. Mortgage interest rates have declined throughout 2019, prompting a refinancing boom among homeowners to reduce their debt costs. Household credit growth remains moderate, but could pick up if homeowners decide to raise additional debt. Reducing tax deductibility of interest expenses further would be welcome to remove incentives for excessive household balance sheet expansion. Following money laundering scandals, continued vigilance of the financial sector and updating of regulatory frameworks are also needed.
Fiscal policy was planned to stay close to budget balance during 2019-2021, which is appropriate. However, a sizeable budget surplus is expected in 2019, reflecting large and volatile revenues from recurrent taxation of interest, dividends and capital gains on pension savings. The government now plans to increase spending on public services in 2020, including on health and education, financed by an expected increase in fiscal space and a welcome withdrawal of reduced inheritance taxation for family‑owned businesses.
The government is committed to address climate change and reach ambitious greenhouse-gas-reduction targets. This should be pursued by implementing the most cost-efficient reductions first, taking into account implications for global emissions. Continued reform of health, education and active labour market policies should also focus on enhancing efficiency of public spending; for instance, by reducing student grants in tertiary education and relying more on student loans.
