Having slowed in the second half of 2004, the upswing should pick up again in 2005 once the effects of oil price increases begin to wane. Both foreign and private domestic demand remain robust so that employment growth is likely to pick up during 2005 and unemployment should fall. Productivity growth and continued wage moderation allow core inflation to remain low. Public finances are set to improve slowly, in part reflecting inclusion of a large capital transaction as revenue in the 2005 budget. The 2005 deficit may exceed government plans. Nevertheless, an improvement in government finances should follow from reforms in central government spending control and health care expenditure management. These reforms will require sustained efforts to change underlying incentives if good intentions are not to be undermined. Having shown that lower employers’ contributions can improve employment prospects, the government should seek to extend these and other labour market reforms. ...