Fiscal Policy Issues

Fiscal policy faces considerable challenges in the short and medium term. The Stability Programme envisages achieving budget balance by 2008, requiring 4% of GDP expenditure cuts, which are not yet fully specified. Government debt is relatively high and significant ageing-related spending pressures will remain ahead. A medium-term budgeting framework is missing and fiscal-sustainability calculations are not available. The tax system is complicated and rates are high. The government introduced a major pension reform in two steps and is streamlining public administration on many fronts. Tax reform reduced corporate tax rates and the tax burden for households. Further reforms should primarily aim for making the government sector more efficient and improve budgeting procedures, make public administration reform more effective, complete pension reform, start with disability benefit reforms and reduce distortions of the tax system.