Economic growth is projected to slow to 1.3% in 2005 but to rise to 2.4% in 2006 as domestic demand and exports strengthen. Despite a pick up in employment growth in 2006, the unemployment rate should only ease back to around 8%. Headline inflation is likely to fall to 1.6% as the effects of higher energy prices pass, converging with the underlying rate.

Additional consolidation measures will be required to keep the budget in balance. In view of the economic costs of the already high tax burden, these should focus on expenditure restraint. Subsidies for early retirement should be progressively phased out to increase the employment rate for older workers.