With exports growing strongly, and investment and consumption firming, economic activity is projected to strengthen in 2006. The investment pick-up reflects improved profits and higher capacity utilisation while consumption should eventually respond to a gradual improvement in labour market conditions. GDP is projected to grow by 1¾ per cent (working day adjusted), slightly above potential, this year and 1½ per cent next year. The general government deficit is likely to remain slightly above 3% of GDP this year, before falling to 2¼ per cent in 2007, as revenues are boosted by an increase in the value added tax. New structural reform measures have been legislated or are being prepared, notably cuts in tax expenditures, measures to reduce bureaucracy and some simplification in federal fiscal relations. These need to be embedded within a coherent policy framework, involving further reform in labour and product markets. Fiscal consolidation should be linked to public sector reform in areas such as the system of intergovernmental revenue allocation and the social security system.