Although these tax cuts will also stimulate demand at a time when the economy is already growing strongly, they are unlikely to provoke overheating in view of the elastic labour supply and the high import content of consumer expenditure. In view of this risk, the authorities have commissioned a report on pension financing which will study the conditions for financing these commitments in the long term and examine whether it would be opportune to make certain modifications, such as placing greater reliance on private pension funds. While moving in this direction would entail transitional costs, it would enhance the long-term sustainability of fiscal policy in Luxembourg. Although fiscal policy is set to ease, the effects of this on growth are likely to be outweighed by slowing growth in export markets and an assumed moderate tightening in monetary conditions in the euro area. Inflation is likely to peak in 2000 at 3 per cent or so and, with the passing of the oil price shock and euro depreciation, to fall back to around 2 per cent by 2002.
Labour input is measured in hours.
Extremely rapid expansion in the finance sector underpins to a considerable extent the sustained high economic growth rates in Luxembourg since the mid-1980s. These developments suggest that the need for structural reform to enhance economic efficiency remains as pressing as ever, despite the high economic growth and low unemployment experienced since the mid-1980s.