As temporary support measures have expired, the fiscal stimulus has gradually petered out and, with the economy expanding faster than previously forecast, public finances have also recovered faster than expected. The accelerated pace of the economy provides an opportunity to reach a structurally adjusted fiscal balance at an earlier stage than expected. However, although the current fiscal policy framework may be relatively transparent and predictable, it does not seem to provide a sufficiently strong incentive to take advantage of unexpected fiscal windfalls in a counter-cyclical fashion. Consequently, monetary policy has been forced to carry a larger share of the burden of adjustment than would be desirable from the standpoint of an optimal policy mix. As inflation hits social groups differently, fiscal policy can be effectively used to support the most vulnerable groups in the economy. However, as the immediate impact of inflation on the fiscal balance is positive - as revenues are in practical terms price-indexed during times of high inflation - it is important that fiscal policy resist the temptation to allow increased revenues to feed into expenditures more than is necessary. From the standpoint of the monetary authorities, while providing support to vulnerable groups, the fiscal authorities could prioritise tightening the fiscal stance and take advantage of the strong economic growth to close the budget deficit. The war in Ukraine still poses significant risks to the global economy. However, as the global energy and food crisis is resolved and monetary and fiscal stimulus is withdrawn, the prospects for global disinflation improve.

Firstly, the expansion of the tourism sector and the associated construction boom have relied quite strongly on imported labour. Because of net migration the average rate of population growth since 2016 has been 2%, far higher than in other advanced countries. The rate of population growth has also been quite variable. To some extent, cyclical expansion has been facilitated by variability in the net migration rate rather than the domestic unemployment rate. Population growth fell into negative territory following the GFC, but has twice peaked at 3% during periods of tourism sector expansion, before and after the pandemic. Recovery of tourism causes net migration to rise  While the variability of net migration can be a useful shock absorber, helping to keep unemployment low and relatively stable during downturns and make the labour market less overheated during expansions, variable population growth creates problems in the housing market. The most recent surge in net migration has amplified the impact of COVID-related expenditure switching on housing prices. The demand for housing fluctuates in line with migration; however, the character-  istically inelastic supply of housing may become even more inflexible if volatile migration makes future housing demand more uncertain. As a result, what is gained in terms of a more flexible labour market may be lost due to a more volatile housing market. Variable net migration affects the housing market  Iceland’s tourism and construction sectors typically attract workers from other EEA countries during expansions.