Economic Policy Conclusions

Fiscal and economic policy is operating in an environment of elevated wage pressures. Inflation has eroded real purchasing power, hours worked are at a multi-decade high, and firms’ ability to pay wages is strengthening. In such a situation, there is a significant risk that demand-driven inflation could be added on top of cost-push inflation unless fiscal policy is used to dampen pressures.

Spending increases and tax cuts are poorly suited to this environment. Fiscal restraint is therefore warranted, both in controlling expenditure growth and in being cautious with tax reductions. For example, direct business subsidies or corporate tax relief would further strengthen firms’ wage-paying capacity, which could amplify wage inflation.

At the same time, welfare and growth considerations must be maintained. Rising electricity prices, for instance, risk pushing many households into unsustainable financial situations, as energy costs can be disproportionately large relative to income. Well-targeted support for the most vulnerable groups can be implemented without significantly increasing inflationary pressure or public debt. Additional investments are also needed in defence capability, cybersecurity, and security of supply.

In the long term, economic growth fundamentals must be safeguarded, not least because growth improves the structural fiscal balance. This requires continued investment in education and innovation. In R&D policy, emphasis should increasingly be placed on directing technological development towards environmentally sustainable technologies and basic research.

Wage pressures have intensified. Wage growth is accelerating both through higher negotiated settlements and wage drift. This does not, at least in the short term, threaten the previously favourable employment trend. The main risk arises if high wage agreements are locked in for an extended period while economic conditions turn out significantly weaker than expected. In such a scenario, labour markets could experience disruptions similar to those following the 2008 financial crisis. This risk should be widely recognised, as correcting such imbalances would again require several years of difficult adjustment. (AI translation)

• Publication in PDF-format