It also found that Luxembourg underperforms in terms of startups and entrepreneurship.
Growth should be more resilient and green
The OECD report suggests introducing additional macro-prudential measures, such as limits to loan-to-value or loan-to-income ratios, because domestic banks are exposed to high household indebtedness and increasing housing prices.
It also recommends reforming land planning, increasing taxation of non-used constructible land, and imposing cross-border railway connections and transport infrastructure.
The financial sector is still the main driver of the economy, representing 28% of total value added growth and 10% of employment in 2015.
The report states that:
“Analysis of the linkages between banks and investment funds should be continued, both at the national level and within the European Systemic Risk Board. The national supervisory authorities should develop further the capacity to undertake regular system-wide stress tests focusing on fund-bank linkages, consider publishing their results and co-operate in developing further policy measures, if needed.”
“Revenues from recurrent property taxes amounted only to 0.1% of GDP in 2014, compared to 1.4% in the euro area (European Commission, 2016a), as they are often based on obsolete valuations that do not reflect current market values. The ongoing elimination of special tax regimes, such as the phasing-out in 2016 of the patent box regime, following the international agreement on the “nexus approach” that uses expenditure as a proxy for real activity and allows a taxpayer to benefit from a preferential regime only to the extent of the incurred qualifying expenditures (OECD, 2016b), would similarly imply tax base broadening.”
Better skills for more inclusive growth
Education and lifelong learning is another issue raised in the report. It states that secondary education “involves grouping pupils by ability at an early age” and features high rates of grade repetition. It recommends providing earlier individualised support to students, introducing differentiated teaching and improving mobility between education programmes.
For lifelong learning, the OECD report suggests that access should be eased for adults who are not highly educated by expanding the study leave. The report also proposes to adjust the tax and benefit system to increase incentives to work for low-skilled youth, older workers and second earners.
The report states that, while the grand duchy benefits from immigrants, challenges remain. Especially people from non-EU countries are more likely to be unemployed.
“As language proficiency is a key precondition for successful integration, public supply of language courses should be stepped up further. To reduce employment segmentation, access to public sector jobs should be improved. Education reforms seek to make schools more equitable for the children of immigrants, but challenges remain. Equality between men and women is being promoted by easing access to childcare and making taxation more gender neutral.”
The social perception of entrepreneurs in Luxembourg is relatively low: compared to a EU average of 56%, only 45% of Luxembourg residents regard entrepreneurship as a desirable career choice, the report notes.
“The share of entrepreneurs and the positive perception of entrepreneurship are higher among immigrants, especially first-generation immigrants. Entrepreneurship is not the preferred career choice in Luxembourg, as can be seen from the low share of self-employed and the enterprise birth rate that is lagging the best EU performers.”
The high costs of insolvency procedures and access to credit are two factors which the OECD has identified in its report for this lack of enthusiasm towards starting a company.