Public finance

24.8% increase in tax revenue

‘Normalisation’ of public spending is underway, according to the finance minister Pierre Gramegna. Library picture: Mike Zenari

‘Normalisation’ of public spending is underway, according to the finance minister Pierre Gramegna. Library picture: Mike Zenari

In parliamentary hearings of the Finance and Budget Committee and the Committee for the Control of Budgetary Execution, the minister of finance, Pierre Gramegna, was able to present rising budgetary revenues and falling expenditure, developments that he interprets as a return to normal.

Pierre GramegnaPierre Gramegna (DP), reporting to MPs on the state's financial situation in the first half of 2021, had reason to be satisfied: "The figures observed on 30 June confirm that the normalisation of economic life in Luxembourg is well and truly underway, despite the uncertainties surrounding the evolution of the pandemic, which call for caution. Revenues collected by the state now amount to €11 billion, i.e., +24.8% more than in the first half of 2020, which was strongly marked by the pandemic. A comparison with the same period in 2019, a period not affected by the crisis, shows an increase of +10%, or +5% on an annual basis, which means that Luxembourg has managed to return to its pre-crisis revenue growth rate."

Luxembourg Inland Revenue (ACD) recorded an increase in revenue of 18.9% compared to the first half of 2020 to €5.2 billion. "The positive trend is mainly due to the good performance of the labour market, which contributes to the significant increase in revenue from the tax withheld on salaries and wages," the minister explained on 16 July.

Good performance of the labour market

A gain was also recorded in the revenue collected by the Registration Duties, Estates and VAT Authority (AED), which amounted to €3.3 billion. "Compared to the previous financial year, they increased by €871 million, or +35.9%. This represents an increase of +21.5% compared to 2019, which confirms the strong recovery in consumption following the lifting of most health restrictions in the first half of 2021."

Lastly, there was an increase in Customs and Excise Agency (ADA) revenue of 18.7%, to €852 million. Compared to the 2019 figures, the level remains practically stable, with an increase of only +0.7%. Stability explained by the ministry by the significant drop, compared to 2019, in fuel sales (-22% for diesel and -18% for petrol), "which contributes favourably to the achievement of the reduction targets for greenhouse gas emissions".

A decrease in expenditure

On the expenditure side, “although decreasing, it remains substantial”, said Gramegna.

In the first half of the year, state expenditure reached €10.9 billion, or 54% of the budget voted for 2021. Over the same period in 2020, the decrease is 4.5% "which can be explained in particular by the more limited use of certain aids, including partial unemployment, in the context of the economic recovery". However, expenditure remains 16% higher than in 2019.

In the end, the central government balance shows a surplus of €100 million. This is much better than the €2.1 billion deficit forecast in the 2021 Stability and Growth Programme. The state deficit as at 30 June 2021 amounts to €894 million against a deficit of €2.4 billion foreseen in the budget for the whole year. While  public debt stands at €17.9 billion, or 25.9% of GDP, down over one month thanks in particular to the early repayment of loans, to the tune of €443 million, made possible by the favourable evolution of the state's liquidity.

Caution is the order of the day

Gramegna refused to draw conclusions on the evolution of the 2021 budget year as a whole: "While the situation of public finances continues to improve, we must not lose sight of the fact that substantial expenditure is still planned, on the one hand to accompany companies on the road to recovery, and on the other hand to continue to invest in our infrastructures and to meet the challenges of the future. Furthermore, in the face of the rise of new variants of the virus, the extent of the recovery remains uncertain and caution is therefore called for. Finally, the government has just put in place an envelope of €50 million to repair the damage caused by the recent torrential rains, which is a natural disaster, by definition unbudgeted."