The Court of Auditors (Cour des Comptes) on 26 November issued its opinion on the draft law on the state revenue and expenditure budget for 2025 and the draft law on multiannual financial programming for the period 2024-2028. The opinion deplores the tripling of the country’s debt since 2008 and, above all, the lack of “any strategy to rebalance the budget in the short and/or medium term.” “As a small, open economy, Luxembourg is particularly exposed to external shocks and must therefore have more budgetary room for manoeuvre than large, less vulnerable economies,” says the Court of Audit. In view of the increasing number of geopolitical and environmental crises, it notes that “it would be useful for the government to devise a proactive fiscal rebalancing strategy that would strengthen the resilience of public finances and, moreover, reserve recourse to debt for the financing of future-oriented investments promoting, in particular, the energy, socio-environmental and digital transition of our economy,”
The Court of Auditors notes that the financial guarantees granted by the state, amounting to 11.13% of GDP in 2023, could have a significant impact on the state’s financial situation if they were to be invoked.
Lack of figures
While the court does not criticise the Entlaaschtungs-Pak, “whose objective is to boost economic activity through tax relief,” it regrets the absence of a comprehensive quantification of the budgetary impact of the packages of measures adopted to limit price rises. It calls on the government to provide a more detailed quantified assessment when it submits its general government accounts and draft budgets.
It also questions the reduction in the rate of corporation tax (IRC) by one percentage point from 1 January 2025 in the name of strengthening the competitiveness of companies and the Luxembourg economy. In the absence of any figures for the impact of this measure, it casts doubt on the central assumption of tax policy that the economic growth induced by the tax cuts would offset the resulting loss of revenue. This criticism has already been voiced by the National Council of Public Finance (Conseil national des finances publiques, CNFP) in relation to the 2024 draft budget. “The positive effects of the tax cuts remain uncertain, while the financial impact on tax revenues and the state budget is indisputable.”
The final source of concern for the Court of Auditors is the importance of the financial sector in tax revenues, which “exposes the budget to a degree of volatility, depending on developments in the financial markets.”
Special funds under attack
In its opinion, the Court of Auditors also makes recommendations for improving the transparency and management of public finances. In its sights are the thirty-three special funds currently in existence, some of which it recommends reviewing their justification, reducing their number and integrating their expenditure into the state budget. “For the financial years 2024 to 2028, the expenditure of the special funds will regularly exceed their revenue. As a result, the level of financial assets in the special funds would fall from €2.97bn at the start of the 2024 financial year to €1.42bn at the end of the 2028 financial year,” the court said, suggesting that the expenditure programme for the special funds should be supplemented by legal authorisations and forecast project costs.
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The court also calls on the government, “in accordance with the recommendation of the Council of the European Union,” to take measures to combat aggressive tax planning, in particular by ensuring that outgoing payments are adequately taxed.
Insufficient green taxation
With regard to the promotion of green taxation, the Court of Auditors analysed the development of environmental taxes and their contribution to achieving the objectives of the National Energy and Climate Plan (PNEC). It found that revenues from environmental taxes remain modest in relation to GDP, and that Luxembourg is below the European average in this respect. “The court reiterates the recommendations made in its special report on the implementation of the Kyoto Protocol and in its opinion on the draft state budget for 2014 and 2020 in favour of promoting green taxation as a lever for achieving Luxembourg’s climate objectives by 2030,” states the opinion.
With regard to the 5.5% increase in excise duty on cigarettes and smoking tobacco from 1 January 2025, the court considers that “in view of the successive and substantial increases that have taken place in certain neighbouring countries to protect public health, this measure will be limited to bolstering state revenues without actually aiming to reduce demand. This increase is more of a one-off initiative than a coherent and integrated strategy aimed at achieving measurable medium-term objectives in the fight against smoking.” The Court of Auditors is of the opinion that the revenue from tobacco sales should be related to the health and social costs caused by smoking.
This article was originally published in .