POLITICS & INSTITUTIONS - ECONOMY

Lux to swing from surplus to deficit due to virus



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Recovering from the covid-19 crisis has blown a hole in Luxembourg’s balance sheet. Pierre Gramenga, the finance minister, outlined the numbers on Wednesday. Pictured: Pierre Gramegna is seen speaking during a press conference, 25 March 2020. Photo credit: SIP/Julien Warnand 

Government programmes to prop up Luxembourg’s economy in the wake of covid-19 will send both public spending and public debt soaring.

The country had been running surpluses since 2011. But Pierre Gramegna, the DP finance minister, stated on Wednesday:

“Luxembourg, like the rest of the world, is facing the greatest economic crisis since the end of the second world war. Thanks to the ambitious policy of fiscal consolidation carried out in recent years, the country has the budgetary means to face it. However, the effort required to restore confidence is of such magnitude that it will not come without an impact on the balanced budget and the level of public debt in the years to come.”

Economic support costs

According to the finance ministry, the cost of the country’s stimulus package has risen from the €8.8bn announced on 25 March to €10.4bn, or 17.5% of GDP, after the government approved additional support measures.

This includes, for example, the more than 26,000 employees at more than 5,700 organisations who are on the emergency parental leave programme. So far, this has added up to €124m of the €226m budgeted for the programme.

The finance ministry reported that more than 26,000 applications from 14,600 employers for the short-time scheme “have been handled” as of Wednesday (although the government did not specify how many employees were involved). €550m out of the budgeted €989m has been tapped so far.

The short-time working scheme will cost the equivalent of 1.7% of Luxembourg’s GDP, the ministry said. Delayed tax payments and social security contributions will tally up to another 7.7% of GDP. State guarantees on bank loans to firms will add a further 4.2% of GDP to public spending.

Public finances

The central government is expected to record a -€4.9bn deficit in 2020, or -8.3% of GDP. “Under the assumption of unchanged policies,” this will narrow to a -€2.2bn deficit in 2021, the finance ministry said. Municipal councils will collectively run a -€372 deficit in 2020 and -€150m shortfall in 2021.

The ministry stated:

“As a result, public debt could reach €17bn, or 28.7% of GDP in 2020 and rise to 29.6% in 2021, while remaining below the 30% limit set by the coalition agreement.”

The finance ministry presented the revised state budget to parliament on 29 April. The budget will subsequently be submitted to the European Commission as part of the EU’s Stability and Growth Pact. The ministry said the deficit and debt levels were in line with current European rules.

The government based its projections on economic estimates provided last week by Statec, the national statistics bureau.