The Idea Foundation undertook a stylistic exercise: to assess the level of public spending in Luxembourg and its effectiveness in relation to its neighbours, France, Belgium, Germany and the Netherlands. To do this, Idea’s economists chose two alternative indicators to the traditional spending to GDP ratio: firstly, the GNI ratio--i.e. spending on residents only as a proportion of gross national income--and secondly, the absolute level of spending on residents, expressed in euros per inhabitant and adjusted to neutralise the impact of higher ambient prices in Luxembourg, particularly in relation to property.

The first finding is that, in 2022, public spending adjusted for ‘border effects’ will have risen to 56% of GNI, compared with 51% for the four neighbouring countries. Expressed in euros, this public spending (calculated in purchasing power parity) amounted to €35,000 per inhabitant in Luxembourg in 2022, compared with €21,000 in the four neighbouring countries, i.e. 66% more.

Idea also calculated the amount of expenditure attributed to non-resident workers in 2022: €4.661bn, or 13.70% of total public spending. Of this total, social security accounts for €3.216bn and health expenditure for €850m.

Seven priority areas

In Luxembourg, seven areas account for the bulk of public spending: old age (11.2% of public spending, or €6,969 per resident), basic and secondary education (4.8% of public spending, or €3,038 per resident), transport (4.5% of public spending, or €2,797), sickness and disability insurance (4.3% of public spending, or €3,038), family (3.1% of public spending, or €1,941 per resident), medical products and equipment (2.1% of public spending, or €1,284 per resident) and general services (2.4% of public spending, or €1,492 per resident).

In all these categories, spending is more than half that of our neighbours. “A structural overspend,” said the Idea Foundation, a thinktank that is part of the Luxembourg Chamber of Commerce.

Debatable efficiency

On the expenditure side, Luxembourg appears to be ‘levitating’. The Idea Foundation looked at two specific areas: old age and education. These are two areas where sufficiently relevant measurement indicators exist.

In education, according to the latest results of the OECD’s Pisa study, which dates back to 2018, Luxembourg has significantly lower results than Denmark, Portugal or Slovenia for similar expenditure, and results that are practically identical to those of Spain or Italy, which spend significantly less. Compared with our neighbours, Luxembourg is also falling behind.

As far as old age is concerned, “the significantly higher age-related expenditure in Luxembourg cannot be explained by the current composition of the population”, noted Idea. The proportion of the population aged over 60 is 20.4% in Luxembourg, compared with 27.3% on average in neighbouring countries. But this high level of expenditure does nothing to reduce the risk of poverty among senior citizens.

In view of this, Idea pointed out that the ageing of the population should lead to an explosion in spending on old age. According to the European working group on demographic ageing, the associated expenditure will increase by 10.7 points of GDP in Luxembourg between 2022 and 2070 --including 8.3% for pensions--compared with 1.2 points of GDP for the eurozone.

Resolute and reasoned action needed

“Faced with these levels of spending and the disappointing results they have produced”, the Idea Foundation is advocating a wide-ranging review of public spending and its determinants, particularly in the seven areas identified as “structurally overspending”, and the adoption of various measures to control spending, such as “zero budgeting”--meaning that the budget envelopes for previous years are not automatically repeated--budgeting by objectives, or the adoption of performance indicators.

Originally published in French by and translated for Delano