The Bettel government had structural tax reform as a top priority, and such a reform was indeed launched in September 2019. The idea was to put the individualisation of personal taxation at the heart of the project, but also to integrate the issues of housing and sustainable development.
Since then, however, the Covid-19 and Ukrainian crises have pushed these concerns into the background.
In May 2021, then-finance minister (DP) postponed the reform until the end of 2023. In other words, after the general election. “Crisis management takes precedence over all other projects,” said the government at the time, arguing that there was no room for manoeuvre to launch the project. This position was reiterated during the election campaign by (DP), who replaced Gramegna as finance minister.
A reform “made in OECD”
The new government has adopted the principle of individualising taxation for private individuals and a single tax class. This was a strong demand from the public. But reform ambitions have changed focus. In accordance with the coalition agreement, the government commissioned the Organisation for Economic Co-operation and Development (OECD) to carry out a study of public finance management in Luxembourg with the aim of identifying ways of modernising budgeting practices and introducing budget management by objectives in Luxembourg. The OECD has submitted its report.
The report, if acted upon, would lead to a Copernican revolution of sorts for public finances, said (LSAP) when the report was presented to MPs on 3 February 2025. Fayot is chair of the Budget Implementation Committee, member of the Finance Committee of the Chamber of Deputies, and former economy minister.
Budget management by objectives
The aim is twofold: to identify ways of modernising budgeting practices and to introduce budget management by objectives. There are four areas of reform:
—The adoption of a new budgetary framework based on simple, credible and flexible rules, as well as on reliable forecasts, clear objectives and binding expenditure ceilings. The wording highlights the limits of the system. The OECD also recommends that responsibility for budget management should no longer rest solely with the finance ministry, but be shared with the relevant ministries.
—The introduction of a structured performance system to fully assess the effectiveness and efficiency of public spending. This would involve programme-based budgeting, regular spending reviews and better coordination of strategic initiatives involving several ministries.
—The modernisation of budgetary mechanisms. The OECD recommends a gradual transfer of financial control to ministries and a modulation of controls. It also recommends abolishing non-restrictive appropriations, which “significantly modify the voted budget,” in favour of a restrictive budgetary reserve, thus encouraging better forecasting of compulsory expenditure. At the same time, it advocates rationalising the use of special funds.
—The modernisation of budget documentation. This would involve “the use of digital tools to make data more accessible” as well as a systematic analysis of the needs of the various users of budget documents.
Reforms: a busy agenda
Without commenting on the fund, (CSV) announced that the issue of reforming budget texts would be examined in the first half of 2025. The emphasis will be on the principles of management by objectives and on taking account of GDP data. On this “new generation” budget framework, the minister hopes to find a majority that will go beyond that of the governing coalition.
The minister will also have to steer two other structural reforms: the revision of the amended law of 8 June 1999 on the state budget, accounting and treasury; the introduction of a single tax class, a reform promised for 2026; and the reform of property tax. For property tax, no timetable has yet been announced. (CSV) did mention tabling a bill by the end of 2024, but we are still waiting for it.
A fiscal stimulus policy
In terms of fiscal and budgetary policy, the government has opted for an economic recovery policy based on supporting household purchasing power: a high level of investment in infrastructure (demographics and dual digital and sustainable transition); strengthening the competitiveness of the economy in general and the financial centre in particular; and creating a favourable framework for housing construction that is better adapted to demand.
On 9 October 2024, Roth presented the Frieden government’s second budget, “the first budget to bear the signature of the coalition in power, a budget that combines triple-A and triple-S.” In terms of the main balances, central government revenues--made up of the administration in the strict sense of the term, local authorities and social security--are set to rise by 5.2% (versus 2024) to €29.6bn. Central government expenditure is expected to rise by only 4.5% to €30.9bn, leaving a deficit of €1.29bn. Debt is forecast to remain stable at 27.5% of GDP for 2025 and 26% for 2028. This is slightly worse than the 2024 budget passed in April--a transitional budget--where the debt reached 26.5% of GDP and with a deficit of €1.9bn.
Virtuous circle
The budget was approved by MPs on 16 December 2024. And it has meet the standards it sought, at least for the time being: on 24 January 2025 and 7 February 2025, S&P Global Ratings and Moody’s respectively confirmed the country’s triple-A rating, with a stable outlook from both agencies.
But the impact on growth by this fiscal policy has yet to be measured. Statec has estimated it at +2.5% for 2025 and +2.4% for 2026, underpinned by stronger domestic and foreign demand. The OECD predicts growth of 2.3% in 2025 and 2.4% in 2026, driven by private consumption, which will remain buoyant thanks to wage indexation, falling inflation and lower interest rates. Will this be enough to finance the government’s tax relief policy and to start a virtuous economic circle? Let’s find out next year.
Purchasing power: the government’s roadmap
On 27 November 2023, the government council gave its assent to the bill on the adjustment of the personal income tax scale to four index brackets from 1 January 2024. This measure was presented as a first step in a more general effort to reduce the tax burden on households. Bill 8343 was passed in December 2023.
On 17 July 2024, the government council approved the “Entlaaschtungs-Pak,” a new set of targeted tax measures designed to strengthen (on one hand) the purchasing power of households and (on the other) Luxembourg’s competitiveness. For households, the government adjusted the income tax scale by 2.5 index brackets from 1 January 2025. The text also provides for a total tax exemption for the non-qualified minimum social wage for all tax classes. Finally, up to a gross annual salary of €52,400, single-parent families will no longer pay tax for the 2025 tax year. That should be enough to tide us over until the single tax class is adopted.
The tax package also amends the participation bonus and the impatriate regime in order to make the country more attractive to talent. It introduces a new bonus for young employees, as well as an overtime tax credit for cross-border workers. Finally, the rate of corporation tax is reduced by one percentage point and actively managed ETFs are exempt from subscription tax from 2025. Bill 8414 was passed by MPs on 11 December 2024.
Other measures are included in the coalition agreement: greater deductibility of special expenses and extraordinary charges, and in particular supplementary old-age pensions; a tax allowance for people entering working life; simplification of the tax treatment of benefits in kind granted by companies to their employees; an increase in the threshold for exempt income received in connection with voluntary work; and encouragement for employees to participate in the capital of the companies that employ them.
As far as companies are concerned, two of the three promises made in the coalition agreement have been kept. These are the adjustment of the rate of corporation tax and municipal business tax to bring them closer to the average applicable in OECD countries. The 1% cut is a first step. Further reductions are not ruled out. Similarly, the new tax subsidy scheme for companies investing in sustainable and digital transition was passed on 18 December 2023. This text had been presented by the previous government in July 2023.
The last promise still to be kept is that relating to an “analysis” of the taxation applicable to the transfer of businesses in order to promote their sustainability.
17.4%
This is, according to finance minister Roth, the level of average reduction in the tax burden of Luxembourg households since 1 January 2024. Between 2023 and 2024, however, taxes on wages and salaries brought in €536.6m more than in 2023: some €6.569bn compared with €6.032bn. This is also 1.9% more than budgeted, an increase that the ministry attributes to the increase in the number of workers and residents subject to this tax.
The single tax class
The major tax reform promised in 2016 by the Bettel government has not taken place. The “structural" reform was due to be launched in September 2019, the idea being to emphasise the individualisation of personal taxation, which would guarantee a tax model that was neutral with regard to people’s lifestyles but that would also integrate the issues of housing and sustainable development. However, Covid-19 and the war in Ukraine have had their way with this project. Without talking about structural reform of the tax system, the new government is not abandoning the principle of a single tax class.
Roth has pledged to arrive at a system based on a single tax class with adjustments according to certain criteria, including the presence of children in a household. His aim is to put the issue on the table in 2026. In the meantime, the tax burden on class 1A single-parent families has been reduced. In other words, the tax burden has been reduced for taxpayers.
This article, , was written for edition of Paperjam magazine, published on 26 February 2025. The magazine’s content is produced exclusively for the magazine. It is published on the site to contribute to the full Paperjam archive.
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