What does the “responsible and sustainable” fiscal policy--the one promised by the Frieden government on its arrival at the end of 2023--look like? As soon as the new centre-right coalition took office, it distinguished itself on the fiscal front. Amongst the measures effective in 2024, there are the adaptation of the personal income tax scale (IRPP) and the “housing package.”
The recent Eurostat public finance statistics make it possible to compare the 2024 financial year in Luxembourg with previous years. Interestingly, it’s evident that there has been no break in the government’s approach. Julien Pénasse, professor of finance at the University of Luxembourg, spoke to Paperjam about the national statistics between 2019 and 2024. “It feels like a very smooth transition. There are different budget choices, there is a reorientation of priorities, but with a constant budget. For me, there is no turning point.”
“When you look at the Luxembourg public balance as a percentage of GDP, my first impression is that the deficits and surpluses remain close to balance overall,” says the economist.
He refers to last year’s surplus as “not the result of a political choice, but a surprise.” While in 2023 Luxembourg had a borrowing requirement of €640m (-0.8% of GDP), the trend was reversed in 2024, with a surplus of €888m (1% of GDP). This result far exceeds the forecasts in the draft 2025 budget.
This budgetary surprise is explained by an unexpected rise in tax revenues. According to the finance ministry, the Luxembourg Inland Revenue (ACD) collected €14.5bn in 2024, up 15% on the previous year. In a recent opinion, the Central Bank of Luxembourg (BCL) notes that at the end of September 2024, "on the revenue side, the very strong increase is driven by current income taxes (+18.4%), due in particular to the high amounts collected in 2024 from corporate income tax and the tax on wages and salaries."
"Cash-based data for the current state revenue situation as of September 30, 2024, show particularly strong growth in corporate income tax (+42% between September 2023 and September 2024), which is likely to be explained in particular by a significant use of tax balances from previous years. As for tax revenues on wages and salaries, they experienced a growth of 10.9% between September 2023 and September 2024, despite the adaptation of the income tax scale to four index brackets since January 1, 2024,” the BCL further notes.
There are other elements of continuity. Public spending, which increased significantly over the 2019-2024 period as a result of crisis measures and structural factors (wage bill, social protection), remained at a high level in 2024. The government’s gross debt has continued to rise, from €20.3bn to €22.7bn in one year. The debt ratio reached 26.3% of GDP, also on the rise (but still well below the 60% set by the EU).
The finance professor points out that “public debt has increased only moderately, in a context of sufficient growth to maintain a small structural deficit.” He also observes a form of continuity in the management of public debt: “It seems implicit that fiscal responsibility will remain the order of the day. This goes back to the question of the triple-A rating, which is a kind of ‘treasure’ for the country, something that nobody wants to risk. The markets want the rating to be triple-A, but they also want it to remain triple-A.”
OECD urges caution
The BCL considers the debt ratio to be sustainable, with “a growth rate sufficient to finance a structural deficit given the level of debt.” It even forecasts a fall in this ratio between 2026 and 2028. However, according to the budget projections, the debt burden is set to double: from €264m in 2024 to €551m in 2028. The Treasury explains that “the 0-rate loans issued during the crisis years are gradually coming to maturity and will have to be refinanced at necessarily higher rates.”
There is nothing alarming in the eyes of Pénasse: “These projections incorporate current market expectations regarding the evolution of the yield curve. For me, this is a prudent approach insofar as these expectations generally include a risk premium.”
The Organisation for Economic Co-operation and Development (OECD) nonetheless, in April, to redouble their caution: “Luxembourg is very exposed to global economic shocks. In addition, spending pressures linked to the ecological transition, demographic ageing and defence are increasing. In the short term, the priority should be to rebuild budgetary room for manoeuvre, in particular by phasing out energy subsidies in their entirety.”
The rating agencies [do not seem to be] giving excessive weight to pension risk.
Of course, the Frieden government’s record on public finances will largely be judged by its ability to deliver pension reform. Old-age pensions, which accounted for 9.7% of GDP in 2022, remain the main source of upward pressure on social spending in the years ahead, according to the BCL.
“Pensions are implicit commitments,” says Pénasse. “It’s not public debt in the strict sense, but it looks like it because the state undertakes to finance if necessary. In a way, we should also have confidence in the rating agencies: if they maintain Luxembourg’s triple-A rating, it is because they are relying on solid fundamentals and are not giving excessive weight to the risk associated with pensions--or, at least, they believe that the government still has room for manoeuvre.”
Manoeuvres like raising the retirement age, , stressing that “long-term debt stabilisation will require comprehensive pension reform.”
This article in French.