This Tuesday, 13 May 2025, the state of the nation address will mark a key moment: Luc Frieden will give a progress report on government action and, above all, unveil his main priorities for the coming months. To mark the occasion, economist Jean-Baptiste Nivet of the Idea Fondation offers his analysis of the budgetary and fiscal policy pursued by Luxembourg’s executive since the start of his coalition’s mandate.

“The core of the government’s strategy is to relaunch the economic machine,” says Nivet. “The government has been very clear from the outset: it is banking on an economic policy focused on growth. This is reflected in a set of fiscal and budgetary measures designed to make the country more attractive and competitive and to stimulate economic activity.”

Paperjam: How would you assess the implementation of the commitments made by the government in the area of public finances and taxation?

Jean-Baptiste Nivet: The coalition agreement mentions four main axes. The government has respected them.

First, support for purchasing power. The SSM tax credit is a flagship measure for people on modest incomes, while personal tax cuts benefit the population as a whole. That said, the overall macroeconomic effect of these measures is difficult to assess at this stage, especially in the complex economic context we are going through.

The second axis is maintaining a high level of public investment. We are talking here about an effort of between 4.8% and 5% of GDP between now and 2025, compared with less than 4% on average between 2012 and 2018. This marks a return to the levels of the 2000s. The investments are spread across several sectors: infrastructure, health, education, environment, security… this is a major effort that demonstrates a clear commitment.

The third pillar is strengthening competitiveness, particularly in terms of taxation and attracting talent. The is a good example of this, as are the tax cuts decided.

Finally, in terms of housing, the aim is to create a more favourable framework for construction. In this structuring area, we are still in a crisis management rationale.

The coalition agreement remains fairly vague on public finances. Why is that?

It does not set any clear numerical targets. Unlike the previous government, which evoked a public debt ceiling of 30% of GDP, this coalition has not taken it up, even though it is still respecting this threshold for the time being, at least until 2028.

This can be explained by the European context: the rules for budgetary surveillance are currently being revised. New indicators and a new way of assessing fiscal sustainability are being considered. In this changing framework, it may seem premature to set targets that are too rigid at national level.

The level of public spending has remained high since the Covid crisis.

Jean-Baptiste Nivet, economist, Fondation Idea

What the agreement emphasises above all is the maintenance of the triple-A rating…

Yes, this is a symbolic priority. Luxembourg is one of the few countries still rated triple-A by the main agencies. This reflects confidence in the country’s financial solidity.

But this confidence is also based on implicit commitments. For example, if Luxembourg had not announced a pension reform, it is not certain that it would have kept its rating. This kind of signal is important to reassure the markets and the rating agencies.

How do you interpret the stated objective of a “responsible and sustainable” fiscal policy?

We need to distinguish between two timeframes marked by two negative dynamics. In the short term, the government seems to be aiming for a gradual reduction in the deficit inherited from the recent crises. In any case, it has not committed itself to achieving a surplus in three or four years’ time. It is clearly not focusing on the level of the deficit, but rather on GDP growth.

In the medium and long term, the main challenge remains the aging of the population, which affects both pensions and healthcare. The announced pension reform is therefore a key lever for preserving fiscal sustainability.

The recent Eurostat public finance statistics the 2024 financial year in Luxembourg with previous years. What do they say about the current budgetary direction?

Not much. These figures are too aggregated to draw any precise conclusions. The effects of recent decisions are drowned in the mass of expenditure and revenue. There have been cuts and additions to aid, cyclical effects… the signal is blurred.

We can see, however, that the level of public spending has remained high since the covid crisis. It rose from around 40% of GDP in 2016 to almost 47% in 2020, and projections remain at around 50% until 2028. This structural jump has taken hold for a long time.

In 2024, direct taxes--particularly taxes on wages and salaries-- unexpected additional revenue. Does this contradict the commitments to purchasing power?

Not necessarily. These increases do not necessarily come from households. In Luxembourg, it is a constant that a significant proportion of tax revenue comes from companies, sometimes in the form of exceptional revenue. So an overall increase in revenue does not necessarily mean increased pressure on the population. We need to analyse the sources of this revenue in more detail before drawing conclusions.

Luxembourg has historically allowed its population to benefit from its prosperity.

Jean-Baptiste Nivet, economist, Fondation Idea

With a surplus, could the state consider a direct “return” to citizens?

It’s possible, but it’s probably not the current priority. It is more likely that any surpluses will be used to extend existing schemes, or that they will be reinvested in structuring sectors such as housing, economic diversification or the ecological and digital transition.

That said, we need to put the issue in the Luxembourg context. Luxembourg is a country that has historically allowed its population to benefit from its prosperity, whether through social benefits, family policies or public services. The 2002 pension reform, which is extremely favourable to pensioners, is a good example of this. This sharing of wealth is a constant feature of the Luxembourg model, which also applies to cross-border commuters.

Guy Hoffmann the creation of a liquid predictability fund that would allow the state to intervene quickly in the event of a competitive shock or strategic need. What do you think?

It’s a defensible idea, especially in a small country exposed to rapid economic cycles. But in the current context, I would prefer to see direct investment in policies that strengthen the economy and limit the risks of crisis, rather than creating a reserve to react after the event.

Such a fund could also be misused. The example of France with the reduction in the price of petrol shows the risks: billions spent on a poorly targeted measure. When money is available, the temptation is great to finance a measure that is popular but not necessarily useful or effective. In my view, there will always be a more urgent priority than building up a reserve fund.

Do you agree with the recent on Luxembourg’s fiscal policy?

Overall, yes. The call for fiscal prudence is justified. The OECD is right to highlight future spending pressures: pensions, ecological transition, defence…

I also agree with the phasing out of energy subsidies, and the need to better target housing policies. Similarly, the idea of increasing the surcharge on vacant land to combat land retention seems relevant to me.

On the other hand, an increase in VAT, as suggested by the OECD, is difficult to reconcile with a policy of supporting the purchasing power of modest households.

What about pensions?

We share the diagnosis but not necessarily the solutions. The OECD in the statutory retirement age. For our part, indexing this age to future changes in life expectancy for people aged 60. In concrete terms, if this life expectancy evolves as expected, this would translate into around one extra month of work per year. This would enable a smoother adaptation.

This article in French.