Finance minister Yuriko Backes (DP) and economy minister Franz Fayot (LSAP) on 27 April presented the PNR and PSC 2022-2026 to the Chamber of Deputies. This exercise, carried out annually, provides an overview of the economic and fiscal outlook of the country. EU member states have to submit their stability and growth plans to the European Commission with forecasts and multi-year budgets in mind. The national reform programme presents the government’s strategy towards a greener, more inclusive and more digitalised future.

This year's PSC exercise was largely shaped by the war in Ukraine, which broke out at the end of February and is already having an impact. “The PSC that I have presented today to the Chamber of Deputies for the year 2022 is set against a worrying and highly uncertain backdrop,” said the finance minister, adding: “Despite the clarification on the pandemic front, and following the recovery of public finances since last year, we are now facing a new crisis.”

Despite this, the finance minister is keen to reassure: “The PSC figures show, however, that Luxembourg will be able to meet the challenges.” Her ministry also explains that the economic recovery took hold at the end of 2020 and accelerated in 2021. In this sense, real GDP growth is estimated at +6.9% in 2021.

Deteriorating public finances

The update of the budgetary forecasts for the stability and growth plan for 2022, on the other hand, results in “a clearly deteriorated situation in the short term. The finance ministry informs that public revenues only increase by 4.3%, while public expenditure increases by 8.3%.”

From a surplus situation of +0.9% of GDP in 2021, the general government balance now moves to a deficit of -0.7%.

The balance sheet of public finances could get even worse. “The deterioration of the macroeconomic situation and the measures recently decided to mitigate the impact of inflationary pressures will thus have a significant impact on the state’s finances,” says the finance ministry. Following this trend, public debt would increase again, reaching 25.4% of GDP in 2022.

The government is counting on a gradual recovery of public finances “to achieve a balanced public administration balance by 2026,” with debt stabilising at around 26% of GDP.

1.4% growth

The effects of the war in Ukraine and its repercussions on energy and food prices also remain a reality. As a result, statistics office Statec has revised Luxembourg's growth outlook downwards by two percentage points, following the trend given by the International Monetary Fund. Growth is now estimated at 1.4% in 2022.

In the medium term, the economic outlook for Luxembourg's economic growth is expected to be between 2.5% and 3%. The shock of the war could affect consumer and business confidence. This is not without causing some volatility on the financial markets.

The outbreak of inflationary fever, which is not sparing Luxembourg, had led the government to convene the social partners in the framework of the tripartite in March. The government points out that an agreement was reached with the representatives of the UEL, the CGFP and the LCGB, concerning in particular the postponement of the index tranche initially planned for August 2022 to April 2023. The OGBL, however, refrained from signing the agreement.

5.2% inflation

Overall, the measures taken in the framework of the so-called Solidaritéitspak (solidarity package) are valued at around €750m, or 1% of GDP. Adding the state guarantees available to companies, Luxembourg is mobilising a total of €1.3bn, equivalent to 1.7% of GDP, to compensate for the immediate consequences of the crisis linked to the impact of the war in Ukraine.

Taking into account measures to prevent the crisis, the government estimates the inflation rate at 5.2% for 2022. This figure is expected to fall to 1.6% in 2023, “under the assumption of a stabilisation or even a reduction in oil prices.”

On the labour market, the finance ministry observes “a continuous fall in unemployment over the last few months”, with . This is the lowest rate for 15 years.

Not presented in the government’s communiqué, the issue of pensions is also likely to weigh on the public purse in the long term. As announced on 26 April by the General Inspectorate of Social Security (IGSS), pension expenditure is

A parliamentary debate will take place on 28 April. The PSC and the PNR will then be transmitted to the European Commission before the end of the month. It should be noted that here is currently a moratorium on European budgetary rules.

This story was first published in French on . It has been translated and edited for Delano.