The Chamber of Commerce has described the draft 2024 budget as “a transitional budget with relative uncertainty”. And there are many uncertainties, the main one being the trajectory of growth. , director general of the Chamber of Commerce, called the prospect of 2% growth “relatively optimistic” during a press conference on Monday.

Faced with sluggish growth and spending that is rising faster than revenues, with the resulting increase in debt “synonymous with a loss of room for manoeuvre”, Thelen said he was concerned about the economy’s ability to finance the measures needed to diversify the economy and thus cope with future shocks, to finance the dual digital and social transition, and to finance the social model. And therefore the sustainability of the Luxembourg model.

€7bn in personnel costs

Faced with the scissor effect of revenue growth of 7.1% and expenditure growth of 7.6%--even if the latter was lower than for the 2023 budget, at +11.5%--the Chamber of Commerce expressed doubts that the government will regain control over expenditure trends in general and personnel costs in particular. And it said it is “concerned” by the “staff remuneration” item of expenditure, which in 2024 will pass the €7bn mark--an increase of 10.2% on 2023--and reach €8.3bn in 2027, or 8.54% of GDP.

“In the 2015 budget, staff costs represented just 6.36% of GDP”, pointed out Anthony Villeneuve, an in-house economist who believes that “there can be no control of public spending without control of staff costs”. In his view, the solution lies in “an in-depth modernisation of the state, in particular through a major digitisation effort”.

“Investment in digitisation promises productivity and economic gains in the medium term”, explained Villeneuve. According to a study by the Chamber of Commerce, increased digitisation would enable the number of public sector employees to be stabilised at around 100,000 by 2030, “i.e., 30,000 fewer than if policy remained unchanged”.

Another “inflexible” spending trend is of concern to the Chamber of Commerce: the increase in military spending which, according to the budget documents, will rise by 73.4% in five years to reach €994m in 2028. “The Chamber of Commerce believes that the significant and unavoidable increase in Luxembourg’s defence spending must be accompanied by an economic strategy--no doubt a niche strategy--aimed in particular at ensuring that the billion in military spending that will soon be invested each year produces spin-offs, at least in part, in the national economy. The challenge is to turn this constrained expenditure into a source of opportunity for economic development”, stated the paper. The Chamber of Commerce called for the creation of a Defence Campus, which would be “a focal point for innovation and investment in new defence technologies”.

Revenues too volatile

On the revenue side, the 7.1% increase to €27.45bn “is supported in part by indexation, which has boosted payroll taxes”, as well as by increased revenues from corporation tax and VAT. The Chamber of Commerce called on the government to pay particular attention to unsustainable revenues from fuel and tobacco sales, which are likely to decline as the country moves towards the electrification of vehicles. In 2024, this will account for 7.39% of total central government revenue.

Expenditure rising faster than revenue means higher debt. Debt in itself is not considered negative. “Debt could be defensible if it were used exclusively to finance investments that support Luxembourg’s competitiveness and attractiveness. However, apart from the support measures adopted in the wake of the various crises, it has to be said that today it is the result of a rapid increase in current expenditure, particularly the most rigid of these (personnel costs, social transfers, etc.)”. The symbolic threshold of 30% debt to GDP could be exceeded if the economic situation worsens.

Positive signals for businesses

Does this budget address the concerns of businesses, businesses that are worried about the country’s competitiveness? This is the key question for the Chamber of Commerce.

The signals sent out are “positive”, it believes, highlighting those sent out in terms of talent through investment in education and training and stimulating the attraction of talent from third countries. Similarly, in terms of taxation, the ambition to gradually align tax rates with the OECD average is welcomed. The downside is the support for cost competitiveness, for which a reform of indexation would have been considered ideal.

On the question of the sustainability of the economic model, the chamber is surprised by some of the cuts, such as the reduction in spending on the development of the financial centre (€14m less, i.e., a 62.3% drop in resources) and the downward revision of the appropriations allocated to the Innovation Fund (Fonds de l’innovation). However, it was satisfied with the resources allocated to diversification, particularly in the logistics, space and health sectors, and for business parks.

A public pension system is not designed to guarantee such high pensions as we have today.

Carlo Thelen, managing director, Chamber of Commerce

As for the sustainability of the social model, with pension-related expenditure set to double to 18% of GDP by 2070, the Chamber of Commerce welcomed the government’s willingness “to launch a debate on the viability of the pension system”. Villeneuve insisted that the reform must not “use the increase in social security contributions as a lever”.

Thelen did not go into concrete measures, but referred to previous Chamber of Commerce has reports and statements. Such as the possibility of gradually changing the formula for calculating pensions, preserving the most modest pensions while only very gradually adjusting those that are higher. This proposal should enable savings of around 4.4% of GDP by 2052 and prevent any future imbalance in the system, according to the Chamber of Commerce’s economists. “We want the debate to start. We know very well that the current system is not sustainable. Action is urgently needed. A public pension system is not designed to guarantee such high pensions as we have today,” stated Thelen.

And in the face of rising expenditure on care insurance and health insurance--health insurance “considered to be structurally in deficit”--the Chamber of Commerce believes that “modernisation of the healthcare system is now inevitable. Preserving the quality of the healthcare system can only be guaranteed if its funding is secured over the long term.”

Stimulating the recovery

By stimulating demand, the government has affirmed its desire to act on purchasing power and consumption. This is a “good signal”, according to the Chamber of Commerce, which is also satisfied with the level of public investment planned between now and 2027, at around 4% of GDP per year, “a level close to the historical average”. It called for more targeted public investment to support the dual transition to digital and sustainable development.

While the business lobby group welcomed the investment in research and the deployment of artificial intelligence mentioned in the 2024 budget, it commented that “the text lacks ambition when it comes to investment in the digital transition”. As far as the environmental transition is concerned, it welcomed the increase in capital expenditure. The Chamber of Commerce is proposing a “super tax deduction” for business expenditure, and is advocating strengthening the climate loan for business renovation and making the CO2 tax progressive “in order to strengthen its incentive nature”.

Originally published in French by and translated for Delano