The government agreement will attempt to revitalise the economy while lowering taxes. Photo: Romain Gamba/Maison Moderne

The government agreement will attempt to revitalise the economy while lowering taxes. Photo: Romain Gamba/Maison Moderne

On 16 November, Luc Frieden presented the broad outline and key measures of the now-signed coalition agreement. The financing of its measures depends on the health and competitiveness of the Luxembourg economy, however, which are not guaranteed.

So far, only a few measures are known about the government agreement; after the government council adopts it on 20 November (assuming it does), the details will be made public. MPs will then have two days to scrutinise it before a vote of confidence on 22 November.

From what we do know, however, it appears that an economic gamble is underway. In short, it is to be a virtuous circle: create more economic activity, which will make it possible to increase revenue while cutting taxes without sacrificing one-off aid to certain sectors or making future investments. Given simultaneous social, economic and environmental concerns, the government does not want to give the impression of sacrificing anything. Everything must go hand in hand.

Giving households and businesses more room to manoeuvre

On the social front, the first objective is to improve household purchasing power, which will involve cutting taxes.  (CSV) has announced a symbolic measure: a reduction in the tax burden on bracket 1A. The issue of the individualisation of taxation--meaning the abolishment of this tax bracket altogether--has widely been seen as a failure of the outgoing coalition, which has been criticised for its inability to carry out a comprehensive tax reform for individuals.

Its abolishment is now scheduled, but not before 2026. The prime minister wants to weigh up the impact of this reform on public finances before going ahead, in the name of maintaining the country’s AAA rating. For the same reason, the tax scale will not be automatically indexed to inflation. Such indexation is not ruled out, but it will be done on a case-by-case basis instead. To emphasise this desire to reduce the tax burden, the current tax scale will be reduced by four index brackets from 1 January. Frieden estimates that this will cost between €150m and €180m.

Neither austerity nor tax hikes

How will these cuts be financed? And how will all the other measures to support activity be financed, particularly in the housing sector--a top priority--where one-off support packages for the sector will be combined with tax cuts? Among the measures already announced are accelerated depreciation; reduced taxation on capital gains; an increase in the tax credit for those buying for housing; and an increase in the deductible amount of interest on property purchases.

But increasing direct taxation will not be a measure. Both inheritance tax and wealth tax are clearly excluded. “Not through austerity, either,” says Frieden, who is banking on the creation of new business to balance the books. Without giving any details, the CSV and DP want to make the economy “more competitive.” This will involve digitalisation as well as certain other tax cuts, including lowering the corporate tax rate to the OECD average.

Can a virtuous circle be created? The European Commission’s latest forecasts for the Luxembourg economy give no big cause for optimism: for 2023, GDP will fall by 0.6% before recovering in 2024 (+1.4%) and 2025 (+2%). Resorting to debt isn’t out of the question: the 30% mark has been openly floated. “What counts is the trajectory. But any recourse to debt will be to finance investments in the future,” say Frieden and  (DP).

This article in Paperjam. It has been translated and edited for Delano.

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