Opinion of the CNFP

Macroeconomic and budget scenarios hold up, says watchdog

“The evolution is favourable and the budgetary balances, both European and Luxembourg, are respected”, Marc Wagener, Director of the CNFP, was satisfied on Monday 15 November 2021. (Photo: Romain Gamba/Maison Moderne)

“The evolution is favourable and the budgetary balances, both European and Luxembourg, are respected”, Marc Wagener, Director of the CNFP, was satisfied on Monday 15 November 2021. (Photo: Romain Gamba/Maison Moderne)

The macroeconomic developments are favourable and the budgetary balances are respected, the budget watchdog CNFP says in its assessment of the draft budget for 2022. It is more in the long term, with the increase in age-related costs, that risks appear.

“The macroeconomic and budgetary scenarios are consistent and rather favourable,” said Marc Wagener, director of the National Council for Public Finance (CNFP), on Monday, during the presentation of the evaluation of public finances, a few weeks after the presentation of the draft budget for 2022.

The Luxembourg economy was less affected than the euro zone as a whole by the covid-19 crisis. The forecast of a V-shaped economic recovery has been confirmed, and this even “rather more pronounced on the recovery side than on the deterioration side,” specifies the CNFP report.

V-shaped recovery

In 2020, Luxembourg experienced a recession of 1.8% of its GDP, followed by an estimated rebound in 2021 of 6% of GDP. Economic growth is then expected to reach 3.5% in 2022 and stabilise at around 2.6% in the medium term--almost double the forecast growth of the euro area (1.4%), but below the historical rate of 3.1% observed in Luxembourg between 1995 and 2020.

The forecasts in the draft law on multi-annual financial programming (LPFP) for the period 2021-2025 are thus practically identical to the forecasts for 2019-2023 made before the pandemic in the autumn of 2019 (in 2019, the GDP forecast for 2023 was €75,699m, it is now forecast at €75,340m).

Uncertainties remain

However, uncertainties remain: a resurgence of covid is always a threat, with its corollary of sanitary measures, and the evolution of inflation in the medium term will have to be closely observed.

As regards budgetary forecasts, after the turbulent years of 2020 and 2021, “a return to a normal situation is retained for the revenue and expenditure forecasts” from 2022 onwards, the CNFP report says. Even if the nominal balance of the general government should remain “in negative territory” in 2023 (-0.1% of GDP), it should then slowly improve to reach +0.3% in 2025.

Rising debt

As for the public debt, unsurprisingly, the general trend is upwards. Over the period 2020-2021, the increase is €4bn, or +3.5 points of GDP. The debt should then stabilise between 2022 and 2025 at around 26% or 27% of GDP. This is less of a deterioration than during the 2008 financial crisis: the debt grew by €8bn, or +14.3 percentage points of GDP, between 2007 and 2013.

In general, “the evolution is favourable”, according to Wagener. “Budgetary balances, both European and Luxembourg, are respected,” he says. Even if he recognises that it is more in the long term that difficulties could arise.

Risk concerning pensions

“We have a high risk regarding the costs of ageing, i.e. the expenses we have to incur to finance pensions, health care and long-term care insurance”, notes the director of the CNFP. This is due to demographics and the dynamism of the labour market: the new contingent of workers, whose numbers have exploded in recent decades, have paid a lot of money into pensions, but will in turn claim pension benefits in the future.

“In a 15 to 20 year perspective, this dynamic will be increasingly noticeable,” says Wagener. “We therefore want to draw attention to this not inconsiderable risk and convey the message that the sooner we start to counteract it, the less incisive measures we will have to take.”

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