€900.2m: that’s how much more Luxembourg taxpayers paid to the Luxembourg Inland Revenue (Administration des contributions directes, ACD) last year, compared with the 2024 budget forecasts, said figures published in January by the finance ministry. The result: “a marked improvement in the central government balance,” from a deficit of €630m at the end of 2023 to “a provisional surplus of €317m” at the end of 2024, according to this January communication.
At a time when the government will probably have to borrow money again to fund pensions and defence, the value of this windfall is obvious. At the end of April, issued in April 2020. Remarkably, contrary to usual practice, this repayment was made without a bond issue: the funds came from cash available at the treasury at the time.
What may be disturbing is the finding that taxpayers have paid more to the state than expected... at the very time when the government intends to restore purchasing power to the population. See, for example, by finance minister (CSV) as part of the “Entlaaschtungs-Pak.” There is also something disconcerting about the state’s inability to provide more reliable forecasts of its tax revenues. Isn’t governing about forecasting?
“A forecast is by nature inaccurate because it contains uncertainty”
When questioned, the ACD first recalls that “a forecast is by nature inaccurate because it contains uncertainty. This uncertainty stems from the complexity and variability of the systems studied, in this case financial markets and the economy.”
It then explains that “the overperformance of tax revenues in 2024 compared to budget forecasts is mainly due to two types of taxes: corporate income tax (IRC) and withholding tax on capital income (IRCAP). For IRC, this item exceeded forecasts by approximately €700m; for IRCAP, the overshoot amounts to some €240m.”
Very volatile levies
Several elements are responsible for this development, according to the tax authority: “Regarding IRC, the observed increase in revenues is mainly due to the good performance of the financial sector linked to rising interest rates [until the European Central Bank began a cycle of rate cuts in June 2024, editor’s note]. The rapid increase in interest rates led to sharp increases in income and profits. However, at the time of preparing forecasts for 2024, during 2023, this series of consecutive interest rate increases over a relatively short period could not be fully anticipated and taken into account by the Luxembourg Inland Revenue. Additionally, a taxpayer who realised exceptionally high profits during the covid-19 pandemic was taxed on these profits in 2024.”
“Regarding IRCAP, this is a very volatile tax characterised by a very high concentration. This means that only a few taxpayers are responsible for a significant portion of the taxes collected for this type of tax. A taxpayer’s decision whether or not to pay dividends and, consequently, to pay the withholding tax can have a significant impact on the total taxes collected. These behavioural effects are difficult to anticipate with certainty,” highlights the ACD.
More taxpayers... and salaries
In addition to the exceptional increases in IRC (+34.1% year-on-year) and IRCAP (+32.8%), the finance ministry also attributes the surprise surplus of 2024 to an increase in withholding tax on salaries and wages (+8.9%), despite the adjustment of four indexed brackets on the income tax scale on 1 January 2024.
As for the increase in revenue from withholding tax on wages and salaries in 2024, it can be explained by several factors, said the ministry. “On one hand, employment grew last year by 1.1%, which translated into an increase in the number of taxpayers. Second, the wage bill was particularly high, notably because of the three increments applied in 2023, the full effect of which did not materialise until 2024. Lastly, the scale of the increase observed in 2024 was accentuated by a base effect: revenues in 2023 were exceptionally low due to the introduction of temporary tax credits (energy tax credit and business cycle tax credit).”
It should be noted that revenue from local authorities continued to grow in the first quarter of 2025, driven by the financial sector and a calendar effect linked to advance payments. In the first quarter of 2025, as far as personal income tax is concerned, “the trend remains in line with the budget forecasts. The trend can be explained in particular by the additional adjustment to the tax scale, which had a moderating effect on revenue,” the ministry noted.
Employment trends remain a key indicator for Luxembourg.
This information seems to “support the vision of a successful financial centre over the past two years, while we await the results for 2025,” commented Fondation Idea economist Jean-Baptiste Nivet. “In terms of personal taxation, if the slowdown in employment growth continues in the coming years, we can expect a decline in the growth momentum of income tax revenues. In this respect, the trend in employment remains a key indicator for Luxembourg.”
As for the €900m gap between forecasts and reality in terms of direct contributions, this refers to “a frequent underestimation bias,” said Nivet. “We can also see that a significant gap was also apparent for the 2023 tax year.”
Modernising the procedure
The Inspectorate General of Finance (IGF) would, however, like to improve the accuracy of state revenue and expenditure projections, which are regularly affected by one-off revenues after the budget has been voted. Questioned on this point, the finance ministry confirmed that work is underway. “The budget preparation procedure is in the process of being modernised. Thus, developments to better structure the management of information and gradually enhance the precision of the procedure and thus strengthen the sustainability of public finances and release margins for action to finance evolving priorities are planned in the preparation of the 2026 annual and 2025-2029 multi-year budgets.”
And to highlight an “important development”: the better integration of revenue forecasts into the budget procedure. “This is reflected in the perpetuation of moments of dialogue between the IGF on the one hand and the tax authorities (tax revenue), the state treasury, ministerial departments (non-tax revenue) and the Inspectorate General of Social Security (social contributions) on the other.”
This article was originally published in .