Economy: Tax spouses separately, increase petrol and property taxes, and cap state spending and pension payments, an intergovernmental research outfit has told Luxembourg.
“Luxembourg is one of the most prosperous countries in the OECD”, but needs to reform its tax and pension systems, the policy group of 34 wealthier countries has said.
While “the economy, including its financial sector, has weathered the crisis well, growth has picked up, supported by sound macroeconomic policies,” the Grand Duchy ought to tighten its monitoring of risk in the funds sector and improve its “cluster” programme to diversify the economy. That is according to the “OECD Economic Survey of Luxembourg” for 2015, published Friday.
The Grand Duchy’s financial and insurance industry represents “about 27%” of value added to the economy “well above other OECD financial centres” like Switzerland (10.5%) and the UK (8.25%), the organisation said. While the financial sector has diversified its products and services, it still faces, among other challenges, evolving capital market regulations, increased banking transparency obligations and growing international competition.
Among the OECD’s recommendations: adopt “a comprehensive approach to risk assessment that accounts for financial linkages between banks and non-bank financial intermediaries, notably investment funds.”
Productivity, cluster cooperation
As for the economy as a whole, the OECD reported that Luxembourg’s total economic capacity (the sum of all the things it could potentially produce or supply if it had enough customers) “has slowed significantly in recent years, reflecting rising structural unemployment and declining” improvements in productivity.
It also found that: “Private spending on research and development (R&D) is low and falling, although public R&D spending has been boosted,” and that economic “clusters do not yet fully exploit potential benefits from cooperation between enterprises and research institutions.” Luxembourg should evaluate the effectiveness of public R&D spending and its cluster policies better, the organisation suggested. The Grand Duchy also should strengthen cooperation between firms, the University of Luxembourg and national and international research organisations.
“The secondary education system is hampered by high repetition rates of students,” the OECD concluded, recommending that Luxembourg grant individual secondary schools more autonomy.
“Female labour force participation, although it increased, is still low,” the think tank observed. Lower average tax rates for resident married couples “reduces work incentives for the spouse with the lower income”, it concluded. So Luxembourg’s “government should reduce disincentives for labour force participation of spouses and lone parents by charging health care contributions for each spouse individually.”
The OECD report said the Grand Duchy’s budget was in good shape overall. “The fiscal position is strong, and the main fiscal challenges are age-related spending, which is projected to rise by about 5.25 percentage points of GDP by 2030.”
However, the organisation urged Luxembourg to considering introducing a ceiling on public services spending, and to increase the retirement age and reduce the proportion that each person’s specific earnings history represents in pension payments.
To promote sustainable economic growth, the OECD advocated for exploring “the introduction of a system of congestion charges” for cars and for raising “taxes on petrol and diesel to gradually eliminate price differentials with neighbouring countries.”
“Procedures for granting construction permits should be speeded up and property taxes be raised by updating property values used as a tax base,” the OECD advocated.
The Paris-based OECD was founded in 1961 to promote trade and economic development. The think tank issues an economic report with policy proposals annually for each member country.
This year’s Luxembourg paper was presented Friday by OECD chief Angel Gurría and Pierre Gramegna, the Grand Duchy’s finance minister, during a press conference at the Abbaye de Neumünster.