## 1. Fiscal Accounts ## Source details **Canonical URL:** [1. Fiscal Accounts](https://www.imf.org/-/media/files/publications/cr/2024/english/1luxea2024002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1luxea2024002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1luxea2024002.pdf.json) --- ### A. Introduction - Luxembourg has a track record of prudent fiscal policy but fiscal performance has become less vigorous in recent years. - General government balance: - Average of 2.1 percent of GDP during 2000–09. - Average of 1.3 percent of GDP during 2010–19. - About ¾ percent of GDP during 2020–22 (accounting for discretionary measures related to the COVID and energy crises of 1.9 percent of GDP on average). - Fiscal deterioration drivers: - Slower growth of social contributions reducing surpluses of social security funds. - More persistent central government deficits, with a pick-up in public spending, notably current expenses. - COVID-19 response: revenues declined and health and social benefit spending increased. - Policy imperative: - Safeguard ample fiscal space to preserve AAA rating, given rising ageing costs and spending needs for green and digital transitions and NATO military spending goals. - Advice: recent revenue increases should not be assumed permanent; pursue budget-neutral tax reforms; limit compensation-of-employees growth; better target and increase efficiency of social programs; pursue early pension reform; consider a national framework to anchor fiscal policy. ### B. Drivers of Revenues and Expenditures — Revenues (overview) - Revenues in 2022: 43.6 percent of GDP, about 2 percentage points of GDP higher than 2010. - Revenue composition in 2022: - Taxes: 27.4 percent of GDP (+2 pps since 2010). - Social contributions: 12 percent of GDP (+0.4 pps since 2010). - Other revenues: 4.2 percent of GDP (-0.5 pps since 2010). - Main contributors to revenue increases since 2010: - Personal income tax (PIT): +3 pps of GDP, reaching 10.4 percent of GDP by 2022. - Other current taxes (including net wealth taxes): +0.6 pps of GDP. - Offsetting declines: corporate income tax (CIT) by 1 pps and taxes on products (VAT and excises) by 0.7 pps since 2010. ### Taxes and Social Contributions — Cross-country and structural notes - Luxembourg’s tax revenues as a share of GDP increased since 2010 but remain at the lower end of EU counterparts. - VAT: - Luxembourg VAT rate: 17 percent (below OECD average close to 20 percent). - Luxembourg relies less on VAT as a share of total revenues than some EU peers. - Decline in VAT revenues attributed to changes in tax regulations concerning cross-border electronics. - Property taxation: - Luxembourg relies more on property taxation than OECD average, including net wealth and taxes on financial transactions (e.g., registration tax). - For 2021, about three-quarter of taxes on property collected in Luxembourg related to recurrent taxes on net wealth; recurrent taxes on immovable property represented 0.1 percent of GDP. - OECD average: recurrent taxes on immovable property represent about 60 percent of taxes on property (1 percent of GDP). - Companies, not individuals, are subject to recurrent net wealth taxes in Luxembourg. - Note: Current valuation method for assessing land taxation is based on figures from the 1940s; reforming property taxation could help housing imbalances. ### Personal Income Taxation - PIT revenue growth drivers: - Strong employment and real wage growth. - Infrequent adjustments of income tax brackets. - PIT thresholds adjustments: - Adjusted in 2001, 2008, and 2009 by +17 percent, +6 percent, and +9 percent on average, respectively. - Policy changes: - Tax rates lowered in 2002 and again in 2017; tax credits increased. - Effect: - Growth in PIT revenue rebounded due to employment and wage growth and bracket drift, driving more taxpayers into higher tax brackets. - Average personal income tax rate gradually increased, particularly since 2017, with the most significant impact on single taxpayers without children. ### Corporate Income Taxation - Nominal combined corporate income tax rate: - Reduced from 37.45 percent in 2000 to 24.95 percent since 2019. - OECD average nominal combined rate: 23.6 percent. - CIT revenue trends: - CIT revenues as a share of GDP declined from around 8 percent of GDP in the early 2000s to around, on average, 4¾ percent in recent years. - Effective tax rates (METR and AETR) estimated to be lower than the nominal rate. - Past reductions in CIT nominal rates were not fully offset by attraction of new firms to maintain CIT shares of GDP. - Volatility and concentration: - CIT shows considerable volatility, partly due to collections of past years’ tax assessments and timing lags between filings and final assessments. - CIT collections can lag gross operating surplus by a couple of years, weakening short-term correlation with economic activity. - CIT revenues are concentrated: about three-quarters of CIT revenues come from the financial sector and from few taxpayers, contributing to volatility. - Composition of corporate taxes (components included): - Corporation tax (Impôt sur le revenu des collectivités). - Supplementary solidarity corporation tax (Impôt de solidarité sur le revenu des collectivités). - Municipal business tax (Impôt commercial communal). - Real estate levy (Prélèvement Immobilier). - Policy note: - Using payments based on estimated current-year income rather than previous-year actuals can strengthen automatic stabilizers. ### Expenditures — Overview - Public spending trends: - Public expenditures reached 43.9 percent of GDP in 2022, up from an average around 41 percent of GDP during 2010–15. - Upward trend since mid–2010s, driven mainly by social benefits and compensation of public employees. - Composition of spending in 2022: - Social benefits: 18.8 percent of GDP. - Compensation of employees: 10.2 percent of GDP. - Contributors to expenditure growth (2010–2022): - Social benefits: +0.8 pps of GDP. - Compensation of employees: +0.8 pps of GDP. - Other spending trends: - Declines offsetting pressures: interest payments and investments fell by 0.3 pps and 0.5 pps of GDP, respectively, during the lower interest rate period in the 2010s–15s. - Structure: - About half of public spending is undertaken by the central government and around 40 percent through social security. - Spending shares (2010–21) above OECD average for social protection, education, and health: Luxembourg share 66 percent vs OECD 62 percent (for combined categories over period). ### Social Protection - Role and trends: - Social protection spending grew faster than GDP since the global financial crisis. - Luxembourg spends less in social protection as percent of GDP than EU average, helped by a relatively lower dependency ratio. - Main programs: pensions (old age and disability), family benefits, unemployment benefits. - Impact on inequality: - Social protection has contributed to reducing income inequality, with relative improvements in the Gini coefficient. - Targeting and efficiency: - Spending is largely untargeted; scope to strengthen efficiency through better targeting. - Trade-offs noted between broader coverage, fiscal costs, and work incentives; a strong progressive tax system can complement untargeted benefits. - Family and unemployment benefits: - Luxembourg among EU countries that spend the most on family support; programs remain largely untargeted. - Combined tax provisions and family benefits can reduce the tax wedge on labor income for a married worker with children by as much as 20 pps compared to the average single worker. - Unemployment benefits are relatively generous despite strict activation requirements. - OECD-estimated net unemployment replacement rate in Luxembourg: 86 percent by the 12th month of unemployment for the average wage earner. - OECD average replacement rate: 36–45 percent. - Activation strictness: Luxembourg rates fourth in the OECD strictness score (scale 1–5). ### Health - NHF (National Health Fund) spending: - NHF spending related to Assurance maladie-maternité (AMM) reached 5.9 percent of GDP in 2020, up close to 1 pp of GDP from the previous year. - NHF expenditures declined to 5.1 percent of GDP in 2022 as exceptional pandemic leave policies were reversed, but remained somewhat above pre-pandemic levels. - Drivers of health spending increases: - Pandemic-related cash benefit payments accounted for two-thirds of the 2020 increase. - Structural drivers: hospital care spending growth since 2018, driven by higher fixed costs, notably personnel, and increased activity. - Hospital staffing increases reflect collective labor agreements and more staff allocated to higher activity. - Health system capacity and outcomes: - Low share of unmet healthcare needs; limited out-of-pocket spending. - Number of beds in line with OECD average. - Number of doctors per population below the OECD average; number of practicing nurses substantially above. - Health outcomes favorable: life expectancy above EU average and low mortality rates. - Coverage and pressures: - Number of protected individuals: over 900,000 in 2021 against a population of about 630,000—making per-capita spending comparisons more favorable when accounting for protected individuals. - Ageing population and approaching retirement of health professionals will put upward pressure on health expenditures. - Recruitment needs: expected increase of 5,000 professionals in the next six years. ### Education: returns, costs, and efficiency - Growth of education spending has been outpacing growth of GDP since 2017. - Considerable returns on education: those without a tertiary degree have relatively higher inactivity rates and represent a lower share of high-income earners, according to the OECD, than in the average member country. - Luxembourg appears to have the highest spending per capita among peers adjusted for purchasing power parity (PPP), especially for tertiary education, including costs for non-core services. - Student-to-teacher ratios are among the lowest in the OECD from pre-primary to tertiary education. - The cumulative costs per student are substantially higher for Luxembourg than for other countries with similar educational achievements as measured by the PISA scores. ### Recent fiscal developments, outlook, and risks Findings for 2023 - Expenditures grew strongly, by 3.9 pps of GDP to 47.8 percent of GDP, reaching its highest level yet. - Growth in expenditures was largely fueled by a significant rise in compensation of employees and social benefits rose by about 1 pp. - Measures aimed at mitigating the energy and cost of living crisis, including energy subsidies, amounted to about 0.7 pps of GDP. - Cyclical factors are estimated to explain about 0.5 pps of GDP in expenditures in 2023. - Revenue collection rose by 2.8 pps of GDP to 46.4 percent of GDP in 2023, despite revenue losses from cost-of-living support initiatives. - Foregone revenues from measures such as a temporary cut of the VAT rate by 1 pp and tax credits were estimated at about 1 pp of GDP in 2023 (an additional 0.5 pp from 2022). - PIT grew strongly by 1.2 pps of GDP reflecting wage growth, boosted by three rounds of indexation. - CIT revenue increase of 0.6 pps of GDP in 2023 is unlikely to be permanent, as it was mainly due to exceptional banking sector profitability and collection related to previous fiscal years. Outlook and downside risks - Staff forecast public expenditures to rise to about 50 percent of GDP by 2029, driven by: - increases in spending in social benefits (+2 pps of GDP) - public investment (+0.5 pps of GDP), including on climate and digital transformation, and housing - Defense spending is expected to double in the next four years to 1.5 percent of GNI (1 percent of GDP). - Revenues are forecasted to continue to rise to near 49 percent of GDP, driven by the increase in income tax revenues and, to a lesser extent, social contributions. - Revenue growth will be constrained by announced and intended policy changes to lighten the tax burden, including: - adjustment of the tax brackets for four wage indexations in 2024 (about 120 million euros each) - subsequent intended regular adjustments of income tax brackets - increased tax credit for registration fees - deductibility of interest payments - reduction of CIT rate by 1 percent in 2025 (as a first step) - Fiscal risks are skewed to the downside: faster convergence to the NATO defense objective, uncertain corporate tax performance, unclear combined impact of lowering of CIT rates and implementation of Pillar II, and further tax bracket adjustments could worsen fiscal balances. - Public debt is projected by staff to increase by 6–7 percentage points of GDP by 2029 under announced policies. ### Pension system, ageing, and health spending Pensions - The general pension scheme’s reserves are comfortable (about 32 percent of GDP), but long-term sustainability is not guaranteed. - Despite the 2012 pension reform, options for early retirement, generous benefits, and adverse demographics will translate into rapidly increasing ageing costs over the longer term. - Low old age dependency ratio supported surpluses in past decades, but it is expected to catch up with the EU average over the long term. - Pension expenditures are projected to rise to about 18 percent of GDP by 2070, almost double the 2022 levels. - Existing institutional safeguards and stabilizers for the general scheme would be triggered by 2028, when annual contributions are forecasted to no longer cover annual pension expenditures. - Even accounting for the modulation of the indexation, the pension system would remain in a deficit, with reserves forecasted to fall below the legal threshold of 1.5 the annual pension expenditure by 2042. Health spending - The NHF is financed through contributions by employers and insured on a contributory income capped at 5 times the minimum wage and financing by the central government equivalent to 40 percent of all contributions. - Expected increases in number of personnel, wages, and number of procedures will put pressure on health expenditures; the NHF is expected to run a small deficit in the short-term. - NHF reserves could fall below the legal requirement of 10 percent of expenditures in the next two years. - Projections assume a fixed allocation for hospital care, a more limited increase in average costs (much lower than in the past two years), and direct financing by the central government of certain expenditures such as on-call doctors. ### Options to safeguard Luxembourg’s ample fiscal space Revenue measures - Carry out more frequent adjustments of the tax brackets for inflation in a budget-neutral manner to protect those in the bottom of the distribution. - Avoid implementing retroactive changes to the tax schedule without compensatory measures. - Recognize that intended reduction of the CIT rate could potentially result in lower CIT revenues as a share of GDP. - Improve CIT collection based on estimated taxable income and shorten delays for collecting taxes related to previous fiscal years to reduce volatility of CIT revenues. - Reform property taxation relying on updated land and property titles, with higher taxes to vacant properties to strengthen fiscal revenues and reduce housing market imbalances. - Streamline tax expenditures to address equity issues and economic distortions (example: interest rate deductibility incentivizing real estate investments could impact housing affordability). Expenditure measures - Moderate the pace of growth in spending while facing pressures from ageing costs, defense requirements, and investment needs for digital and climate transition. - Reassess plans for increased recruitment to contain spending pressures, including compensation of employees. - On education, reconsider further increases given already high teacher-to-student ratios. - In the health sector, combine macro-level actions (e.g., implementing caps in spending) with micro-level strategies (e.g., assessing priorities and incentives, reducing hospital visits for non-urgent care). - Consider increasing contribution rates or the cap on contributory income. - Improve efficiency of social benefits by better targeting and reassessing benefits while considering labor supply impacts. - Early pension reform options include increasing the contribution rate, reducing replacement rates, or increasing the retirement age to ensure long-term sustainability and intergenerational equity. Fiscal framework - Develop a national fiscal framework to anchor fiscal policy and maintain a credible commitment to prudent fiscal policies. - Complement the EU Economic Governance Framework with a national medium-term objective. - Consider an expenditure rule as an operating target and a strengthened role for the fiscal council. *Source: 1. Fiscal Accounts (content unit: 1luxea2024002)* ### 1. Fiscal Accounts ________________________________________________________________________ 3 ### 1. Fiscal Accounts ### A. Introduction - Luxembourg has a track record of prudent fiscal policy but fiscal performance has become less vigorous in recent years. - General government balance: - Average of 2.1 percent of GDP during 2000–09. - Average of 1.3 percent of GDP during 2010–19. - About ¾ percent of GDP during 2020–22 (accounting for discretionary measures related to the COVID and energy crises of 1.9 percent of GDP on average). - Fiscal deterioration drivers: - Slower growth of social contributions reducing surpluses of social security funds. - More persistent central government deficits, with a pick-up in public spending, notably current expenses. - COVID-19 response: revenues declined and health and social benefit spending increased. - Policy imperative: - Safeguard ample fiscal space to preserve AAA rating, given rising ageing costs and spending needs for green and digital transitions and NATO military spending goals. - Advice: recent revenue increases should not be assumed permanent; pursue budget-neutral tax reforms; limit compensation-of-employees growth; better target and increase efficiency of social programs; pursue early pension reform; consider a national framework to anchor fiscal policy. ### B. Drivers of Revenues and Expenditures — Revenues (overview) - Revenues in 2022: 43.6 percent of GDP, about 2 percentage points of GDP higher than 2010. - Revenue composition in 2022: - Taxes: 27.4 percent of GDP (+2 pps since 2010). - Social contributions: 12 percent of GDP (+0.4 pps since 2010). - Other revenues: 4.2 percent of GDP (-0.5 pps since 2010). - Main contributors to revenue increases since 2010: - Personal income tax (PIT): +3 pps of GDP, reaching 10.4 percent of GDP by 2022. - Other current taxes (including net wealth taxes): +0.6 pps of GDP. - Offsetting declines: corporate income tax (CIT) by 1 pps and taxes on products (VAT and excises) by 0.7 pps since 2010. ### Taxes and Social Contributions — Cross-country and structural notes - Luxembourg’s tax revenues as a share of GDP increased since 2010 but remain at the lower end of EU counterparts. - VAT: - Luxembourg VAT rate: 17 percent (below OECD average close to 20 percent). - Luxembourg relies less on VAT as a share of total revenues than some EU peers. - Decline in VAT revenues attributed to changes in tax regulations concerning cross-border electronics. - Property taxation: - Luxembourg relies more on property taxation than OECD average, including net wealth and taxes on financial transactions (e.g., registration tax). - For 2021, about three-quarter of taxes on property collected in Luxembourg related to recurrent taxes on net wealth; recurrent taxes on immovable property represented 0.1 percent of GDP. - OECD average: recurrent taxes on immovable property represent about 60 percent of taxes on property (1 percent of GDP). - Companies, not individuals, are subject to recurrent net wealth taxes in Luxembourg. - Note: Current valuation method for assessing land taxation is based on figures from the 1940s; reforming property taxation could help housing imbalances. ### Personal Income Taxation - PIT revenue growth drivers: - Strong employment and real wage growth. - Infrequent adjustments of income tax brackets. - PIT thresholds adjustments: - Adjusted in 2001, 2008, and 2009 by +17 percent, +6 percent, and +9 percent on average, respectively. - Policy changes: - Tax rates lowered in 2002 and again in 2017; tax credits increased. - Effect: - Growth in PIT revenue rebounded due to employment and wage growth and bracket drift, driving more taxpayers into higher tax brackets. - Average personal income tax rate gradually increased, particularly since 2017, with the most significant impact on single taxpayers without children. ### Corporate Income Taxation - Nominal combined corporate income tax rate: - Reduced from 37.45 percent in 2000 to 24.95 percent since 2019. - OECD average nominal combined rate: 23.6 percent. - CIT revenue trends: - CIT revenues as a share of GDP declined from around 8 percent of GDP in the early 2000s to around, on average, 4¾ percent in recent years. - Effective tax rates (METR and AETR) estimated to be lower than the nominal rate. - Past reductions in CIT nominal rates were not fully offset by attraction of new firms to maintain CIT shares of GDP. - Volatility and concentration: - CIT shows considerable volatility, partly due to collections of past years’ tax assessments and timing lags between filings and final assessments. - CIT collections can lag gross operating surplus by a couple of years, weakening short-term correlation with economic activity. - CIT revenues are concentrated: about three-quarters of CIT revenues come from the financial sector and from few taxpayers, contributing to volatility. - Composition of corporate taxes (components included): - Corporation tax (Impôt sur le revenu des collectivités). - Supplementary solidarity corporation tax (Impôt de solidarité sur le revenu des collectivités). - Municipal business tax (Impôt commercial communal). - Real estate levy (Prélèvement Immobilier). - Policy note: - Using payments based on estimated current-year income rather than previous-year actuals can strengthen automatic stabilizers. ### Expenditures — Overview - Public spending trends: - Public expenditures reached 43.9 percent of GDP in 2022, up from an average around 41 percent of GDP during 2010–15. - Upward trend since mid–2010s, driven mainly by social benefits and compensation of public employees. - Composition of spending in 2022: - Social benefits: 18.8 percent of GDP. - Compensation of employees: 10.2 percent of GDP. - Contributors to expenditure growth (2010–2022): - Social benefits: +0.8 pps of GDP. - Compensation of employees: +0.8 pps of GDP. - Other spending trends: - Declines offsetting pressures: interest payments and investments fell by 0.3 pps and 0.5 pps of GDP, respectively, during the lower interest rate period in the 2010s–15s. - Structure: - About half of public spending is undertaken by the central government and around 40 percent through social security. - Spending shares (2010–21) above OECD average for social protection, education, and health: Luxembourg share 66 percent vs OECD 62 percent (for combined categories over period). ### Social Protection - Role and trends: - Social protection spending grew faster than GDP since the global financial crisis. - Luxembourg spends less in social protection as percent of GDP than EU average, helped by a relatively lower dependency ratio. - Main programs: pensions (old age and disability), family benefits, unemployment benefits. - Impact on inequality: - Social protection has contributed to reducing income inequality, with relative improvements in the Gini coefficient. - Targeting and efficiency: - Spending is largely untargeted; scope to strengthen efficiency through better targeting. - Trade-offs noted between broader coverage, fiscal costs, and work incentives; a strong progressive tax system can complement untargeted benefits. - Family and unemployment benefits: - Luxembourg among EU countries that spend the most on family support; programs remain largely untargeted. - Combined tax provisions and family benefits can reduce the tax wedge on labor income for a married worker with children by as much as 20 pps compared to the average single worker. - Unemployment benefits are relatively generous despite strict activation requirements. - OECD-estimated net unemployment replacement rate in Luxembourg: 86 percent by the 12th month of unemployment for the average wage earner. - OECD average replacement rate: 36–45 percent. - Activation strictness: Luxembourg rates fourth in the OECD strictness score (scale 1–5). ### Health - NHF (National Health Fund) spending: - NHF spending related to Assurance maladie-maternité (AMM) reached 5.9 percent of GDP in 2020, up close to 1 pp of GDP from the previous year. - NHF expenditures declined to 5.1 percent of GDP in 2022 as exceptional pandemic leave policies were reversed, but remained somewhat above pre-pandemic levels. - Drivers of health spending increases: - Pandemic-related cash benefit payments accounted for two-thirds of the 2020 increase. - Structural drivers: hospital care spending growth since 2018, driven by higher fixed costs, notably personnel, and increased activity. - Hospital staffing increases reflect collective labor agreements and more staff allocated to higher activity. - Health system capacity and outcomes: - Low share of unmet healthcare needs; limited out-of-pocket spending. - Number of beds in line with OECD average. - Number of doctors per population below the OECD average; number of practicing nurses substantially above. - Health outcomes favorable: life expectancy above EU average and low mortality rates. - Coverage and pressures: - Number of protected individuals: over 900,000 in 2021 against a population of about 630,000—making per-capita spending comparisons more favorable when accounting for protected individuals. - Ageing population and approaching retirement of health professionals will put upward pressure on health expenditures. - Recruitment needs: expected increase of 5,000 professionals in the next six years. *Source: 1. Fiscal Accounts (content unit: 1luxea2024002)* ### 16. Although the returns on education are strong, costs per student are elevated. Growth ### 16. Although the returns on education are strong, costs per student are elevated. Growth ### Education: returns, costs, and efficiency - Growth of education spending has been outpacing growth of GDP since 2017. - Considerable returns on education: those without a tertiary degree have relatively higher inactivity rates and represent a lower share of high-income earners, according to the OECD, than in the average member country. - Luxembourg appears to have the highest spending per capita among peers adjusted for purchasing power parity (PPP), especially for tertiary education, including costs for non-core services. - Student-to-teacher ratios are among the lowest in the OECD from pre-primary to tertiary education. - The cumulative costs per student are substantially higher for Luxembourg than for other countries with similar educational achievements as measured by the PISA scores. ### Recent fiscal developments, outlook, and risks Findings for 2023 - Expenditures grew strongly, by 3.9 pps of GDP to 47.8 percent of GDP, reaching its highest level yet. - Growth in expenditures was largely fueled by a significant rise in compensation of employees and social benefits rose by about 1 pp. - Measures aimed at mitigating the energy and cost of living crisis, including energy subsidies, amounted to about 0.7 pps of GDP. - Cyclical factors are estimated to explain about 0.5 pps of GDP in expenditures in 2023. - Revenue collection rose by 2.8 pps of GDP to 46.4 percent of GDP in 2023, despite revenue losses from cost-of-living support initiatives. - Foregone revenues from measures such as a temporary cut of the VAT rate by 1 pp and tax credits were estimated at about 1 pp of GDP in 2023 (an additional 0.5 pp from 2022). - PIT grew strongly by 1.2 pps of GDP reflecting wage growth, boosted by three rounds of indexation. - CIT revenue increase of 0.6 pps of GDP in 2023 is unlikely to be permanent, as it was mainly due to exceptional banking sector profitability and collection related to previous fiscal years. Outlook and downside risks - Staff forecast public expenditures to rise to about 50 percent of GDP by 2029, driven by: - increases in spending in social benefits (+2 pps of GDP) - public investment (+0.5 pps of GDP), including on climate and digital transformation, and housing - Defense spending is expected to double in the next four years to 1.5 percent of GNI (1 percent of GDP). - Revenues are forecasted to continue to rise to near 49 percent of GDP, driven by the increase in income tax revenues and, to a lesser extent, social contributions. - Revenue growth will be constrained by announced and intended policy changes to lighten the tax burden, including: - adjustment of the tax brackets for four wage indexations in 2024 (about 120 million euros each) - subsequent intended regular adjustments of income tax brackets - increased tax credit for registration fees - deductibility of interest payments - reduction of CIT rate by 1 percent in 2025 (as a first step) - Fiscal risks are skewed to the downside: faster convergence to the NATO defense objective, uncertain corporate tax performance, unclear combined impact of lowering of CIT rates and implementation of Pillar II, and further tax bracket adjustments could worsen fiscal balances. - Public debt is projected by staff to increase by 6–7 percentage points of GDP by 2029 under announced policies. ### Pension system, ageing, and health spending Pensions - The general pension scheme’s reserves are comfortable (about 32 percent of GDP), but long-term sustainability is not guaranteed. - Despite the 2012 pension reform, options for early retirement, generous benefits, and adverse demographics will translate into rapidly increasing ageing costs over the longer term. - Low old age dependency ratio supported surpluses in past decades, but it is expected to catch up with the EU average over the long term. - Pension expenditures are projected to rise to about 18 percent of GDP by 2070, almost double the 2022 levels. - Existing institutional safeguards and stabilizers for the general scheme would be triggered by 2028, when annual contributions are forecasted to no longer cover annual pension expenditures. - Even accounting for the modulation of the indexation, the pension system would remain in a deficit, with reserves forecasted to fall below the legal threshold of 1.5 the annual pension expenditure by 2042. Health spending - The NHF is financed through contributions by employers and insured on a contributory income capped at 5 times the minimum wage and financing by the central government equivalent to 40 percent of all contributions. - Expected increases in number of personnel, wages, and number of procedures will put pressure on health expenditures; the NHF is expected to run a small deficit in the short-term. - NHF reserves could fall below the legal requirement of 10 percent of expenditures in the next two years. - Projections assume a fixed allocation for hospital care, a more limited increase in average costs (much lower than in the past two years), and direct financing by the central government of certain expenditures such as on-call doctors. ### Options to safeguard Luxembourg’s ample fiscal space Revenue measures - Carry out more frequent adjustments of the tax brackets for inflation in a budget-neutral manner to protect those in the bottom of the distribution. - Avoid implementing retroactive changes to the tax schedule without compensatory measures. - Recognize that intended reduction of the CIT rate could potentially result in lower CIT revenues as a share of GDP. - Improve CIT collection based on estimated taxable income and shorten delays for collecting taxes related to previous fiscal years to reduce volatility of CIT revenues. - Reform property taxation relying on updated land and property titles, with higher taxes to vacant properties to strengthen fiscal revenues and reduce housing market imbalances. - Streamline tax expenditures to address equity issues and economic distortions (example: interest rate deductibility incentivizing real estate investments could impact housing affordability). Expenditure measures - Moderate the pace of growth in spending while facing pressures from ageing costs, defense requirements, and investment needs for digital and climate transition. - Reassess plans for increased recruitment to contain spending pressures, including compensation of employees. - On education, reconsider further increases given already high teacher-to-student ratios. - In the health sector, combine macro-level actions (e.g., implementing caps in spending) with micro-level strategies (e.g., assessing priorities and incentives, reducing hospital visits for non-urgent care). - Consider increasing contribution rates or the cap on contributory income. - Improve efficiency of social benefits by better targeting and reassessing benefits while considering labor supply impacts. - Early pension reform options include increasing the contribution rate, reducing replacement rates, or increasing the retirement age to ensure long-term sustainability and intergenerational equity. Fiscal framework - Develop a national fiscal framework to anchor fiscal policy and maintain a credible commitment to prudent fiscal policies. - Complement the EU Economic Governance Framework with a national medium-term objective. - Consider an expenditure rule as an operating target and a strengthened role for the fiscal council. *Source: 1luxea2024002 - 16. Although the returns on education are strong, costs per student are elevated. Growth* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1luxea2024002.pdf_