## 1lieea2025002 — Selected findings and policy implications

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### Net primary income and GDP–GNI disparity
- Context and overview:
  - Liechtenstein shows a significant gap between GDP and GNI due to its role as a financial center with a high share of cross-border commuters and globally competitive manufacturers.
  - High nominal GDP per capita—second highest in Europe—is driven by the financial services sector and multinational corporations; some income generated within Liechtenstein’s borders is distributed to nonresidents (including wages to commuters from Austria and Switzerland), reducing GNI relative to GDP.
- Accounting and decomposition:
  - GNI = GDP less primary incomes paid to nonresidents plus primary incomes received from nonresidents.
  - Net primary incomes components: cross-border worker compensation; cross-border property income (interest and dividends, reinvested profits from direct investments, and rent); cross-border subsidies and taxes (not very significant).
  - Positive net primary incomes to the rest of world indicate GNI less than GDP; negative indicates GNI greater than GDP.
- Net workers’ compensation:
  - Roughly 25 percent of incomes paid by Liechtenstein producers go to nonresidents (after netting incomes received by outward commuters).
  - Comparative figures: Luxembourg ~15 percent of GDP; Switzerland under 5 percent of GDP; Ireland almost 0 percent of GDP.
  - Net workers’ compensation flow large but relatively stable since 2013.
- Net property income:
  - Net property income volatility for Liechtenstein: surged by 178 percent in 2016; increased by 37 percent in 2020; plummeted by 64 percent in 2021.
  - Liechtenstein has persistent net inflows of property income, while Ireland, Luxembourg, and Switzerland have seen net outflows.
- Sectoral drivers:
  - Volatility primarily influenced by NFCs (including resident multinationals) and FCs.
  - Typical patterns: NFCs generally net outflows; FCs consistently net inflows.
  - Liechtenstein NFCs often receive reinvested earnings, interest and dividends from foreign affiliates, bringing NFC property income balances close to zero between 2016 and 2020 — contrasting with Ireland’s large NFC outflows.
- International Investment Position (preliminary):
  - Net-IIP is around 8x GDP, including large net outwards FDI with Liechtenstein headquartered companies employing 53.000 people in their foreign subsidiaries.
- Key conclusion:
  - The GDP–GNI gap is among the largest among major economies and comparable in magnitude to Ireland and Luxembourg but more volatile; the gap is largely driven by net outflows to foreign workers and balanced at times by inflows of interest, dividends, and reinvested earnings.

### High-frequency indicators (KonSens) and proposal for HFIEG
- KonSens (Liechtenstein Institute):
  - Composite quarterly business cycle indicator based on 16 indicators across quantitative measures, qualitative business sentiment, and qualitative consumer sentiment in Switzerland and Austria.
  - Standardized indicators; principal component analysis used to extract composite score.
  - Operates on a continuous scale relative to long-term average since 1998; KonSens value of 0 aligned with average annual growth in real GDP – 1999–2023 (2.06 percent).
  - Limitation: index values are not directly interpretable as proportional changes and cannot be decomposed by activity.
- Need for HFIEG (High-Frequency Indicator of Economic Growth):
  - Rationale: OS publishes annual GDP with a 23-month lag; HFIEG recommended as interim/complementary measure and a step toward QNA.
  - Characteristics (Stanger 2020b): bottom-up by sector; value-added weights consistent with annual accounts; relies on transaction data (VAT, targeted surveys); constant-dollar basis (deflated where necessary); provides growth rates for direct quantitative comparisons.
- Key steps to establish HFIEG:
  - Step 1: Analyze economic structure by descending value-added.
  - Step 2: Identify source data by activity; explore higher-frequency VAT reporting and mapping to NACE.
  - Step 3: Use monthly merchandise trade exports and SNB company reports; expand economic survey to include quantitative data.
  - Step 4: Where appropriate, estimate production volumes directly.
  - Step 5: Calculate activity-specific volume indices and aggregate with Laspeyres weights; adapt seasonal/calendar adjustments from KonSens.
  - Step 6: Disseminate HFIEG regularly with sub-indices (manufacturing, financial services, other activities) and use for preliminary annual real GDP estimates.

### Gross Value Added by NACE activity (2022 — largest activities)
- 28 Manufacture of machinery and equipment n.e.c.: 1359.02 Million CHF; Share 20.01%; Cumulative Share 20.01%
- 69 Legal and accounting services: 638.99 Million CHF; Share 9.41%; Cumulative Share 29.42%
- 45-47 Wholesale and retail trade; motor vehicle repair: 628.89 Million CHF; Share 9.26%; Cumulative Share 38.68%
- 64-66 Financial service activities, insurance, and related services: 533.37 Million CHF; Share 7.85%; Cumulative Share 46.54%
- 68 Real estate services: 461.86 Million CHF; Share 6.80%; Cumulative Share 53.34%
- 84 Public administration and defence; compulsory social security: 407.05 Million CHF; Share 6.99%; Cumulative Share 59.33%
- 31-33 Manufacture of all other products n.e.c; machinery and equipment repair: 301.74 Million CHF; Share 4.44%; Cumulative Share 63.78%
- 41-43 Construction: 273.84 Million CHF; Share 4.03%; Cumulative Share 67.81%
- 29-30 Manufacture of motor vehicles and other transport equipment: 225.13 Million CHF; Share 3.32%; Cumulative Share 71.13%
- 62-63 Computer programming, data processing, hosting, and related services: 207.03 Million CHF; Share 3.05%; Cumulative Share 74.17%
- 70 Activities of head offices and management consultancy: 201.12 Million CHF; Share 2.96%; Cumulative Share 77.14%
- 10-12 Manufacture of food, beverage, and tobacco products: 186.12 Million CHF; Share 2.74%; Cumulative Share 79.88%
- 24-25 Manufacture of basic metals and fabricated metal products: 170.32 Million CHF; Share 2.51%; Cumulative Share 82.38%
- 26 Manufacture of computer, electronic and optical products: 159.42 Million CHF; Share 2.35%; Cumulative Share 84.73%
- 77-82 Rental and leasing; business support activities n.e.c.: 145.72 Million CHF; Share 2.15%; Cumulative Share 86.88%
- 86 Human health activities: 117.81 Million CHF; Share 1.73%; Cumulative Share 88.61%
- 71 Architectural and engineering activities; technical testing and analysis: 108.71 Million CHF; Share 1.60%; Cumulative Share 90.21%

### Potential HFIEG data sources by NACE (selected)
- Manufacturing: merchandise exports to SNB; company surveys; Swiss PPIs for deflation.
- Construction: building permits, government investment, supply of inputs; direct volume estimation (no deflation).
- Wholesale/retail: VAT data; Swiss CPIs for deflation.
- Financial services, insurance: assets under management, premiums and claims, banking deposit/loan stocks and flows, FMA statistics; direct volume estimation.
- Real estate: employment, realtor register, number of transactions; direct volume estimation.
- Non-financial services and public administration: employment, hours worked; direct volume estimation.
- Human health: usage of services by type, hospital bed usage; direct volume estimation.

### Fiscal consolidation, fiscal framework, and expenditure profile
- Consolidation overview:
  - Fiscal consolidation delivered a reduction of 4.1 percent of GDP during 2014–18 to address sustainability concerns and signal credible reform.
  - Measures combined revenue and expenditure actions: current expense savings, reduced state pension and health contributions, slowed civil service recruitment, broadened tax base, and rationalized administrative fees.
- Budget Balance Rule (BBR):
  - Targets balancing income and expenses in the central government income statement over the medium term (Art. 2).
  - Income statement includes results of business activities, financial and extraordinary results; net results from assets under external management (interest, dividend income, capital gains less costs) are key.
  - Extraordinary results defined as occasional and unusual expenses or income of more than CHF10 million.
  - Financial Budget Act (FHG) 2010 envisages a four-year multi-annual framework, updated annually; rule enshrined in higher-level legislation.
  - Coverage limited to central government; municipalities and social security fund autonomous. Escape clauses exist; government must propose corrective measures within six months if parameters cannot be met.
- Budget rule principles (five benchmarks):
  - At least a balanced annual income statement.
  - Absolute growth of expenditure must not exceed growth of income.
  - Self-financing ratio must be at least 90 percent.
  - Ratio between financial assets and external funds ≥ 420 percent.
  - Ratio between financial assets and operating expenses between one and three times.
  - Compliance outcomes: generally met except Benchmark 2 (absolute growth of expenditure vs income) based on multi-year plans.
- Expenditures: levels and trends:
  - Spending declined by 5 percentage points during consolidation.
  - Wage bill: 5.2 percent of GDP.
  - General government employment: 7.7 percent of workforce (EU median ~16–17 percent).
  - Capital spending below 2 percent of GDP (EU average ~3½ percent for 2011–22).
  - Social protection ~36 percent of total government outlays or 8.1 percent of GDP (Euro area average 16 percent of GDP in 2022).
  - Public investment averaged 1.5 percent of GDP during 2013–2022.
- Functional breakdown and sector specifics:
  - Social protection 8 percent of GDP in 2022; education 4 percent of GDP in 2022 (government 78 percent / municipalities 22 percent); public services outlays 4.3 percent of GDP in 2022.
  - Old age pension: maximum CHF 2,450 (paid 13 times a year); minimum CHF 1,225; old age and survivors’ insurance covers pensions amounting to 80 percent of the maximum old age pension.
  - Life expectancy: 84.3 years (EU 80.6); women expected to live 2.3 years longer.

### Revenue structure and tax performance
- Overall tax level:
  - Tax-to-GDP ratio averaged 14¾ percent of GDP in the last two decades.
  - VAT, customs, heavy goods vehicle tax, CO2 tax, and stamp duties levied in line with Swiss regime; other taxes domestically determined.
- Tax composition:
  - Direct taxes (PIT and CIT) contribute about 60 percent of tax revenue.
  - CIT revenue averaged 4.5 percent of GDP during 2000-22 (Austria 2.4 percent; Euro area 2.9 percent; Switzerland 2.7 percent).
  - PIT revenue averaged 3.7 percent of GDP during 2000-22 (Austria 9.8 percent; Switzerland 8.3 percent).
- Personal Income Tax (PIT):
  - Progressive PIT rates 2.5 to 24 percent.
  - Wealth tax uses a standard return of 4 percent on net worth to determine notional income.
- Corporate Income Tax (CIT):
  - CIT rate 12.5 percent.
  - Dividend income and capital gains from sale of participations generally exempt if anti-abuse provisions do not apply.
  - Income on assets under management of investment funds not taxed at the fund company level.
- Indirect taxes:
  - VAT increased from 7.7 to 8.1 percent in line with Switzerland; reduced rate 2.6 percent for some goods/services; hotel/lodging reduced rate 3.8 percent; medical treatment and real estate exempt.
- VAT collection performance:
  - OECD unweighted VAT revenue ratio (VRR) for Liechtenstein and Switzerland ~0.7 on average (implies ~30 percent of theoretical VAT potential not collected versus OECD average 42 percent).

### International tax alignment and Pillar II BEPS implementation
- Liechtenstein joined the inclusive framework on BEPS in 2016.
- Complies with international standards on exchange of tax information, elimination of harmful tax practices, and artificial tax structures.
- Implementing OECD Pillar II reforms; introduced an income inclusion rule (IIR) and a qualified domestic top-up tax (QDMTT) effective January 2024.
- IIR and QDMTT ensure domestic group companies are subject to an effective taxation floor of 15 percent.
- Undertaxed payment rule (UTPR) not yet effective.
- Impact on tax revenue has not been quantified; where foreign jurisdictions already ensure sufficient taxation, IIR may not yield additional income.

### Productivity, financial center strategy, and infrastructure constraints
- Productivity trends:
  - Productivity (real GDP per FTE) has been flat over two decades and volatile; productivity higher than Switzerland but gap has narrowed.
  - Alternative measures (productivity per hours worked) show a decline in Liechtenstein while rising in Switzerland.
  - Contributing factors: aging workforce, geopolitical uncertainties, infrastructure congestion.
  - Empirical model finding: a 1pp increase in capital spending/GDP would temporarily boost productivity growth by around 3 percent (analysis notes uncertainty due to data limits).
- Financial center profile:
  - Strategy focused on asset management for international institutional investors and private clients leveraging dual access to EU and Swiss markets and low taxes.
  - Shifted from secrecy to transparency post-GFC; implemented FATCA and Automatic Exchange of Information early.
  - Financial Market Authority (FMA) established 2005.
  - Since 2007, AuM has more than doubled, with most growth abroad.
- Key financial sector size metrics (2023):
  - Broad measure (on- and off-balance sheet and foreign subsidiaries): CHF 773 billion (100x GDP).
  - Narrow measure (domestic banks): CHF 81.5 billion (11x GDP).
  - Combined AuM by banks/asset managers and investment funds: CHF 539 billion (75 percent of total financial sector).
- Risks and operational metrics:
  - Principal risks: AML/CFT compliance, reputational risk, complex structures that obfuscate ownership.
  - On-balance activities largely collateralized Lombard loans (~20 percent of total assets) and deposits.
  - Fund sector typically unleveraged; not likely a systemic risk source.
  - Employees (FTE) in domestic banks increased from 2.300 in 2016 to 3.300 in 2023.
  - Cost-to-income ratio: 78.3 percent at second quarter 2024.
  - Revenue composition (first half 2024): 56 percent from net commissions (AuM business sensitive to global conditions).
- Distinguishing feature:
  - Liechtenstein is not a host for shell corporations; inward FDI into resident SPEs as % of GDP is low; most inward FDI is in companies with physical production presence.

### Labor market, skills, and infrastructure policy implications
- Commuter reliance and skill mix:
  - Commuters comprise the greater share of employment, especially in higher-skilled occupations; majority from Switzerland and Austria; share of Swiss commuters increased over time.
  - Examples: industry sector — 23 percent of commuters are engineers vs 13 percent of residents; services sector — 21 percent of non-resident workers in financial services vs 12 percent of residents.
  - Commuter wage premium exists; policy measures aim to upskill residents.
- Labor supply and participation:
  - Resident labor force participation: 77.8 percent in 2023 (up from under 74 percent a decade earlier).
  - Labor force participation of women: 72.2 percent in 2023 (more than 10 percentage points below men).
  - Participation of older workers: 56.6 percent in 2023.
  - Gender wage gap: ~14 percent on average; above 21 percent for female workers above age 45.
  - Tertiary enrollment (2015→2022): males 58 percent → 50 percent; females 42 percent → 50 percent.
- Infrastructure constraints and policy recommendations:
  - High commuting congestion (Mobility Concept Report, 2030) reduces productivity potential.
  - Recommended measures: invest in skills (vocational training, dual training, digital skills), center support for R&D, targeted training in fintech/automation/robotics, cross-border education and research collaboration, childcare expansion, parental leave and flexible work to increase female and older worker participation, extension of retirement age options and pre-retirement counseling.
  - Empirical evidence suggests retaining women and older workers would boost growth.

### Pension system: structure, metrics, pressures, and options
- System overview:
  - Three-pillar framework; accumulated savings exceed 150 percent of GDP (third globally after Denmark and Iceland).
  - Pillars: (i) AHV-IV-FAK (public); (ii) occupational scheme (Pillar 2); (iii) voluntary insurance (Pillar 3).
- Pillar I (AHV-IV-FAK):
  - Retirement age: 65 for men and women; early retirement at 60; deferred to 70.
  - Replacement ratio: minimum monthly pension replacement ~35 percent (below international minimum recommended 40 percent), complemented by Pillar 2.
  - Contribution rates:
    - AHV: employers 4.2 percent, employees 4.0 percent, self-employed 8.3 percent.
    - IV: employees 0.7 percent, employers 0.7 percent, self-employed 1.4 percent.
    - FAK: employers 1.9 percent, self-employed 1.9 percent.
  - State contribution and reform history: 2001, 2011, 2016 reforms; 2016 state contribution CHF 30 million annually (inflation-adjusted); regular financial examinations every five years.
  - Intervention triggers: AHV fund ratio projected to decline from 9.9 to below 5.0 by 2043; if reserves <5× annual expenditures pension inflation adjustment halted.
  - Foreign participation: ~66 percent of Pillar I’s recipients are from foreign countries.
  - Funding composition: contributions from insured persons/employees 67.2 percent; government 13.1 percent; capital gains 19.8 percent.
  - Asset allocation targets: bonds 50 percent (Switzerland 67 percent of bonds), shares 33 percent (Switzerland ~one third of shares), alternative investments 7 percent, real estate 7 percent.
  - Monthly median wage series (2018–2023 range): around 6,600–7,110 CHF.
- Pillar II (Occupational):
  - Mandatory since 1989; assets > CHF8.4 billion or 118 percent of GDP in 2023.
  - Predominantly defined-contribution plans: 96.8 percent of actively-insured under DCP; occupational funds: nine company foundations and six collective foundations; 96.8 percent DCP coverage.
  - Coverage (2023): Pillar II covers 45,500 people; 32,547 (83 percent) actively insured; 6,462 (17 percent) pensioners; 60 percent of actively insured are foreigners.
  - Commuters comprised 46 percent of total pension payments in 2023.
  - Contributions amounted to 7½ percent of GDP in 2023; of which 53 percent employer contributions and 47 percent employee contributions.
  - Asset composition (2023): Bonds 36 percent; Equities 33 percent; Real estate 17 percent; Alternative investments 10 percent.
  - Coverage/market performance: funding ratios reached 120 percent in 2021; decreased to 106 percent in 2022; median coverage ratio rebounded to 109 percent in 2023.
  - Reforms: EEA accession, 2005 transparency/accounting/security fund, 2017–2018 contribution increases and governance strengthening.
  - Funding risks: dependence on investment income exposes funds to interest-rate fluctuations and potential search-for-yield risks if rates remain low.
- Pillar III (Voluntary):
  - Private savings and voluntary old-age insurance complement Pillars I and II.
- Demographics and projections:
  - Population projected to grow by 11 percent by 2060; individuals over age 65 to increase by 59 percent.
  - Life expectancy at birth: 81.8 years in 2020 → 84.6 years in 2023.
  - Life expectancy after 65: 19.8 in 2020 → 23.3 years in 2023.
  - EU 2024 Ageing Report: an increase in life expectancy at birth of around two years relative to baseline would push up average pension expenditure by 0.4 percentage points of GDP in 2070.
  - Pillar I projections: assets fall from 9.8 to 3.1 years of annual expenditures by 2043 (below statutory 5-year minimum).
- Policy options to address financing gaps:
  - Increase effective retirement age.
  - Raise contributions for employers, insured persons, or the state.
  - Other structural adjustments to ensure sustainability in light of aging and longevity increases.

*Source: 1lieea2025002-print-pdf — selected sections from the provided PDF content.*

### 2.   Net Primary Income to Rest of World ________________________________________________ 5

### 2.   Net Primary Income to Rest of World

### Context and overview
- Liechtenstein exhibits a significant gap between Gross Domestic Product (GDP) and Gross National Income (GNI) due to its economic structure as a financial center with a high percentage of cross-border commuters and globally competitive manufacturers.
- GDP measures total value of goods and services produced within borders; GNI represents total income earned by residents regardless of location of production.
- High nominal GDP per capita—second highest in Europe—is driven by the financial services sector and multinational corporations; some of the income generated within Liechtenstein’s borders is distributed to nonresidents (including wages paid to commuters from Austria and Switzerland), reducing GNI relative to GDP.
- When GDP per capita is adjusted for net commuters, it is considerably lower (Figure 1a).

### Accounting definition and decomposition
- GNI = GDP less primary incomes paid to nonresidents plus primary incomes received from nonresidents (Figure 2).
- Net primary incomes in GNI are composed of:
  - cross-border worker compensation;
  - cross-border property income (interest and dividends, reinvested profits from direct investments, and rent);
  - cross-border subsidies and taxes (not very significant in Liechtenstein).
- Positive net primary incomes to the rest of world indicate GNI less than GDP; negative net primary incomes to the rest of world indicate GNI greater than GDP.

### Net workers’ compensation: magnitude and comparison
- Inward commuters’ wages are included in Liechtenstein’s GDP but accrue to nonresidents and reduce GNI when netted.
- Liechtenstein: roughly 25 percent of incomes paid by Liechtenstein producers go to nonresidents, after incomes received by outward commuters are netted out.
- Comparative figures:
  - Luxembourg: around 15 percent of GDP.
  - Switzerland: under 5 percent of GDP.
  - Ireland: almost 0 percent of GDP.
- Liechtenstein’s net workers’ compensation flow is large compared to other European countries but has been relatively stable since 2013.

### Net property income: volatility and cross-country contrasts
- Net cross-border property income includes dividends and interest income.
- Net property income has exhibited large fluctuations in recent years for Liechtenstein:
  - surged by 178 percent in 2016;
  - increased by 37 percent in 2020;
  - plummeted by 64 percent in 2021.
- Liechtenstein has persistent net inflows of property income, while Ireland, Luxembourg, and Switzerland have seen net outflows.
- Cross-country comparison charts (Figure 3):
  - Net Property Income to Rest of World (Percent of GDP): Liechtenstein, Ireland, Luxembourg, Switzerland (2013–2022 shown in source).

### Sectoral contributions to property income flows
- Net property income can be dissected into contributions by institutional sectors: households, government, non-financial corporations (NFCs), and financial corporations (FCs).
- Volatility is primarily influenced by NFCs (including Liechtenstein resident multinationals) and FCs.
- Typical patterns:
  - Liechtenstein NFCs generally have net outflows of property income.
  - Liechtenstein FCs consistently have net inflows of property income.
- Comparison with Ireland:
  - Ireland’s cross-border property income is dominated almost exclusively by outflows of NFC interest, dividends, and reinvested profits to foreign entities; MNCs have key headquarter functions domiciled outside the Irish border, leading to greater net outflows of property income.
  - Liechtenstein’s property income cross-border flows are more balanced by contrast.

### Government, household, and financial corporation balances
- Liechtenstein’s government and households are consistent net recipients of property income, reflecting:
  - government surpluses;
  - foreign interest and dividend income of households.
- Liechtenstein FCs received more foreign property income than they distributed to nonresidents, although this balance is highly volatile.
- Strong net inflows of interest and dividends led to FC net property income amounting to over 1 billion CHF each year between 2017 and 2020, reflecting Liechtenstein’s position as a financial center.

*Source: 1lieea2025002-print-pdf - 2.   Net Primary Income to Rest of World*

### 8.      Liechtenstein NFCs often report net outflows of interest and dividends to foreign

### 8.      Liechtenstein NFCs often report net outflows of interest and dividends to foreign

### Property income balances and multinational headquarter role
- Liechtenstein NFCs often report net outflows of interest and dividends to foreign investors, although this is volatile.
- Strong inflows of reinvested earnings, interest and dividends to NFCs brought their property income balance close to zero between 2016 and 2020.
- These inflows include payments made by foreign affiliates to Liechtenstein resident multinationals.
- The relative balance in Liechtenstein stands in contrast to Ireland, where NFCs have large and consistently growing primary income outflows.
- This indicates that the headquarters function of receiving payments from foreign affiliates and then reallocating them is more important in Liechtenstein than in Ireland.
- Many of the most important multinationals in Liechtenstein were founded in the country rather than having shifted to the country for strategic or financial considerations.

### International Investment Position and data reconciliation
- Preliminary data on International Investment Position (IIP) produced by FMA in their 2023 Financial Stability Report shows that net-IIP is around 8x GDP, including large net outwards FDI with Liechtenstein headquartered companies employing 53.000 people in their foreign subsidiaries.
- The national accounts data used in the analysis are from the national accounts published by Liechtenstein’s Statistical Office.
- Future work will be needed to improve macroeconomic statistics and reconcile data sources.

### Key conclusions on GDP, GNI, and cross-country comparison
- Liechtenstein sometimes has GDP that is larger than GNI, and the sources of this gap are different from those in Ireland.
- The GDP-GNI gap is among the largest among major economies and comparable in magnitude to Ireland and Luxembourg — but is more volatile.
- Liechtenstein’s gap is largely due to net outflows to foreign workers, and not because MNCs are domiciling operations in the country for financial reasons.
- In Ireland, MNCs can have key HQ functions and shareholders domiciled elsewhere, leading to outflows of property income.
- Due to Liechtenstein’s role as financial center and the presence of large MNC HQs, the large outflow of compensation to foreign workers can sometimes be balanced by inflows of interest, dividends, and reinvested earnings.
- The paper emphasizes analyzing Liechtenstein's economic developments through an alternate lens given the significant presence of commuters and foreign investments by Liechtenstein residents.

### High-frequency indicators: KonSens and need for HFIEG
- KonSens: a concurrent quarterly composite business cycle indicator developed by the Liechtenstein Institute based on systematic aggregation of 16 indicators.
  - Indicator categories:
    - Quantitative measures: goods exports, goods imports, employees, commuters, unemployed, vacancies, share prices of companies, electricity consumption, overnight stays, new vehicle registrations.
    - Qualitative business sentiment: Liechtenstein economic survey (assesses general situation, plant utilization, incoming orders, earnings on scale: good, satisfactory, poor).
    - Qualitative consumer sentiment in Switzerland and Austria.
  - Each indicator standardized; principal component analysis extracts composite score.
  - KonSens operates on a continuous scale relative to long-term average since 1998: positive values indicate growth above long-term average, negative values indicate growth below it.
  - Limitation: direct quantitative comparisons of index values across time are not interpretable as proportional changes; cannot decompose by activity.
  - KonSens has tracked changes in business cycle well since inception (figure comparison with real GDP growth; KonSens value of 0 aligned with average annual growth in real GDP – 1999–2023 (2.06 percent)).

- Need for HFIEG:
  - The Liechtenstein Office of Statistics (OS) publishes annual GDP by activity in current prices with a lag of 23 months.
  - A High-Frequency Indicator of Economic Growth (HFIEG) is recommended as an interim and complementary measure to KonSens and as a step toward quarterly national accounts (QNA).
  - HFIEG characteristics (Stanger 2020b):
    - Bottom-up approach aggregating changes in production for major sectors (manufacturing, trade, financial services, professional services, public administration).
    - Based on national accounting framework with value-added weights consistent with annual national accounts; updated with each release.
    - Relies heavily on transaction data tied to domestic output from a statistically representative panel of domestic producers (observed quantities and sales values), sourced from administrative tax filings such as VAT and targeted surveys of large companies; business sentiment indicators are not used.
    - Estimated on a constant-dollar basis, excluding price effects; where production values used they are deflated with relevant price indices (likely Swiss PPIs).
    - Provides growth rates that allow direct quantitative comparisons of economic activity over time.

### Key steps to establish HFIEG and data sources
- Step 1: Analyze economic structure to determine most important productive activities by descending value-added.
- Step 2: Identify source data for values or quantities by activity; assess VAT data availability.
  - The Fiscal Authority currently provides OS with a broad indicator of changes in VAT receipts for large enterprises every six months; OS should explore higher frequency reporting, expanded coverage, and mapping to NACE.
- Step 3: Use monthly merchandise trade exports and company reports to the SNB (quarterly) as supplements; expand quarterly Liechtenstein economic survey to include quantitative data on sales, production, inventories, expenses, and services exports.
- Step 4: For some activities, direct estimation of production volumes may be used as a first step (instead of deflation of values).
- Step 5: Calculate activity-specific volume indices and aggregate using a Laspeyres formulation with value-added weights from most recent annual national accounts; adapt seasonal and calendar adjustment methods from KonSens.
- Step 6: Disseminate HFIEG by OS on a regular, pre-announced schedule; provide summary sub-indices (manufacturing, financial services, other activities) and use for preliminary annual real GDP estimates.

### Gross Value Added by NACE Activity - 2022 (largest activities listed)
- 28 Manufacture of machinery and equipment n.e.c.: 1359.02 Million CHF; Share 20.01%; Cumulative Share 20.01%
- 69 Legal and accounting services: 638.99 Million CHF; Share 9.41%; Cumulative Share 29.42%
- 45-47 Wholesale and retail trade; motor vehicle repair: 628.89 Million CHF; Share 9.26%; Cumulative Share 38.68%
- 64-66 Financial service activities, insurance, and related services: 533.37 Million CHF; Share 7.85%; Cumulative Share 46.54%
- 68 Real estate services: 461.86 Million CHF; Share 6.80%; Cumulative Share 53.34%
- 84 Public administration and defence; compulsory social security: 407.05 Million CHF; Share 6.99%; Cumulative Share 59.33%
- 31-33 Manufacture of all other products n.e.c; machinery and equipment repair: 301.74 Million CHF; Share 4.44%; Cumulative Share 63.78%
- 41-43 Construction: 273.84 Million CHF; Share 4.03%; Cumulative Share 67.81%
- 29-30 Manufacture of motor vehicles and other transport equipment: 225.13 Million CHF; Share 3.32%; Cumulative Share 71.13%
- 62-63 Computer programming, data processing, hosting, and related services: 207.03 Million CHF; Share 3.05%; Cumulative Share 74.17%
- 70 Activities of head offices and management consultancy: 201.12 Million CHF; Share 2.96%; Cumulative Share 77.14%
- 10-12 Manufacture of food, beverage, and tobacco products: 186.12 Million CHF; Share 2.74%; Cumulative Share 79.88%
- 24-25 Manufacture of basic metals and fabricated metal products: 170.32 Million CHF; Share 2.51%; Cumulative Share 82.38%
- 26 Manufacture of computer, electronic and optical products: 159.42 Million CHF; Share 2.35%; Cumulative Share 84.73%
- 77-82 Rental and leasing; business support activities n.e.c.: 145.72 Million CHF; Share 2.15%; Cumulative Share 86.88%
- 86 Human health activities: 117.81 Million CHF; Share 1.73%; Cumulative Share 88.61%
- 71 Architectural and engineering activities; technical testing and analysis: 108.71 Million CHF; Share 1.60%; Cumulative Share 90.21%

### Potential data sources by NACE activity (selected)
- Manufacturing:
  - Potential sources to estimate change in value of production: Merchandise exports reported to the SNB, company surveys.
  - Potential source to estimate change in prices: Swiss PPIs for manufacturing.
- Construction:
  - Potential sources for change in value: Building permits, government investment, supply of construction inputs, private investment reports of large projects, records of public tenders.
  - Potential source to estimate change in prices: Direct volume estimation (no deflation).
- Wholesale and retail trade:
  - Potential source: Value-added tax data.
  - Price measure: Swiss CPIs.
- Financial service activities, insurance, and related services:
  - Potential sources: Assets under management, premiums and claims for insurance, stocks of deposits and loans and interest flows for banking, FMA statistics.
  - Price approach: Direct volume estimation (no deflation).
- Real estate services:
  - Potential sources: Employment, register of realtors, number of transactions.
  - Price approach: Direct volume estimation (no deflation).
- Non-financial services activities and Public administration:
  - Potential sources: Employment, hours worked.
  - Price approach: Direct volume estimation (no deflation).
- Human health activities:
  - Potential sources: Use of services by type of care, usage of hospital beds.
  - Price approach: Direct volume estimation (no deflation).

*Source: Liechtenstein Authorities.*

### 4.1 percent of GDP during 2014–18. The significant and quick consolidation reflected sustainability

### 4.1 percent of GDP during 2014–18. The significant and quick consolidation reflected sustainability

### A. Overview of consolidation and purpose of the paper
- Fiscal consolidation delivered a reduction of 4.1 percent of GDP during 2014–18.
- Consolidation responded to sustainability concerns and the desire to signal a credible reform commitment.
- Measures combined revenue and expenditure actions:
  - Expenditure savings comprised current expenses, state pension and health contributions, aid, and subventions to municipalities.
  - The state’s contribution towards pensions was reduced and decoupled from current expenditure and civil service recruitment slowed.
  - Revenue measures focused on broadening the tax base targeting income and wealth taxes, and rationalization of administrative fees.
- Objective of the paper: benchmark Liechtenstein’s fiscal sector against peers, analyze contributing factors, discuss the fiscal framework, benchmark key fiscal aggregates, and review emerging spending pressures for future fiscal policy.

### B. The Fiscal Framework
- Institutional importance:
  - Quality of fiscal institutions is key to consolidation success and to responding to external shocks (IMF 2014; Balasundharam et al. 2023).
  - Credible medium-term fiscal framework and strong institutions support discipline, transparency, controls, and risk assessment (IMF 2022).
- Budget Balance Rule (BBR) design:
  - The BBR targets balancing income and expenses in the income statement of the central government over the medium term (Art. 2).
  - The income statement comprises results of business activities, financial, and extraordinary results—revenues minus expenses.
  - A key component: net results from assets under external management—interest and dividend income and capital gains less asset management costs.
  - Dividends derive from entities including the Landesbank, Post AG, and Telecom.
  - Extraordinary results refer to occasional and unusual expenses or income of more than CHF10 million.
- Practical operation:
  - Liechtenstein aims to achieve a balanced nominal budget in practice.
  - The rule does not systematically use macroeconomic assumptions for revenues or expenses, nor does it consider shocks.
  - The Financial Budget Act (FHG) 2010 envisages a multi-annual framework covering four years, updated annually.
  - The rule is enshrined in higher-level legislation, making it difficult to reverse and largely insulated from changes in government.
- Coverage and flexibility:
  - Coverage is limited to the central government; municipalities and social security fund operate autonomously.
  - Escape clauses provide flexibility for rare events, including one-off future-oriented projects.
  - If key financial parameters cannot be met and the additional expenditure or shortfall is not one-off, the FHG obliges the government to draw up proposals for measures within six months of the financial plan being discussed in parliament; measures are then presented back to parliament which decides whether they are necessary.

### C. Budget Rule Principles and assessment
- The budget rule is anchored on five principles; the first three must be met on average over the financing plan; the last two must be met at the end of the financial plan period:
  - At least a balanced annual income statement.
    - Contributed to budget surpluses and accumulation of sizeable fiscal buffers.
    - Strict adherence could limit flexibility to respond to shocks; focus on net operating balance or change in net worth excludes net capital investments.
  - The absolute growth of expenditure must not exceed the growth of income.
    - Strict adherence could affect the response to shocks.
  - Self-financing ratio must be at least 90 percent.
    - Instills discipline that public investments should primarily be funded through internal resources rather than borrowing.
    - Contributed to the current virtually zero debt level.
    - May limit investment in infrastructure or other long-term projects; during a downturn self-financing may become challenging and lead to underinvestment.
    - The Financial Budget Act provides for exceptions for forward-looking and important investments.
  - The ratio between financial assets and external funds should be at least 420 percent.
    - Provides buffers against market stress and reduces vulnerability to sudden funding disruptions.
    - May incentivize higher-than-norm asset accumulation and involve higher opportunity costs of maintaining high liquid assets.
  - The ratio between financial assets and operating expenses should be between one and three times.
    - Prioritizes fiscal buffers to cover operational costs and is de facto considered a target for the size of financial assets.
    - May risk holding excessive assets with lower overall returns; suggests need for analysis of adequacy of precautionary balances.
- Compliance outcomes:
  - Outcomes have been in line with the budget rule except for Benchmark 2. This benchmark has not been met based on the multi-year financing plans.
  - The escape clause and netting of one-off expenses or income have facilitated realignment with the rule.
  - There may be scope to review Benchmark 2 given potential to restrict or delay spending amid rising pressures and frequent breaches.

### D. Expenditures: levels, composition, and trends
- Size and trends:
  - Liechtenstein maintains a small government footprint.
  - During the fiscal consolidation, spending declined by 5 percentage points.
  - Spending was significantly lower compared to the Euro area average and Switzerland during 2011–22.
  - Current spending accounted for the bulk of the spending adjustment.
  - The wage bill is 5.2 percent of GDP.
  - General government employment levels are 7.7 percent of the workforce compared to the EU median of about 16–17 percent.
  - Capital spending was below 2 percent of GDP compared to 3½ percent on average for the EU (2011–22).
- Social protection and investment:
  - Social protection is about 36 percent of total government outlays or 8.1 percent of GDP, well below the Euro area average of 16 percent of GDP in 2022.
  - Low social spending is primarily driven by relatively low pension spending following the pension reform of 2013 and reduced state contributions.
  - Public investment averaged 1.5 percent of GDP during 2013–2022.
- Historical drivers:
  - Upscaling of public expenditures after the GFC and regulatory changes in the financial sector led to deterioration: without policy measures the central government was projected to accumulate a deficit of 13½ percent of GDP by the end of 2014.
  - This prompted restructuring of the budget by reducing current expenses and state pension contributions.
  - The pandemic and energy prices crisis induced another spike in public spending, reverting to 31.3 percent of GDP in 2020, reflecting largely discretionary relief measures and augmentation of the Pillar 1 pension.
- Functional breakdown (high-level findings):
  - Social protection and education are the main drivers of public outlays.
  - Social protection was 8 percent of GDP in 2022 (significantly lower than Euro area 16 percent).
  - Education reached 4 percent of GDP in 2022, comparable to the Euro area.
  - Public services outlay were 4.3 percent of GDP in 2022.
- Sector specifics:
  - Social protection:
    - Based on a three-pillar system including old-age and survivors’ insurance, disability insurance, family allowances, unemployment insurance, and mandatory health insurance.
    - Maximum old age pension is CHF 2,450 (paid 13 times a year); minimum is CHF 1,225.
    - Old age and survivors’ insurance covers pensions amounting to 80 percent of the maximum old age pension.
    - A family compensation fund pays one-time childbirth, monthly children, and single parents’ allowances.
  - Education:
    - Public education expenditure reached 4 percent of GDP in 2022; government contributed 78 percent while municipalities funded 22 percent.
    - State operates public schools and provides scholarships and interest-free loans.
    - Education is free and compulsory for children ages 6–15; pathways after compulsory schooling include general or vocational education and training.
    - Excellent vocational training opportunities contribute to a low youth unemployment rate.
  - Health:
    - Life expectancy is 84.3 years (EU 80.6), with women expected to live 2.3 years longer.
    - Universal healthcare with public and private options; health insurance is mandatory and financed by employer and employee based on per capita premium.
    - Government subsidizes low-income individuals, children, and young adults but subsidies account for 40 percent of health care insurance.

### E. Revenue: structure, levels, and performance
- Overall tax level:
  - Tax-to-GDP ratio averaged 14¾ percent of GDP in the last two decades.
  - This is significantly lower than Austria, the Euro area, and Switzerland and at a similar level as Andorra for the past decade.
  - VAT, customs, heavy goods vehicle tax, CO2 tax, and stamp duties are levied in line with the Swiss regime; other taxes are determined domestically.
- Composition:
  - Taxation relies on direct taxes: PIT and CIT contribute about 60 percent of tax revenue.
  - CIT revenue averaged 4.5 percent of GDP during 2000-22 for Liechtenstein (compared to Austria 2.4 percent, Euro area 2.9 percent, Switzerland 2.7 percent).
  - PIT revenue averaged 3.7 percent of GDP during 2000-22 (compared to Austria 9.8 percent, Switzerland 8.3 percent).
- Personal Income Tax (PIT):
  - Residents pay unlimited worldwide income taxes; covers employment, self-employment, agriculture, forestry, pensions, and other income.
  - A wealth tax is determined by applying a standard return of 4 percent to the net worth of notional income.
  - Non-residents taxed on income sourced from Liechtenstein; limited by double tax agreements.
  - Progressive PIT rates vary from 2.5 to 24 percent.
- Corporate Income Tax (CIT):
  - Levied on company profit, allowing tax-related adjustments including a 4 percent notional interest.
  - Dividend income and capital gains from sale of participations are generally exempt if anti-abuse provisions do not apply.
  - Income on assets under management of investment funds is not taxed at the level of the investment fund company.
  - CIT rate has remained at 12.5 percent.
  - Numerous double tax agreements have been signed.
- Indirect taxes:
  - VAT rate recently increased from 7.7 to 8.1 percent in line with Switzerland; still much lower compared to EU peers.
  - Reduced VAT rate of 2.6 percent applies for some goods and services, including water and cultural services, and certain sectors notably agriculture.
  - Hotel and lodging industry subject to a reduced VAT rate of 3.8 percent.
  - Medical treatment and real estate are exempted.
- VAT collection performance:
  - OECD unweighted VAT revenue ratio (VRR) for Liechtenstein and Switzerland is about 0.7 on average.
  - A VRR of about 0.7 implies an estimated 30 percent of theoretical potential VAT revenue is not collected, lower compared to the OECD average of 42 percent.
  - This suggests VAT compliance is high.

*Prepared by Rodgers Chawani and Tara Iyer (both EUR).*

### 18. Aligning with international tax standards remains a policy priority. Liechtenstein joined

### 18. Aligning with international tax standards remains a policy priority. Liechtenstein joined

### International tax standards and BEPS implementation
- Liechtenstein joined the inclusive framework on Base Erosion and Profit Shifting (BEPS) in 2016.
- The country complies with all international standards on exchange of tax information, elimination of harmful tax practices, and artificial tax structures.
- Liechtenstein is implementing the OECD Pillar II tax reforms although the impact has not been quantified.
- Liechtenstein introduced an income inclusion rule (IIR) and a qualified domestic top-up tax (QDMTT) effective January 2024.
- The IIR and QDMTT ensure that all domestic group companies are subject to the effective taxation of 15 percent.
- The undertaxed payment rule (UTPR) is not effective yet.
- The impact on tax revenue has not been quantified; if foreign jurisdictions in which multinational corporate groups operate already ensure sufficient taxation, then IIR does not lead to any additional income.

*Source: Liechtenstein authorities material in the content unit.*

### Impact of infrastructure investment on productivity
- Productivity in Liechtenstein has been flat over the past two decades.
- Productivity, measured as real GDP per full-time equivalent (FTE), has been volatile but not grown over time.
- Productivity is higher than in Switzerland, but the gap has narrowed.
- Based on other estimated measures (e.g., productivity measured through hours worked), productivity has been declining in Liechtenstein while it has increased in Switzerland.
- Contributing factors to stagnation include an aging workforce, which reduces labor supply and can lower overall productivity, and recent geopolitical uncertainties that have affected business confidence and investment.
- Additional public investment spending may boost productivity and potential growth by stimulating private investment and reducing congestion and travel times.

Key quantitative finding from an empirical model:
- If capital spending/GDP were to increase by 1pp, the model predicts that there would be a temporary boost to productivity growth by around 3 percent.
- The analysis notes some uncertainty given data limitations and recommends extending the analysis as macroeconomic statistics are extended.

Figure/source note:
- Figure 3 (Productivity in Liechtenstein and Switzerland) source: Liechtenstein Authority.

### Liechtenstein as a financial center — strategy and structural characteristics
- Liechtenstein pursues an international financial center strategy aimed at securing growth, well-paying jobs, a robust economy, and a strong tax base.
- The sector primarily focuses on asset management for international institutional investors and private clients, leveraging dual access to the EU and the Swiss financial markets and low taxes.
- Following the global financial crisis, Liechtenstein shifted from a model of secrecy to transparency and compliance, implementing FATCA and Automatic Exchange of Information in Tax Matters as an early adopter.
- The Financial Market Authority (FMA) was established in 2005 to ensure financial market stability, protect clients, prevent abuse, and comply with international standards.
- Since the 2008 law, the number of trusts and foundations has decreased by 80 percent.

Key size and composition statistics:
- The financial sector in the broadest measure (including on-balance and off-balance sheet and activities in foreign subsidiaries) was CHF 773 billion in 2023, 100x GDP.
- In the narrowest measure (domestic banks), it was CHF 81.5 billion or 11x GDP.
- A proxy for international clients’ holdings — combined assets under management (AuM) by banks or asset management companies and investment funds — is CHF 539 billion and makes up 75 percent of the total financial sector.
- Since 2007, AuM has more than doubled, with most growth abroad.
- Insurance companies write premiums overwhelmingly for non-residents.

Distinguishing feature:
- Unlike some financial centers, Liechtenstein is not a host for shell corporations; inward FDI into resident Special Purpose Enterprises (SPEs) as a percentage of GDP is low and most inward FDI is in companies with physical production presence in Liechtenstein.

### Risks and operational features of the financial center
- Principal risks include compliance and reputational risks in AML/CFT, cross-border activities, and wealth management; obfuscation of ownership or asset origins through complex structures complicates supervision.
- Liechtenstein relies on Swiss financial market infrastructure (FMI); access to Swiss FMI is subject to legal uncertainty where Swiss regimes are not considered equivalent to the EU regime.
- A moratorium until 2030 exists on the EU’s equivalence decisions on key components of the Swiss FMI.
- AuM are off-balance sheet and investment funds are typically unleveraged, mitigating balance sheet and systemic risks.
- On-balance sheet activities are largely collateralized Lombard loans (around 20 percent of total assets) and simple deposits from AuM clients.
- Funds in Liechtenstein are typically unleveraged and maturity profiles do not point to liquidity mismatches; the fund sector is not likely to be a source of systemic risk.

Operational and cost structure:
- The international business model entails high-touch service and high compliance costs.
- Employees (on an FTE basis) in banks in Liechtenstein (foreign subsidiaries not included) increased from 2.300 in 2016 to 3.300 in 2023.
- Higher growth in cost than revenue is driving the cost-to-income ratio up: 78.3 percent at second quarter 2024.
- In the first half of 2024, 56 percent of revenue came from net commissions mostly generated from the AuM business, which is sensitive to global financial conditions and geopolitical fragmentation.

### Labor market: commuters, skills, and infrastructure constraints
- Liechtenstein's labor market relies heavily on non-resident workers; commuters comprise the greater share of employment, particularly in higher-skilled occupations.
- Growth in commuters has led to employment exceeding population; the vast majority of commuters travel from Switzerland and Austria, and the share of Swiss commuters has increased over time.
- Commuters are more likely than residents to be employed in higher-skilled occupations; examples given:
  - Industry sector: 23 percent of commuters are engineers, compared to 13 percent of residents.
  - Industry sector: 12 percent of commuters are construction workers compared to 29 percent of residents.
  - Services sector: 21 percent of non-resident workers worked in financial services compared to 12 percent of residents.
- The demand for skilled workers has led to a wage premium for commuters and policy measures to upskill residents, including promoting vocational training, strengthening dual training, promoting digital skills, and partnering with educational institutions.

C. Infrastructure constraints and productivity:
- The steady inflow of skilled labor has led to infrastructure constraints that have contributed to productivity stagnation over time.

*Italic: Content unit sourced from the provided IMF PDF excerpt.*

### 4.      To promote productivity and growth, the enhancement of skills and infrastructure is

### 4.      To promote productivity and growth, the enhancement of skills and infrastructure is important.

### Productivity, skills, and infrastructure
- Productivity has not grown despite the inflow of high-skilled labor; without imported skilled labor into Liechtenstein, productivity growth is likely to have been even lower.
- Importance of continuing to invest in skills training and productivity-enhancing infrastructure is underscored.
- High traffic and congestion during peak commuting hours noted (Mobility Concept Report, 2030).
- Source data and decomposition presented as "Real GDP per Capita Decomposition — Contribution of Labor Productivity and Utilization (Percent year-on-year and contributions in percentage points)."
- Source: Liechtenstein Office of Statistics. Note: For services, there is a slight wage premium for residents in the lower quartile and the median, and a slight wage premium for commuters in the upper quartile.

### Increasing labor supply (Aggregate trends)
- Labor force participation rate of residents increased to 77.8 percent in 2023 from under 74 percent a decade ago.
- The unemployment rate declined over the same period and is now lower than the EU average and other comparator countries.
- Source: Liechtenstein Authorities and IMF staff calculations.

### Labor supply by gender and age (Key statistics and patterns)
- Labor force participation rate of women: 72.2 percent in 2023, more than 10 percentage points below that of men.
- Participation rate of older workers: 56.6 percent in 2023.
- Gender wage gap:
  - Averages around 14 percent, higher than the EU average.
  - Gap rises with age and averages above 21 percent for female workers above age 45.
- Tertiary enrollment changes (2015 to 2022):
  - Males: declined from 58 percent in 2015 to 50 percent in 2022.
  - Females: increased from 42 percent in 2015 to 50 percent in 2022.
- Taxable income patterns:
  - Taxable income of women tends to drop with age, while it keeps rising until age 60 for men.
- Unemployment rate charts follow ILO's definition including both registered and unregistered unemployment.
- Source: Liechtenstein Authorities; Liechtenstein Office of Statistics.

### Conclusion and policy measures to boost skills and labor supply
- Skill shortages across industry and services persist despite growth in commuters.
- Implemented measures to upskill residents:
  - State-supported vocational training in new technologies and industry-specific skills.
  - A dual-training system linked to the private sector that includes courses in fintech and automated manufacturing.
  - A digital skills transformation program aimed to boost IT skills in finance and engineering.
  - Programs promoting retraining for workers from other sectors into finance and engineering.
- Infrastructure development, including in cross-border transport, could reduce congestion and travel time for high-skilled commuters, leading to higher aggregate productivity.
- Further planned measures to upskill residents:
  - Centers to support R&D, fostering collaboration between business and education to prepare skilled workers for future technologies.
  - Further education for mechanical engineers on energy-efficient machines and in the financial sector for sustainable investments.
  - Training programs to enhance skillsets of older workers for new technological roles.
  - Collaboration with the EU and Switzerland in education and research to attract highly qualified specialists to Liechtenstein.
  - Further training in fintech, blockchain, cryptocurrencies, and automated advisory services.
  - Further training in automation, robotics, and additive manufacturing processes.
- Measures to address gender pay disparities and lower labor supply of women and older workers:
  - Actions in the 2024 report “Measures to Increase Workforce Potential and Labor Force Participation” include offering flexible work options, extending parental leave for men, creating part-time positions aligned with qualifications, supporting childcare facilities and expanding childcare options within schools.
  - Other suggested measures: greater public investment in childcare facilities, enhanced job re-training and integration programs for new mothers returning to the labor force.
  - Planned measures for older workers: extension of the retirement age, flexibility in work schedules, offering pre-retirement career counselling, encouraging longer employment within the public administration, and improving work environments for extended employment in later years.
- Empirical evidence indicates retaining women and older workers in the labor force can boost growth and lead to improved labor market outcomes.
- Authorities referenced a 2024 report: “Measures to Increase Workforce Potential and Labor Force Participation.”

*Source: IMF — Chapter/Section 4 from the provided PDF content.*

### LIECHTENSTEIN’S PENSION SYSTEM

### Overview of the pension system
- Structured around a three-pillar framework to provide a balanced, sustainable, and secure retirement income.
- The system has accumulated savings exceeding 150 percent of GDP, third globally after Denmark and Iceland, and higher than in Switzerland.
- The three complementary pillars:
  - (i) Old Age and Survivors’ Insurance (AHV-IV-FAK);
  - (ii) an occupational scheme (Pillar 2);
  - (iii) voluntary insurance.

### Pillar I — AHV-IV-FAK (Public pension)
- Objective: guarantee a secure standard of living for retirees; comprises mainly three distinct arms supervised by government and reporting to parliament.
- Retirement age: 65 years for both men and women; early retirement can be initiated at 60 or deferred until 70.
- Replacement ratio: minimum monthly pension with a replacement ratio of about 35 percent, below the recommended international minimum of 40 percent, complemented by Pillar 2.
- Funding and contribution rates:
  - AHV (employers 4.2 percent, employees 4.0 percent, self-employed individuals 8.3 percent, and non-active persons who benefit from state contributions).
  - IV (Invalidity Insurance): contributions from employees 0.7 percent, employers 0.7 percent, self-employed 1.4 percent; pay-as-you-go disability system funded by AHV contributors; also holds reserve; no funding from state resources.
  - FAK (Family Compensation Fund): funded by employers 1.9 percent, self-employed 1.9 percent, and non-active people.
  - Additional contributions: State and Municipalities provide mean-tested supplementary benefits.
- Reforms (selected):
  - 2001: Reforms paved the way for early retirement at 60.
  - 2011: Measures included reducing the state’s contribution, adjusting pensions in line with the consumer price index, re-introduction of actuarial reduction coefficients for early pensioners, and re-allocation of 0.2 percent of wage contributions from the FAK.
  - 2016: Parliament approved an annual state contribution of CHF 30 million to AHV, with inflation adjustment; increased and equalized the statutory retirement for men and women to 65 years; implemented an intervention mechanism mandating a financial examination of the AHV every five years. The most recent report to parliament indicates that the ratio of the AHV fund to annual expenditure is projected to decline from 9.9 to below 5.0 by 2043, thereby requiring specific proposals to be presented to parliament.
  - 2022–23: Shifted contribution rates from the overfunded IV towards the FAK and indexed pensions to an arithmetic average of consumer price index and wage index.
  - Future reforms: The EU directive on work-life balance for parents and carers will become effective in January 2026 and includes guaranteeing four months of parental leave for each parent for children up to three years; financial compensation for two months (about CHF 4,900 per month); additional leave of 10 days for fathers including compensation of 80 percent of wages.
- Intervention mechanisms:
  - If reserves decline to below five times annual expenditures, the ability to adjust pensions according to inflation is halted.
  - IV financing mechanism: state contribution will be made if reserves decline to below 0.05 of annual expenditures.
  - Current annual expenditures ratio for IV is 2.25.
  - FAK mechanism: defined state contribution if reserves drop below one annual expenditure. Current reserves are at 5.29 times annual expenditure.
- Foreign participation:
  - About 66 percent of Pillar I’s recipients are from foreign countries.
  - Most payments are made to residents given the short-term nature of most employment.
- Funding composition and asset allocation:
  - Contributions from insured persons and employees: 67.2 percent.
  - Government contributes: 13.1 percent.
  - Capital gains: 19.8 percent.
  - Asset targets: bonds 50 percent (of which Switzerland accounts for 67 percent); shares 33 percent (of which Switzerland accounts for a third); alternative investments and real estate 7 percent each.
- Figures and indicators referenced:
  - "Average Monthly Wage and AHV Replacement Ratio (CHF, Percent)."
  - "Assets Relative to Annual Expenditure (Percent)."
  - "Pension Recipients by Residence (Percent of Total)."
  - "Pension Payments by Nationality (Percent of Total)."
  - "Source of Funds for the Pillar I Pension Fund (Percent)."
  - "Pillar I Pension Investment Performance (Percent)."
  - Data points shown in figures include values such as 13.1, 19.8, 67.2 and 32.0, 33.0, 34.0, 35.0 for various distributions and series; monthly median wage series spanning 2018–2023 around 6,600–7,110 CHF.

### Pillar II — Occupational scheme
- Mandatory occupational scheme introduced in 1989; accounts for over CHF8.4 billion or 118 percent of GDP in 2023.
- Fully funded by employer and employee contributions as well as interests and deposits.
- Entities are autonomous legal entities subject to the Occupation Pensions Act and supervised by the FMA.
- Consolidation trend: decreased from 33 occupational plans in 2010 to 15 in 2024 due to challenging financial market conditions and heightened regulatory demands.
- Coverage and participation (2023):
  - Pillar II covers 45,500 people.
  - 32,547 or 83 percent were actively insured.
  - 6,462 or 17 percent were pensioners.
  - Sixty percent of the actively insured are foreigners.
  - Commuters comprised 46 percent of total pension payments in 2023.
- Benefit portability:
  - Once no longer employed in Liechtenstein, benefits are transferred to a vested benefit account, except for Swiss where vested benefits move to a new pension fund.

*Source: IMF — Chapter/Section 4 and subsequent pension system content from the provided PDF content.*

### 10.  Employer and employee contributions and investment income finance Pillar 2. Total

### 10.  Employer and employee contributions and investment income finance Pillar 2. Total

### Overview
- Total contributions amounted 7½ percent of GDP in 2023, of which 53   percent was employer contributions and 47   percent was employee contributions.
- The occupational funds consist of nine company foundations and six collective foundations and are defined-contribution plan (DCP), except for one entity.
- 96.8 percent of actively-insured individuals are covered under DCP, which provides flexibility, portability, and ownership.
- The final pension is influenced by contributions, accrued interest, and a   conversion rate.

### Coverage and funding
- Coverage ratios improved following a decline in 2022.
- After the global financial crisis, funding ratios stabilized and reached 120 percent in 2021, with increased investment income.
- Market turbulence and lower valuations caused the coverage ratio to decrease to 106 percent in 2022; some funds fell below the requisite 100 percent coverage ratio due to adverse equity performance.
- Median coverage ratios rebounded to 109 percent in 2023, facilitated by market recovery and higher interest rates.

### Investments and risk exposure
- Dependence on investment income exposes the system to fluctuations in interest rates.
- Asset composition of occupational pension funds in 2023:
  - Bonds: 36 percent of total assets
  - Equities: 33 percent of total assets
  - Real estate: 17 percent of total assets
  - Alternative investments: 10 percent of total assets
- A return to sustained low or even negative interest rates could affect the funds and may lead to accumulation of risks due to search for yield.

### Reforms and measures that increased resilience of Pillar II
- EEA Accession:
  - Legislative amendments introduced, including equal treatment for men and women, early retirement provisions, division of entitlements in the event of divorce, and introduction of risk insurance for the unemployed.
- 2005 reforms:
  - Introduced information and transparency regulations, strengthened accounting conventions, and created a security fund.
- 2017–2018 reforms:
  - Increase in retirement contributions, lowering of the entry thresholds for compulsory insurance, and strengthening governance of the pension funds.

### Pillar III
- Voluntary individual pension savings constitute the third pillar.
- Pillar 3 covers provisions of pensions through private savings or private voluntary old-age insurance policies; income from these products supplements state and occupational pension schemes.

### Demographic pressures and projections
- Demographic changes will result in additional costs:
  - The population is anticipated to grow by 11 percent by 2060.
  - The number of individuals over the age of 65 is expected to increase by 59 percent.
- Higher life expectancy will increase pension spending:
  - Life expectancy at birth increased from 81.8 years in 2020 to 84.6 years in 2023.
  - Life expectancy after 65 years of age increased from 19.8 in 2020 to 23.3 years in 2023.
  - According to the EU’s 2024 Ageing Report, an increase in life expectancy at birth of around two years as compared the baseline scenario assumptions would push up average pension expenditure by 0.4 percentage points of GDP in 2070.

### Projected financing challenges and options
- Closing future financing gaps in line with mandatory actuarial forecasts is important.
- Pillar I projections indicate that assets will fall from 9.8 to 3.1 years of annual expenditures by 2043, well below the statutory 5-year minimum.
- If reserves fall below the minimum threshold, the law suspends the inflation adjustment of the old-age, survivors' and disability insurance benefits.
- Options to address gaps include:
  - Increasing the effective retirement age
  - Raising contributions for employers, insured persons, or the state

### Conclusion
- The pension system has substantial buffers and a three-tiered structure with high accumulated assets.
- Aging will pressure the system going forward, calling for measures to ensure sustainability, including raising the retirement age and/or contributions.

*Source: 1lieea2025002-print-pdf - 10.  Employer and employee contributions and investment income finance Pillar 2. Total*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1lieea2025002-print-pdf.pdf_