May 6, 2026
PRESS OFFICER: Eva Graf
Phone: +1 202 623-7100Email: MEDIA@IMF.org
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.Recent developments
Luxembourg’s economy has yet to regain its past dynamism amid challenging external environment. Growth has fallen behind euro area average since 2022, with output below its long-term trend. Public sector activity has increasingly driven growth, masking underlying weaknesses in the private sector, partly reflecting the erosion of domestic non-financial corporate income due to subdued productivity and rising labor costs. Growth has edged up to 0.6 percent in 2025, supported by expansionary fiscal policy and real income gains, but weak external demand continued to be a drag. The labor market has been sluggish with unemployment rising above 6 percent amid persisting skill mismatches. The real estate market has started to recover, but vulnerabilities remain. Headline inflation picked up in March–April 2026 above 2½ percent, driven by the energy price increase, partially offset by the new electricity subsidy.
The fiscal balance deteriorated more than expected in 2025 as expenditure significantly outpaced revenue. Expenditure rose by 8.8 percent y-o-y driven by substantially higher-than-budgeted capital spending, elevated public wages (beyond the automatic wage indexation) and rising social benefits. Meanwhile, revenue growth slowed markedly in 2025 (2.5 percent y-o-y) as personal income tax receipts softened and corporate income tax revenue declined, despite higher contributions from financial sector. The general government balance turned from a surplus of around 1 percent of GDP in 2024 to a deficit of 2 percent of GDP in 2025, though public debt remains low by international standards.
The financial system has remained resilient, but heightened uncertainty warrants continued vigilance. Banks and non‑banks maintain high capital and liquidity buffers and have weathered well recent market stress episodes. Asset quality in the corporate sector is gradually improving, and real estate risks have eased with a limited recovery in prices and activity. Nonetheless, Luxembourg’s large, outward‑oriented and highly interconnected financial system remains exposed to shocks, including the risk of abrupt repricing, fund outflows, and tighter financial conditions, with potential spillovers to banks and the real economy.
Outlook and Risks
Growth is expected to remain moderate in the near term amid heightened uncertainty from the war in the Middle East. Growth momentum would be dampened by the expected slowdown in European trading partners, headwinds from weaker confidence and higher inflation, while strong public spending and solid private consumption would provide support. Against this backdrop, GDP growth is projected at 1.2 percent in 2026 (compared to 1.6 percent forecast at the onset of the war) and pick up to 1.7 percent in 2027 as the impact of the conflict wanes. Growth is expected to gradually converge toward potential (around 2 percent) over the medium term as external demand recovers and private investment strengthens. Inflation is projected to increase to 2.6 percent in 2026 driven by higher energy prices, automatic wage indexation and second‑round effects, before easing toward 2 percent in the medium term.
Downside risks dominate. An extended war in the Middle East combined with higher energy prices and weaker growth in the EU could further dampen economic activity and keep inflation higher for longer. Given the large size and cross-border orientation of the investment fund sector in Luxembourg, this could create a significant adverse feedback loop with further market repricing, liquidity drying up, higher volatility, and tighter financial conditions. Domestically, persistent competitiveness pressures from high labor costs and weak productivity, a prolonged softness in the labor market, or delays in the construction sector recovery would weigh on growth and fiscal outcomes. On the upside, faster‑than‑expected progress on EU‑wide single market reforms could help boost investment and medium‑term growth.
Fiscal Policy
A broadly neutral fiscal stance projected by staff in 2026 is appropriate following a notable deterioration last year, but the composition should be more growth friendly. The 2026 budget kept the cost-of-living package and introduced new social support measures, including an electricity grid subsidy. These measures along with higher defense spending and an elevated public wage bill are projected to keep the general government deficit around 2 percent of GDP, roughly the same level as in 2025. However, containing the increase in current spending with a rebalancing toward more growth-enhancing investment spending would have been preferable.
Untargeted energy support measures should be avoided. If energy pricing as indicated in current futures curve holds, the impact on households will be modest, and could be largely compensated by automatic wage indexation and existing electricity grid subsidy. Should the war in the Middle East escalate and significantly affect activity and purchasing power, automatic stabilizers should be allowed to operate fully. Temporary and well-targeted support could be provided to the most vulnerable, but broad‑based subsidies should be avoided.
Over the medium term, the fiscal position is projected to weaken further under current policies, and moderate tightening is needed to stabilize debt and preserve buffers. Spending pressures from social protection, interest costs, aging‑related health and pension outlays, and sustained defense spending will likely intensify. Meanwhile, the drivers of recent revenue gains—the financial sector’s outperformance and rising labor income share—are expected to decline and revenue uncertainty remains elevated given a concentrated tax base, volatile external demand and potential changes in EU legislation on excise taxes. Additionally, the planned individual taxation reform along with enhanced family and child allowance and the reform of the childcare service voucher (CSA) system would add around 1.5 percent of GDP to the spending bill. Under staff’s baseline forecast, public debt is not projected to stabilize over the medium term. Staff thus recommend a moderate and growth‑enhancing fiscal adjustment focused on stabilizing debt and safeguarding fiscal space. Fiscal adjustment could be achieved mainly through containing current expenditure, as well as efficiency gains and broadening revenues.
The planned income tax reform could support labor supply but entails a sizable fiscal cost. Staff welcome the move toward individual taxation as it would incentivize labor participation of second earners and help boost purchasing power through a reduced average tax bill and accompanied support for family and childcare. The planned introduction of indexation of income tax brackets will help limit procyclicality. However, the reform alone is expected to cost around 1 percent of GDP annually starting from 2028, adding to growing fiscal pressures. Staff recommend identifying offsetting measures to mitigate the revenue loss and further enhance the design of tax exemption threshold and rate structure to improve progressivity.
Strengthening the fiscal framework would enhance credibility and help mitigate fiscal risks. Mounting spending pressures and increasing fiscal risks underscore the need for a reform of the national fiscal rule. Staff propose combining a debt anchor with an operational fiscal rule based on fiscal balances or expenditure limits. The operational rule should be designed to preserve flexibility to absorb shocks (e.g., excluding automatic stabilizers) and accommodate investment needs. In parallel, strengthening the budgeting framework with improved fiscal risk analysis and bolstering the fiscal council’s capacity would further enhance policy making. The 2026 pension reform is a timely and welcome step, but further measures will be needed to ensure long‑term sustainability. Action is also needed to address the deterioration of the balance of the National Health Fund.
Financial sector policies
Vulnerabilities and risks associated with elevated household and corporate leverage warrant continued monitoring, although there are significant mitigating factors. Despite the recent decline, leverage remains substantial compared to the other EU countries, making both sectors exposed to shocks. Some household risk metrics continued deteriorating across the distribution, alongside a sizable and persistent share of more vulnerable mortgage loans. The high household indebtedness is to some extent mitigated by high assets and savings as well as substantial automatic stabilizers. High corporate leverage is partly mitigated by the large share of intercompany loans. In an adverse scenario of weaker growth, rising unemployment, and higher risk premia, bank asset quality could potentially deteriorate.
While bank resilience is strong, maintaining robust bank risk management practices is essential amid heightened uncertainty and geopolitical risks. Solvency and liquidity stress tests show substantial resilience of the banking sector to adverse scenarios. While the aggregate NPL ratio is relatively low, it is elevated in construction and real estate sectors, and supervisors should continue ensuring that banks exercise conservative provisioning while conducting targeted reviews of vulnerable portfolios. Banks should further strengthen forward-looking credit risk assessments. Establishing a credit registry should remain a priority to improve credit risk management and reduce loan losses. Given substantial cross-border activities, supervisors should also continue ensuring that banks hold adequate liquidity buffers and diversified funding.
Continued close oversight of non-banking sector is warranted. Given the importance of liquidity and leverage for investment funds, with limited pockets of high leverage in certain funds, close monitoring should continue, especially in terms of concentration risks. European and international initiatives to enhance oversight of liquidity and leverage offer scope to further deepen supervision, including on synthetic leverage and systematic use of supervisor-led stress testing, complemented by an ongoing but broader in scope implementation of liquidity management tools. For insurance companies, close scrutiny of liquidity and solvency buffers is essential given weak profitability, along with monitoring concentration risks. Recent European initiatives on liquidity risk management plans and macroprudential oversight for insurance companies present an opportunity to further deepen supervision, complemented by supervisor-led stress testing, which is currently in development.
The highly interconnected financial system requires a continued holistic and cross-sectoral approach to systemic risk assessment. Strong domestic and international interconnectedness across banks, insurers, and investment funds could amplify the effects of market stress. These effects have historically been partially mitigated by an increase in investment funds’ deposits at times of market stress, providing banks with a hedge against liquidity risk. The results of the recently developed and deployed supervisor-led system-wide stress tests point to the importance for systemic risk assessment to account for interconnectedness.
The macro-prudential framework should continue evolving in line with emerging risks. With the credit cycle entering a nascent expansionary phase and domestic bank regulatory capital requirements relatively low, though mitigated by high management buffers, consideration could be given to increasing releasable buffers. This could include increasing the countercyclical capital buffer or alternatively activating the systemic risk buffer. Direct income-based measures should be introduced early in the recovery phase. Staff reiterate the FSAP proposal of a stressed DSTI limit with a speed limit that could be adjusted over the cycle. A second-best option would be to introduce a more conservative guidance on residual income after the Stress Test on Residual Income and Interest Rate (STIIR) and/or consider allowing limited asset use in DSTI assessments. A gradual reduction of the high LTV limit should also be considered.
Staff commend further progress in implementing the 2024 FSAP recommendations. The authorities have strengthened the assessment of systemic risk by operationalizing a solvency–liquidity stress‑testing framework for banks and a system‑wide stress test covering banks and investment funds. Bank liquidity supervision has been reinforced through the finalization of a memorandum of understanding between the BCL and the CSSF. Oversight of liquidity and leverage risks in investment funds has also improved, supported by more risk‑based, data‑driven supervision, and the development of margin stress testing. Accountability and transparency of macroprudential policy have been enhanced through the publication of the factors underpinning policy decisions. Further progress has been made in operationalizing resolution tools.
Structural policies
Luxembourg could benefit from AI-driven productivity gains if skills mismatches are addressed. As a small open economy, there is an increasing demand for new skills but a limited domestic supply of labor with the needed skill sets. Education and training should better match market needs by prioritizing STEM, ICT, and technical skills through updated curricula and improved school-to-work connections. Reskilling and upskilling should be expanded with government support (e.g., the Skills-Plang (“Skills Plan”) Bill introduced in 2025).
Labor market reforms should be accelerated to increase participation and improve flexibility. As labor force growth slows, policies should prioritize raising participation rates, facilitating labor movement and increasing flexibility. The recent pension reform could help extend effective working ages, while moving toward single class taxation would reduce disincentives for second earners and help reduce the large gender gap in employment. Moreover, increasing the flexibility of automatic wage indexation would better align wage growth with productivity and strengthen competitiveness.
Addressing housing affordability requires a decisive shift toward supply‑side measures. Persistently high housing costs are weighing on real incomes, labor supply and competitiveness. Accelerating land taxation to discourage land hoarding and easing regulatory bottlenecks would help unlock supply. The proposed introduction of land mobilization tax is a step in the right direction, though the design of reform could be enhanced by setting a minimum tax rate and lowering the allowances in the land valuation formula. The acceleration of investment in social and affordable housing in 2025 could mitigate supply constraints and support vulnerable households; in this context, phasing out untargeted demand side housing support is welcome.
Deepening the European single market reform would yield significant gains for Luxembourg. Completing the Single Market for services by reducing regulatory fragmentation and compliance costs would largely benefit Luxembourg. Progress toward a Savings and Investment Union, that would deepen and integrate EU capital markets, could reinforce Luxembourg’s position in securitization and asset servicing. In addition, enhanced cross-border labor mobility would help address skill matching and ease wage and capacity constraints.
The IMF team would like to thank Luxembourg’s authorities and other interlocutors for their hospitality and for constructive and insightful discussions.
