Key Challenges

Current challenges in Luxembourg include an expensive education system, the need to finance generous welfare provisions, the need to reform the pension system further, and ongoing changes in the global fiscal landscape.
Generous welfare system no longer sustainable
According to the OECD and the European Commission, Luxembourg’s generous welfare provisions – primarily in the area of early retirement, but also within the health care sector – need to be revised and reduced if they are to become sustainable. The OECD and the European Commission have criticized Luxembourg’s pension system for years, as it is founded on overly optimistic annual economic-growth projections of 3%, and requires the rejuvenating effect of migration inflows. Luxembourg did enjoy these conditions for decades, avoiding the aging-population pressures already felt in other European countries, but pressure is today rising fast. Substantial incentives for early retirement need to be diminished, and the populace needs to come to terms with full and longer participation in the labor market. Migration and rising employment rates are unlikely to fully counter the structural problems posed by demographic changes over the long term.
Austerity needed to ensure long-term stability
However, any reform able to produce a sustainable pension system would need strong political commitment to succeed. Moreover, the country must find a way to manage migration flows and employment growth sustainably while simultaneously making necessary infrastructure investments. These demands have resulted in a need for austerity measures in order to consolidate the social-security system, thus ensuring long-term stability and sustainability.
Health insurance reform on its way
Despite these factors, the new government is swiftly expected to implement a comprehensive reform of the country’s health-insurance system (for example by introducing digital patient files, a primary-doctor principle and a performance-oriented fee-per-case system) with the aim of improving long-term budgetary sustainability within the health care and statutory nursing care systems.
Financial “niche” revenue losses must be filled
The country is also currently dealing with the aftereffects of the European Union’s change in e-commerce VAT rules, which is leading to substantial loss in revenues, as well as the ongoing international scrutiny of the advantageous taxation deals that had formed a cornerstone of Luxembourg’s appeal to international corporations. The future of the country’s so-called niche policies and the competitiveness of its economy are thus key concerns.
Consensus behind improving R&D
Luxembourg falls below the European average in terms of research and development investment, having spent 1.3% of its GDP for this purpose in 2015 (compared to a target of over 2.3%). The Luxembourg Cluster Initiative, led by the national research agency, Luxinnovation, has identified seven sectors as important for the future sustainable development of Luxembourg’s economy, including health care and biotechnology, information and communication technology (ICT), materials technology, space technology, logistics, maritime activities, and the establishment of alternative investment funds including private-equity funds. There is therefore broad consensus that public spending on research and development (R&D) must increase significantly, and that Luxembourg’s competitiveness must be improved in order to boost economic-growth rates.
Innovation gaps make progress more difficult
Luxembourg must invest larger sums in research and development with an objective and impact-oriented oversight system. International rankings reveal the fact that Luxembourg is not an innovation leader, and has difficulties in encouraging start-ups in part due to a lack of venture capital. This makes targeted economic diversification more difficult.
Sheltered public sector must be opened
Luxembourg’s domestic labor market is the most transnationally diverse within the OECD; yet it is also highly segmented, as private-sector firms are primarily run by foreigners (80%), while the public sector is run by nationals (90%). The European Court of Justice has ruled that Luxembourg must open up employment in the public sector in order to end discrimination against EU citizens. This may ultimately improve the performance of the public administration in areas such as analysis, planning and management).
Migrants’ civic rights a key political issue
The degree of democratic representation is low among Luxembourg’s resident population. The country’s population numbered 562,958 people in 2014 (100,000 more than 10 years previously), about 46% of whom were foreigners who cannot vote in national elections. However, EU citizens as well as citizens from third countries have the right to participate in local elections, vote and run for mayoral positions. The economy is essentially supported by this large group of noncitizens, which includes commuters and resident migrants at all levels. Last year, 22,332 immigrants arrived in Luxembourg – an increase of more than 11,000 people over 2014 – while 11,283 left the country.
Voting rights for non-citizens rejected
Employers and non-governmental organizations (NGOs) have lobbied the government to allow resident migrants to vote in national elections, with the aim of reconciling legal rights with the reality of the country’s population. But the clear rejection (78.02%) of full foreigner-voting rights in the referendum of June 2015 put at least a temporary end to the project. In partial response, the government announced a new legislative initiative facilitating access to Luxembourgish nationality. Including non-nationals in the democratic process would improve parliament’s representative mix, and would strengthen non-nationals’ identification with “their” country. Offering non-natives the opportunity to obtain Luxembourgish nationality or even dual citizenship are obviously not the only tools through which to foster inclusivity.
Housing-stock expansion underway
The availability of affordable housing has been a growing problem for decades. There is an insufficiency of living space, with a very limited stock of rental properties and high real-estate prices. The government thus announced that it would promote the construction of 11,000 new apartments in order to help support continuing migration flows and population growth. Some municipalities have decided to impose a special tax on unoccupied houses in order to create disincentives to leaving spaces empty, thus encouraging existing residential property to be rented or sold.
Environmental, education challenges remain
The country’s most pressing environmental-policy challenges include the improvement of water quality and the need to construct of wastewater-treatment plants.
The national education system presents another persistent challenge, with its trilingual character posing difficulties both to nationals and foreigners. Moreover, the country’s PISA test scores rank below the OECD average. During the past 15 years, several school reforms have sought to ease migrant children’s integration within this multilingual system, while diminishing the importance of language facility in determining students’ appropriate school levels. Long-term competiveness needs to be improved through further education-system reform. The government is currently working on 85 school-reform projects.
expansion ongoing
The new government intends to establish a sustainable family policy, one of the top priorities of its coalition program in 2013. Therefore, on 1 January 2015, a special tax of 0.5% was imposed on wages, pensions and other income, earmarked specifically for the purpose of supporting education and family policies. Within the scope of the “Chèque-Service Accueil” scheme, the government contributes an annual €313 million (2016) toward child care costs. Moreover, with the goal of increasing the employment rate among women, the government intends to provide free child care for one- to three-year-olds in 2016, as well as bilingual (French and Luxembourgish) early-childhood education (for one- to four-year-olds) starting in 2017. A needed reform of regulations protecting minors is still awaiting implementation.
Structural reforms must tackle future risks
Supported by the sustained economic upturn, Luxembourg is on the right track to correcting its excessive expenditures and creating viable long-term social, economic and environmental perspectives. To reduce vulnerabilities, structural-reform efforts must be continued, and further efforts will be needed to achieve long-term targets in a generally volatile economic environment.
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