Luxembourg

   

Policy Performance

#5

Economic Policies

#7
Having recovered swiftly from a series of financial-sector setbacks, Luxembourg receives a high overall ranking (rank 7) for its economic policies. Its score on this measure has improved by 0.6 points since 2014.

Growth has been robust, with projections for the coming years remaining strong. A pre-Brexit exodus of financial-services firms from the United Kingdom has benefited the country disproportionately. The banking sector currently contributes about 20% of government revenue.

Unemployment rates are moderate and declining, with cross-border commuters accounting for a very high share of the workforce, enabling a high degree of flexibility. Youth unemployment has declined particularly sharply. Government spending has risen faster than tax revenues, with long-term budgetary estimates looking increasingly unsustainable.

New EU and OECD tax regulations have forced transparency on Luxembourg’s famously secretive banks. The country continues to offer preferential tax-incentive deals to most global companies. However, the country is no longer listed as a tax haven by the Global Forum. The adoption of EU rules on e-commerce taxation produced significant revenue losses, resulting in increases in the overall VAT rate.

Social Policies

#3
With a generous social safety net, Luxembourg falls into the top ranks internationally (rank 3) for its social policies. Its score on this measure has improved by 0.1 point relative to 2014.

Education spending is high, but children of migrants are disproportionately pushed to non-university schooling tracks. Linguistic complexity forces many students to repeat academic years. Income inequality levels are very high, but the welfare system is comprehensive and generous. In response to fast-rising housing costs, a new housing allowance was launched in 2018.

Child-care services have been expanded, and child benefits increased. A relatively high share of children live below the poverty line. Women’s labor-market participation rate is relatively low but rising. The health care system is generally of high quality. System costs are high, but out-of-pocket expenses very low.

Pension benefits are quite high, but further reforms are needed to ensure sustainability. More than half of the country’s residents have a migrant background. A new naturalization act has eased the way to citizenship, and all foreigners, whether citizens of the EU or third countries, can vote in local elections if they fulfil residency requirements.

Environmental Policies

#7
Despite some difficulties in reaching ecological goals, Luxembourg scores well overall (rank 7) with respect to environmental policies. Its score in this area has improved by 1.1 points relative to 2014.

The country has made reasonable progress toward emission-reduction goals, though its current target of a 40% reduction compared to 2005, to be achieved by 2030, appears quite ambitious. The state invests heavily in international climate aid.

Drinking water quality has been a point of difficulty. A new Water Act will help farmers avoid groundwater contamination, and provide incentives to replace outdated sewage treatment plants.

A new Nature Conservation Act makes it easier for property developers and builders to pursue projects, while retaining conservation protections overall. Building regulations within “green zones” have been standardized, potentially avoiding arbitrary permit approval and project proliferation.

Democracy

#13

Quality of Democracy

#13
With generally strong democratic institutions, Luxembourg falls into the upper-middle ranks (rank 13) with regard to democracy quality. Its score on this measure has declined by 0.1 point relative to its 2014 level.

Voting is compulsory for nationals. The 2018 parliamentary elections highlighted problems related to the allocation of legislative seats. Newspapers are generally tied to political parties, but the media is free of direct government interference, and reporting is becoming less partisan. The appearance of new online publications has created sources of serious journalism and made the sector more pluralistic.

Parties receive most of their funding from the state. No freedom of information act exists, and the government cultivates a certain culture of secrecy. Civil rights and political liberties are well protected, and xenophobia and anti-Semitism are consistently punished by the courts.

Administrative decisions are often ad hoc, reducing legal certainty. A major constitutional reform is underway, with some residents concerned that it is being written in French rather than Luxembourgish. The overloaded and understaffed courts are slow, but independent. Corruption is comparatively well controlled.

Governance

#10

Executive Capacity

#15
With its comparatively small administration, Luxembourg falls into the upper-middle ranks internationally (rank 15) with respect to executive capacity. Its score on this measure has declined by 0.3 points relative to its 2014 level.

The country’s small executive has limited resources for strategic planning. While the Prime Minister’s Office is not legally allowed to work with line ministries in policy preparation, it can propose projects and reject bills, thus retaining a central policy role. There are no institutionalized mechanisms of coordination between line ministries, but informal coordination is very important.

Implementation is generally effective if somewhat slow, particularly when powerful lobbies are involved. A recent municipal-finance reform aims to provide municipalities with greater financial security. Municipalities have complained about the lack of a national land-use plan, which means that planning procedures vary significantly across municipalities.

RIAs for draft bills are required. Two new online platforms offer information on the impact of ongoing reform programs. Ex post evaluations of legislation are rare. Policy development typically involves broad and institutionalized consultation with economic interest groups and relevant civil-society organizations. Power interest groups such as civil servants can disproportionately affect policy.

Executive Accountability

#5
With a strongly consensus-driven system, Luxembourg falls into the top ranks internationally (rank 5) in terms of executive accountability. Its score on this measure has declined by 0.1 point relative to its 2014 level.

Parliamentarians have adequate resources, and formal oversight powers are strong, though government answers to parliamentary questions are often inadequate. The low-profile Court of Auditors effectively reviews public spending. The Ombuds Office is a particularly useful instrument for non-citizen residents, and the National Data Protection Commission oversees the legality of personal data processing.

With 47% of residents being foreign nationals, there is strong unmet demand for political participation. Full social inclusion requires command of three national languages, with Luxembourgish particularly important in the political sphere. The media offers high-quality policy reporting, and newspapers have become less partisan over time.

Political parties vary in their approach to internal democracy. The government is required to consult with economic associations, which have well-developed research units. Other interest groups are also influential, though have fewer resources.
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