Luxembourg

   

Economic Policies

#8
Key Findings
Having recovered swiftly from a series of financial-sector setbacks, Luxembourg receives a high overall ranking (rank 8) 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. Growth engines include goods and services exports, but domestic demand has also shown a steady upward trend. The country’s per capita consumer expenditure is the EU’s highest. Real wages have risen moderately over the last several years.

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. Long-term unemployment rates have been declining for years. The government has posted small surpluses, and the overall government debt is low by EU standards at 19.8% of GDP.

Recent 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. The adoption of EU rules on e-commerce taxation produced significant revenue losses, resulting in increases in the overall VAT rate.

Economy

#2

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
9
GDP in Luxembourg was expected to increase by 3% in real terms in 2019. This means the country is growing significantly faster than the euro zone average.

Growth engines include goods and services exports, which were expected to grow by 3.2% in 2018 and 2.7% in 2019. Investment (+3.2%) and private consumption (+3.5%) were even more important in 2019. In real terms, imports were forecast to increase by 2.6% in 2019. Overall domestic demand increased by 2.4% in real terms in 2018 and was expected to increase by 2.1% in 2019, according to the European Commission.

Luxembourg’s real GDP collapsed by 5.6% during the crisis years of 2008 and 2009. However, the economy has grown continuously since. By 2017, price-adjusted GDP was 18.2% higher than before the recession in 2007. By comparison, this level has increased by only 8.6% across the EU as a whole.

Luxembourg’s population increased by 24.4% between 2008 and 2018. The Eurostat statistics office expects a further increase of 21.3 by 2028%. The strong influx of mostly well-educated workers is increasing the long-term demand for goods and services of all kinds.

According to the EU Commission, investment in Luxembourg was expected to increase by 3.2% in 2019 in real terms.

Luxembourgish private consumption was forecast to increase by 3.5% in 2019, according to the European Commission. This robust demand has helped drive strong increases in the number of those employed, by 3.6% in 2018 and a predicted 3.3% in 2019. Real wages have risen moderately over the same period, by 0.6% (2018) and 0.5% (2019). However, as a result of the influx of workers, real-estate prices are rising sharply, reducing the disposable income available for private consumption. Nevertheless, Luxembourg’s per capita consumer expenditure in 2017 of €28,400 was by far the highest such level in the EU.

Luxembourg’s trade deficit increased by 16.6% in 2017. Since the country’s industrial sector has lost much of its importance in recent decades, dependence on imported goods is high. In 2017, 31.9% of imports came from Belgium, with Germany (24.9%) and France (11.4%) also serving as key countries of origin. The most important foreign market in 2017 was Germany, with an export share of 25.5%, ahead of Belgium (17.4%) and France (14.2%).

Various industries outside the financial sector also make significant contributions to the country’s economic stability and innovation. With its political and economic cluster initiative, the Grand Duchy is promoting seven non-financial industrial sectors. These include audiovisual production, the digital economy, health and environmental technologies, the aerospace industry, shipping, and the automotive supply industry.

In addition, Luxembourg’s government is pursuing various strategies to increase the country’s attractiveness as a business location. Key activities include the provision of support for the fintech sector, the passage of cybersecurity measures, the digitalization of the public administration and the development of the country’s technological infrastructure. With more than 20 data centers in place today, Luxembourg is already one of the largest data and internet hubs in Europe.

Citations:
“Wirtschaftswachstum hält weiter an.” 6. Juni 2019. http://www.lessentiel.lu/de/wirtschaft/dossier/ecolux/news/story/wachstum-wird-sich-2019-und-2020-fortsetzen-10884216. Accessed 17 Oct. 2019.

Business Monitor, Luxemburger Wirtschaft kompakt, Deloitte, März 2019 (z.T. allerdings schon bei Publikationszeitpunkt veraltet). https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/int-markets/lu-deutschsprachige-markt-luxemburg-2019.pdf. Accessed 17 Oct. 2019.

“Der Finanzsektor im Aufwind. Das Großherzogtum festigt seine Position als leistungsstarker Finanzplatz.” http://luxembourg.public.lu/de/actualites/2017/05/16-secteur-financier/index.html. Accessed 20 Nov. 2019.

Labor Markets

#4

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
9
Luxembourg’s working population at the start of 2020 numbers 466,000 people, of which 200,000 are cross-border commuters who arrive daily to work. Of these 466,000 employees, 100,000 are French, 50,000 are German and 50,000 are Belgian (mainly French speaking and German-speaking Belgians). Around 50% of the total working population lives in Luxembourg, and only one-fourth of the working population holds Luxembourgish citizenship. Without the foreign workforce, Luxembourg’s economy could not function. Every year, about 15,000 new jobs are created in in the country, and around 15,000 people are unemployed. At the time of this writing (January 2020), the unemployment rate is 5.4% (seasonally adjusted). A slight increase in the unemployment rate was evident during the review period due to a change in the way the rate is calculated. Nevertheless, the absolute number of long-term unemployed citizens has been falling for years. Overall, the country’s labor market has a strong need for workers, especially in the fields of accounting, IT and finance.
The rights accorded to unemployed citizens in the EU are being reformed. The new law states that unemployment benefits are to be paid by the countries where the unemployed person last worked. Luxembourg is particularly affected by this reform, and has therefore called for transitional arrangements. Debate over the new unemployment law was interrupted by the European elections in 2019 and the formation of the new EU Commission under Ursula von der Leyen.

Citations:
“Ein dynamischer Arbeitsmarkt.” Luxemburger Wort, 2. Oktober 2019, page 11.

“The Luxembourg Jobmarket.” https://adem.public.lu/de/marche-emploi-luxembourg.html.
Accessed 20 Nov. 2019.

“Luxemburg übernimmt Arbeitslosengeld für Grenzpendler.” Luxemburger Wort, 21 March 2019. https://www.wort.lu/de/politik/luxemburg-uebernimmt-arbeitslosengeld-fuer-grenzpendler-5c93a165da2cc1784e3404bf. Accessed 7 Dec. 2019.

Taxes

#13

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
In recent years, Luxembourg has struggled under new EU and OECD tax regulations that make it difficult for the country to maintain its largely secret and advantageous tax deals for companies. However, after a series of delaying tactics, the country accepted the new international transparency rules, seeking to avoid greater damage to Luxembourg’s role as a financial center.

On 20 March 2018, France and Luxembourg signed a new bilateral tax treaty to avoid double taxation and to prevent tax reductions in income taxes. The new Double Taxation Agreement (DTA) between Luxembourg and France, following the BEPS measures (OECD Action Plan on Profit Reduction and Profit Shifting – BEPS), includes the so-called Principal Purpose Test (PPT), which states that abusive structures are denied the benefits provided for in the agreement. The agreement applies to natural and legal persons resident and taxable in France or Luxembourg. Taxable French companies, such as SCI, may benefit from the agreement, which may result in reduced tax withholding rates. The new agreement is expected to enter into force in 2019, once it has finally been ratified by France and Luxembourg.

In 2016, most global players in the country had negotiated deals that exempted them from corporate income taxes (2017: 19%), municipal business taxes (6.75%), a special contribution (solidarity surtax 7%) and net wealth taxes (0.5%). More than 50,000 companies had negotiated tax deals with the government which allowed them to channel profits through Luxembourg and to reduce their overall tax obligations. The European Union’s penalty payments of Fiat Chrysler, Starbucks and the European headquarters of Amazon (with 1,500 employees, one of the big players in Luxembourg) were unexpectedly beneficial for Luxembourg as the penalty payments (totaling €250 million) benefited the state treasury. Nevertheless, to clarify the principle of legal certainty, Luxembourg appealed to the European Court of Justice against the ruling.

The effects of these proceedings and ongoing audits under the new rules will have a major impact on state revenues over the long term. The European Union and OECD are working toward harmonizing the tax systems of EU member states. After being listed as a tax haven in 2013, the Global Forum removed Luxembourg from its blacklist in October 2015.

In 2015, the European Commission implemented new e-commerce rules for the European Union, which state that value added tax is payable in the country in which the services are carried out or the product is sold, effectively undermining Luxembourg’s business-friendly e-commerce VAT regime. To boost public finances, Luxembourg has implemented new tax rates. Several tax rates were increased, including the general VAT (from 15% to 17%). The higher VAT rate and low interest rates will lead to a slight increase in the inflation rate (about 1.7% in 2017). Nevertheless, Luxembourg continues to have the lowest VAT rate in Europe.

Important recent milestones include a major tax reform in 2017, which focused on harmonizing individual (including cross-border worker) taxation with higher allowances (pension plans and building loan contracts) to increase second earners. Furthermore, the government implemented a corporate tax system and a restructuring program to attract more foreign investment. In 2015, the process of declaring VAT was simplified by the introduction of an electronic system. Long outstanding tax arrears were used to consolidate the 2017 budget. Despite losses in e-commerce (€225 million in 2017) and tax reform cuts, the payment of corporate-income-tax arrears and an early 2017 index tranche are compensating for lost tax revenues.

Luxembourg is known for its favorable framework conditions and flexibility in global competition. For example, in 2014 Luxembourg introduced a so-called freeport, a VAT free zone at Luxembourg airport and reduced tax rates by 8% on imports and intra-EU acquisitions of antiques, art and collectibles. In 2016, Bitstamp opened the first EU compliant cryptocurrency exchange in Luxembourg. In addition, Google may open a new €1 billion data center in Luxembourg. The country is also exploring another niche product, so-called asteroid mining, offering a regulatory legal business framework for the purpose. While this may sound very futuristic, Spire Global has already announced plans to open a European headquarters in Luxembourg with 250 employees, with strong support from the Luxembourg Future Fund.

Luxembourg’s financial center (mostly foreign-owned) is the most important locus of the so-called renminbi trade. Luxembourg’s global fund management industry is the second most important location for investment funds worldwide after the United States. In October 2017, the Luxembourg investment fund industry was home to €4,135 trillion in net assets (€3,664 trillion in Oct 2016), with 4,098 funds, including 14,711 fund units. Following a massive slump in the previous year, Luxembourg’s investment funds deposits increased by 9.8% since January 2017. Furthermore, Luxembourg is the European leader for responsible investment fund management. Overall, the number of employees in the financial sector rose from 45,097 in 2016 to 47.411 in June 2017.

PricewaterhouseCoopers’ 2017 business report gave Luxembourg its top ranking. The total tax rate (TTCR) after deductions and exemptions is currently 20.5%. This is the lowest total tax rate among European and European Free Trade Association (EFTA) countries, before Croatia (20.6%) and Cyprus (22.7%). Luxembourg’s taxation system is very attractive for businesses, with only 20% of companies paying business taxes. In 2012, property taxes accounted for 1.3% of GDP and represented 3.3% of tax revenue. Totaling 0.1% of GDP, Luxembourg’s recurrent property-tax revenue is the EU’s third-lowest by GDP share after Malta and Croatia.

Luxembourg has the highest ratio of capital tax to GDP among EU member states. This demonstrates the size and systemic importance of the financial sector in Luxembourg. To maintain the competitiveness of the financial sector, the government has decided not to introduce the Tobin tax on financial transactions. Following international standards on tax competition, Luxembourg reduced the corporate tax by 2% to 19% in 2017, with an additional reduction to 18% in 2018. Meanwhile, higher personal-tax allowances and income-tax reductions will benefit middle-class taxpayers.

The government recently announced major tax reforms slated to go into effect in 2021, which will take particular account of environmental, social justice and housing issues.

Citations:
Torslov, Thomas R./Wier, Ludvig S./Zucman, Gabriel: The Missing Profits of Nations. NBER Working Paper 24701. https://gabriel-zucman.eu/files/TWZ2018.pdf. Accessed 7 Dec. 2019.


“18th Update of the Stability and Growth Programme of the Grand Duchy of Luxembourg for the 2017 – 2021 Period. Le gouvernement du Grand-Duché de Luxembourg, 2017.” https://mfin.gouvernement.lu/fr/publications.html. Accessed 20 Oct. 2019.

“General government gross debt.” Eurostat, www.ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&plugin=1&pcode=teina225&language=en. Accessed 20 Oct. 2019.

“Le journaliste au coeur de Luxleaks.” Luxemburger Wort, 23 Nov. 2017. https://www.wort.lu/de/business/portrait-le-journaliste-au-coeur-de-luxleaks-5a159fe5c1097cee25b77aef. Accessed 29 Nov. 2019.

“Interview: Pierre Gramegna spricht über neue Steuerreform.” Luxemburger Wort. www.wort.lu/de/politik/interview-pierre-gramegna-spricht-ueber-neue-steuerreform-5d725d63da2cc1784e34b10e. Accessed 20 Nov. 2019.

“PwC Luxembourg Annual Review 2018.” www.pwc.lu/en/annual-review/pwc-luxembourg-annual-review-2018.html. Accessed 18 Nov. 2019.

“Neue CO2-Steuer verteuert Tanken in Luxemburg.” Trierischer Volksfreund, 9. Dezember 2019. https://www.volksfreund.de/region/luxemburg/neue-co2-steuer-verteuert-tanken-in-luxemburg_aid-47709819. Accessed 12 Dec. 2019.

Budgets

#3

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
9
Luxembourg’s budgetary situation is very stable. The Finance Ministry stated on 14 October 2019 that economic growth of 2.4% was expected for 2020, with an even stronger 3.5% rate in 2021. Furthermore, the employment rate was forecast to rise by 2% to 3.2% annually through 2023, which would result in a total of 517,600 jobs in Luxembourg, in comparison to 466,000 jobs now. Moreover, the inflation rate is supposed to remain below 2%, while the unemployment rate is expected to remain at around 5% through 2023, a historically low value.
Due to this positive development, Luxembourg’s current budgetary policy is sustainable. In 2018, the government achieved a surplus of €262 million, although a deficit of €910 million had been forecasted. In 2020, public spending is expected to climb above €20 billion, or 38% of GDP. Fully 47% of this sum will be spent on social benefits and subsidies, while another 23% goes to salaries and 14% to public investments. Total public revenue is about €20 billion. Half of this comes through direct taxes. The national debt is 19.8% (Maastricht limit: 60%) of GDP. Although this percentage is falling, the absolute value of the debt is rising. With regard to public investments, climate protection has the highest priority. As a part of this goal, public transportation services were to be made free beginning in 1 March 2020. In addition, the tram network will be expanded. The state also intends to improve the climate efficiency of its buildings.

Citations:
Le projet de loi concernant le budget des recettes et des dépenses de l’État pour l’exercice 2020 et le projet de loi de programmation financière pluriannuelle pour la période 2019-2023 ont été déposés le 14 octobre 2019 par le ministre des Finances à la Chambre des députés. https://gouvernement.lu/fr/gouvernement/pierre-gramegna/actualites.gouv_igf%2Bfr%2Bactualites%2Barticles%2B2019%2Boctobre-2019%2Bprojet-de-budget-2020.html. Accessed 20. Nov 2019.
Les principaux chiffres du budget 2020, paperjam, 14.10.2019.
“Haushalt 2019: Das Wichtigste im Überblick.” Luxemburger Wort, www.wort.lu/de/politik/haushalt-2019-das-wichtigste-im-ueberblick-5c7e42a4da2cc1784e33f13e. Accessed 20 Nov 2019.
“Luxembourg Budget Law 2019 voted – Corporate tax rate reduction, and revamp of tax unity regime.” www.pwc.lu/en/newsletter/2019/luxembourg-budget-law-2019-voted.html. Accessed 20. Nov 2019.

Research, Innovation and Infrastructure

#12

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
8
With regard to its Europe 2020 strategy, Luxembourg set a goal of raising public expenditure on research and innovation to between 2.3% and 2.6% of GDP, of which 0.7 to 0.9 percentage points are earmarked for public use (0.73% in 2015) and 1.6 to 1.7 percentage points earmarked for private research. The overall European goal is 3% of GDP.
Luxembourg supports private research projects; innovation and research activities can benefit from financial support totaling up to 35% of costs. Private sector innovation can receive grants of up to 50% of a project’s total spending, with up to 75% of the cost of feasibility studies subsidized. The Grand Duchy has a high proportion of high-skilled workers, with 59.5% of jobs demanding a high level of education or training. More than 40% of the working-age population has achieved a tertiary level of education and/or is employed in the science and technology sector. This creates synergies between public research and industry. Luxembourg ranks among the top 10 worldwide on the Innovation Output sub-index and is number 12 in the overall assessment of the 2017 Global Innovation Index (GII).
In the World University Rankings of 2018, the University of Luxembourg ranked 179th out of 1,000 universities. The new Belval campus, designed for 7,000 students, 3,000 researchers and about 6,000 residents, is one of the largest urban conversion projects in Europe. The relocation to Belval (with the exception of parts of the Faculty of Law, Economics and Finance) was to be completed in 2019. However, the campus has failed architecturally and looks quite sterile. The university does not own the buildings, but has to rent them from a “Belval Fund (Le Fonds Belval),” and conflicts exist between the two institutions. The lack of a university atmosphere in Belval may undermine the university’s ability to attract professors and students from outside the country.

Citations:
“2018 Index of Economic Freedom.” Heritage. https://www.heritage.org/index/pdf/2018/book/index_2018.pdf. Accessed 19 Oct. 2019.

“2019 Report.” www.globalinnovationindex.org/gii-2019-report. Accessed 21 Nov. 2019.

“The World University Rankings 2018.” www.timeshighereducation.com/world-university-rankings/2018/world-ranking#!/page/0/length/25/sort_by/rank/sort_order/asc/cols/stats. Accessed 19 Nov. 2019.

Global Financial System

#32

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
6
Since the opening and creation of the single European market in the 1970s, Luxembourg has been the most important actor in the European debt-capital market, playing a major role in stimulating the international financial architecture.
Luxembourg performed relatively well in the global financial crisis. After the government acted to save DEXIA and Fortis, two domestically important banks, tax revenues have begun to rise again in recent years. Yet as a small country, Luxembourg’s economy remains strongly influenced by the general economic climate and international trends.

Luxembourg is a major financial center, with the banking and financial services industry (non-bank financial institutions), directly and indirectly contributing an estimated 30% to GDP. Consequently, the country was exposed to the effects of the economic crisis within the European Union. Furthermore, Luxembourg’s treatment of offshore accounts and capital assets by non-resident customers came under international scrutiny during that period. As a consequence, Luxembourg has developed new clusters, such as fintech (new financial technology), to complement the traditional fields of work of the financial industry.

In the 2018 Index of Economic Freedom, Luxembourg is ranked 14 out of 186 countries. In the 2018 World Bank’s Doing Business report, Luxembourg ranked 63 out of 190 countries (2016: 61). Reflected in these rankings is the perception that Luxembourg has difficulties encouraging the founding of startups and creating new professions. In response, Luxembourg set up several opportunities for employees and created innovation centers to support startups.

The House of Startups (HoST), founded by the Chamber of Commerce in September 2017, opened its doors on 1 June 2018. With its central location in the capital, HoST is said to be an “innovation-fueling community” with an area of almost 6,000 square meters. The HoST’s missions are based on the following pillars: attracting and developing startups, and facilitating their integration into Luxembourg’s economy.

Citations:
Index of Economic Freedom 2018. https://www.heritage.org/index/pdf/2018/book/index_2018.pdf. Accessed 20 Oct. 2019

“Doing Business Report 2018.” World Bank Group 2018.
http://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2018-Full-Report.pdf. Accessed 20 Oct. 2019.

Sinner, Michèle: “Geplant, geplant, geplant.” Land.lu, 14 October 2011. www.land.lu/page/article/847/4847/FRE/index.html. Accessed 20 Oct 2019.
Back to Top