# EUR-Lex - 52013DC0366 - EN

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# 52013DC0366

**Recommendation for a COUNCIL RECOMMENDATION on Luxembourg’s 2013 national reform programme and delivering a Council opinion on Luxembourg’s stability programme for 2012-2016 /* COM/2013/0366 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on Luxembourg’s 2013 national reform
programme
and delivering a Council opinion on Luxembourg’s stability programme for
2012-2016

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning
of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular Article 5(2)
thereof,

Having regard to the recommendation of the
European Commission[2],

Having regard to the resolutions of the
European Parliament[3],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1)       On 26 March 2010, the
European Council agreed to the Commission’s proposal to launch a new strategy
for growth and jobs, Europe 2020, based on enhanced coordination of economic
policies, which will focus on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

(2)       On 13 July 2010, on the
basis of the Commission's proposals, the Council adopted a recommendation on
the broad guidelines for the economic policies of the Member States and the
Union (2010 to 2014) and, on 21 October 2010, adopted a decision on guidelines
for the employment policies of the Member States[4],
which together form the ‘integrated guidelines’. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.

(3)       On 29 June 2012, the Heads
of State or Government decided on a Compact for Growth and Jobs, providing a
coherent framework for action at national, EU and euro area levels using all
possible levers, instruments and policies. They decided on action to be taken
at the level of the Member States, in particular expressing full commitment to
achieving the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.

(4)       On 6 July 2012, the
Council adopted a recommendation on Luxembourg’s national reform programme for
2012 and delivered its opinion on Luxembourg’s updated stability programme for 2011-2015.

(5)       On 28 November 2012, the
Commission adopted the Annual Growth Survey[5],
marking the start of the 2013 European Semester for economic policy
coordination. Also on 28 November 2012, the Commission, on the basis of
Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic
imbalances, adopted the Alert Mechanism Report[6],
in which it did not identify Luxembourg as one of the Member States for which
an in-depth review would be carried out.

(6)       On 14 March 2013, the
European Council endorsed the priorities for ensuring financial stability,
fiscal consolidation and action to foster growth. It underscored the need to
pursue differentiated, growth-friendly fiscal consolidation, to restore normal
lending conditions to the economy, to promote growth and competitiveness, to
tackle unemployment and the social consequences of the crisis, and to modernise
public administration.

(7)       On 26 April 2013, Luxembourg submitted its 2013 stability programme covering the period 2012-2016 and its
2013 national reform programme. In order to take account of their
interlinkages, the two programmes have been assessed at the same time.

(8)       Based on the assessment of
the 2013 stability programme pursuant to Council Regulation (EC) No 1466/97,
the Council is of the opinion that the macroeconomic scenario underpinning the
budgetary projections in the programme is plausible. In particular, the
programme scenario for 2013 is very close to the 2013 Commission spring
forecast, while for 2014 it is slightly more optimistic. Medium-term deficit
projections are made under a slightly optimistic growth scenario, above
potential growth. The objective of the budgetary strategy outlined in the
programme is to bring the deficit from 0.8% of GDP in 2012 to 0.6% of GDP in
2014. However in the outer years of the programme period, the deficit is
forecast to deteriorate to 1.3% of GDP both in 2015 and 2016. This is the
result of the introduction of the new VAT rules regarding electronic services,
entering into force on 1 January 2015, which will bring Luxembourg into compliance with EU rules. According to these rules, the VAT revenues
generated from e-commerce activities will be transferred from the country where
the supplier is located to that of the residence of the customer. The impact of
the new rules is estimated by the authorities to lower tax revenues from VAT by
1.4% of GDP. The government has already announced that the standard VAT rate
will be increased, with a view to make up a part of the revenue loss. The 2013
Stability Programme confirms the previous medium-term budgetary objective (MTO)
of a structural surplus of 0.5% of GDP. The MTO is in line with the
requirements of the Stability and Growth Pact. Based on both the 2013
Commission spring forecast as well as on the (recalculated) structural budget
balance in the programme, Luxembourg is expected to be at a structural surplus
of 0.1% of GDP, which is below the MTO, in 2012, and is projected to achieve
its MTO in 2013. However, Luxembourg is projected to depart again from its MTO
starting from 2014 by 0.3% of GDP and even further in 2015 and 2016. The
national authorities have reiterated their objective to return to the MTO at
the latest in 2017 so as to provide greater room for manoeuvre. At 20.8% of GDP
in 2012, gross government debt is well below the Treaty reference value.

(9)       Luxembourg has been able
to keep its public deficit below the 3% of GDP threshold over the past years,
therefore avoiding entering the excessive deficit procedure. This has been due
more to buoyant revenues rather than to expenditure restraint. Specifically, in
2012, the growth rate of government expenditure, net of discretionary revenue
measures, is estimated to have exceeded the expenditure benchmark as defined in
the Stability and Growth Pact. The deviation of the growth rate of government
expenditure from the expenditure benchmark is estimated to reach 1.3%pp of GDP,
above the threshold of 0.5% of GDP defined in Regulation (EC) 1466/97. However,
to qualify this deviation, an overall assessment needs to be conducted, taking
into account other factors: (i) the deficit deteriorated in structural terms by
only 0.2% of GDP in 2012; (ii) the economy of Luxembourg, given the small size
of the country and its degree of openness is very volatile; and (iii) according
to the Commission services' spring 2013 forecast, Luxembourg should attain its
MTO already in 2013. All these elements point to a non-structural nature of the
deviation. Still, the high volatility of the revenues collected by Luxembourg's general government, up to now resulting in higher-than-planned revenues,
represents a risk for the sustainability of public finances. To better address
these risks, both the debt and expenditure constraints, should be established
in law. Moreover, there should be an identified monitoring body and predefined
action in case of non-compliance. The entry into force on 1 January 2015 of the
above-mentioned VAT package and its subsequent strong negative impact on tax
collection illustrates the importance for Luxembourg to introduce a medium-term
budgetary framework. Specifically, this would call for a particularly prudent
fiscal stance in 2014.

(10)     Currently, less than a
third of tax revenues are raised from consumption taxes, partially owing to
moderate standard and reduced VAT rates. Luxembourg ranks first in the EU in
terms of the number of categories of goods and services covered by reduced VAT
rates. The presence of a large financial sector, exempted from VAT, also
contributes to the low VAT to GDP ratio. Overall, Luxembourg has scope to raise
revenue by extending the standard VAT rate. In addition, the corporate tax
system in Luxembourg is characterised by a large tax bias towards indebtedness,
which contributes to a high private debt to GDP ratio.

(11)     The Luxembourg pension reform adopted in December 2012 can only be considered a first step in
the right direction. Even when taking into account most of the aspects of the
adopted pension reform, Luxembourg would still need to implement long-term sustainability-enhancing
policies equivalent to a permanent improvement of 8.6 percentage points of GDP
in the primary balance to close the fiscal gap. Luxembourg therefore needs to
go further in its pension reform. The introduction of a cap on pension adjustments
based on real wage increases would increase pension reserves and linking the
statutory retirement age to life expectancy would help ensure the long-term
sustainability of the pension system. Moreover, the possibilities for early
retirement should be reduced and it should be made more attractive to work
longer than the minimum required. In addition, the impact on fiscal
sustainability of long-term care expenditure is projected to contribute by 2.1
percentage points to Luxembourg's sustainability gap. The expected increase in
both the number of elderly and the number of dependents in Luxembourg is high compared to the EU average.

(12)     Luxembourg’s current
productivity is rather high. However, the room for manoeuvre in terms of
productivity gains is getting smaller. Therefore, the growth of unit labour
costs should be limited by ensuring a better correlation between wages and
productivity. Luxembourg has taken measures to moderate wage growth by
modulating the indexation system between 2012 and 2014. However, this reform is
only temporary and does not guarantee that wages will over time evolve in line
with productivity. Productivity is not the same across all economic sectors,
and the level of produtivity in the financial sector is almost twice as high as
in the remaining part of the economy. There will be a significant risk to Luxembourg’s competitiveness from 2015 onward, when the automatic indexation system will
again be applied in the normal way. Additional measures should thus be taken to
reform the wage setting system in a more permanent way to avoid a further
deterioration of competitiveness in the future.

(13)     Luxembourg's economy is
heavily dependent on its financial sector, which accounts for about 30% of
total value added and 25% of collected fiscal revenues. To safeguard the
country's future competitiveness, alternative "competence niches"
would need to be developed. However, the Luxembourgish research and innovation
system remains very weak and Luxembourg is not on track to reach its R&D
intensity target for 2020. The performance of Luxembourg on the indicators on
cooperation between public research institutions and firms is well below the EU
average, reflecting the current disconnections between the private sector
R&D and the public research system. Luxembourg should counteract the
declining trend of its R&D intensity, notably by helping boost business
R&D intensity. The development of a more targeted smart specialisation
strategy could play a crucial role in maximising the economic impacts of public
research funding, in particular through ensuring a leverage effect on private
investments. Such a targeted approach should be complemented by a comprehensive
horizontal policy focused on the development and growth of innovative firms.

(14)     Youth unemployment remains
persistently high at 18 % and depends heavily on the educational level.
Young residents face intense competition for jobs from non-residents, who are
often more skilled. While Luxembourg has demonstrated a strong commitment to
combat youth unemployment, further efforts are needed. In order to maximise
returns, measures taken should be made part of a comprehensive reform strategy,
including enhanced activation policies to combat benefit dependency. Luxembourg’s PISA performance testing on basic skills of young people is relatively weak. Further
measures are needed to counteract the negative tendency in reading, mathematics
and science observed since 2006. Further efforts should be made to improve and
target education resources for schools with disadvantaged students and increase
resources available for language support and remedial classes. The specific
challenges faced by people with a migrant background on the labour market
should be further examined and addressed by targeted measures, including in
respect of language skills. Vocational education and training should be given
particular attention in this context. Further measures should be taken to
improve early childhood education and reduce early school leaving, in
particular for the migrant population. The employability of older workers
should be improved, including through skills upgrading.

(15)     Luxembourg is committed to
reducing its greenhouse gas emissions in the non-ETS sectors by 20 % in
2020 compared to 2005 but is expected to fail to meet its target by 27
percentage points. The transport sector was responsible for 64 % of
non-ETS emissions in 2010 and represents a key challenge for Luxembourg. Measures currently in place would only contribute to approximately a third of
the greenhouse gas emission reduction necessary to meet the target.
Consequently, measures need to be significantly stepped up, notably by
increasing fuel taxation so as to reduce the taxation gap with neighbouring
countries. The vehicle tax reform should also be accelerated. Luxembourg should continue with the implementation of projects which favour the use of
public transport. It should introduce congestion charging on roads to encourage
a shift towards public transport. Better public transport connections with
neighbouring regions should be promoted.

(16)     In the context of the
European Semester, the Commission has carried out a comprehensive analysis of Luxembourg’s economic policy. It has assessed the stability programme and national reform
programme. It has taken into account not only their relevance for sustainable
fiscal and socio-economic policy in Luxembourg but also their compliance with
EU rules and guidance, given the need to reinforce the overall economic
governance of the European Union by providing EU-level input into future
national decisions. Its recommendations under the European
Semester are reflected in recommendations (1) to (6) below.

(17)     In the light of this
assessment, the Council has examined Luxembourg’s stability programme, and its
opinion[7]
is reflected in particular in recommendation (1) below.

(18)     In the context of the
European Semester the Commission has also carried out an analysis of the
economic policy of the euro area as a whole. On this basis the Council has
issued specific recommendations addressed to the Member States whose currency
is the euro. Luxembourg also should ensure the full and timely implementation
of these recommendations,

HEREBY RECOMMENDS that Luxembourg should take action within the period 2013-2014 to:

1.           Preserve
a sound fiscal position and remain at the medium-term objective so as to ensure
the long-term sustainability of public finances, in particular by taking into
account implicit liabilities related to ageing. Strengthen fiscal governance by
adopting a medium-term budgetary framework covering the general government and
including multi-annual expenditure ceilings, and by putting in place the
independent monitoring of fiscal rules.

2.           Take measures to address
the debt-bias in corporate taxation and extend the
application of the standard VAT rate.

3.           Curb age-related
expenditure by making long-term care more cost effective, in particular through
a stronger focus on prevention, rehabilitation and independent living, strengthening the recently adopted pension reform, taking
additional measures to curb early retirement and increasing the effective
retirement age, including by linking the statutory retirement age to life
expectancy.

4.           Beyond
the current freeze, take further structural measures, in consultation with the
social partners and in accordance with national practices, to reform the wage
setting system, including wage indexation, to improve its responsiveness to
productivity and sectoral developments and labour market conditions and foster
competitiveness. Step-up efforts to diversify the structure of the economy,
fostering private investment in research, notably by developing cooperation
between public research and firms.

5.           Step
up efforts to reduce youth unemployment by improving the design and monitoring
of active labour market policies. Strengthen general and vocational education to
better match young people’s skills with labour demand, in particular for people
with migrant background. Take resolute action to increase the participation
rate of older workers, including by improving their employability through
lifelong learning.

6.           Step
up measures to meet the target for reducing non-ETS greenhouse gas emissions,
in particular by increasing taxation on energy products for transport.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               COM(2013) 366 final.

[3]               P7_TA(2013)0052 and P7_TA(2013)0053.

[4]               Council Decision2013/208/EU of 22 April 2013.

[5]               COM(2012) 750 final.

[6]               COM(2012) 751 final.

[7]               Under Article 5(2) of Council Regulation (EC) No
1466/97.