# IMMC.COM%282023%29616%20final.ENG.xhtml.1_EN_ACT_part1_v6.docx

european flagEUROPEAN COMMISSION Brussels, 24.5.2023 COM(2023) 616 final Recommendation for a COUNCIL RECOMMENDATION on the 2023 National reform Programme of Luxembourg and delivering a Council opinion on the 2023 Stability Programme of Luxembourg {SWD(2023) 616 final}
Recommendation for a COUNCIL RECOMMENDATION on the 2023 National reform Programme of Luxembourg and delivering a Council opinion on the 2023 Stability Programme of Luxembourg 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 Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances 2 , and in particular Article 6(1) thereof, Having regard to the recommendation of the European Commission, Having regard to the resolutions of the European Parliament, Having regard to the conclusions of the European Council, Having regard to the opinion of the Employment Committee, Having regard to the opinion of the Economic and Financial Committee, Having regard to the opinion of the Social Protection Committee, Having regard to the opinion of the Economic Policy Committee, Whereas: (1) Regulation (EU) 2021/241 of the European Parliament and of the Council 3 , which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support to the Member States for the implementation of reforms and investment s , entailing a fiscal impulse financed by the EU . In line with the European Semester priorities, i t contributes to economic and social recovery and to the implementation of sustainable reforms and investment s , in particular to promote the green and digital transition and make the Member States’ economies more resilient . It also helps strengthen public finances and boost growth and job creation in the medium and long term , improve territorial cohesion within the EU and support the continued implementation of the European Pillar of Social Rights . The maximum financial contribution per Member State under the Recovery and Resilience Facility was updated on 30 June 2022 , in accordance with Article 11(2) of Regulation (EU) 2021/241. (2) On 2 2 November 202 2 , the Commission adopted the 2023 Annual Sustainable Growth Survey 4 , marking the start of the 202 3 European Semester for economic policy coordination. The European Council endorsed the priorities of the s urvey around the four dimensions of competitive sustainability on 23 March 202 3 . On 2 2 November 202 2 , on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the 2023 Alert Mechanism Report, in which it identif ied Luxembourg as one of the Member States that may be affected or may be at risk of being affected by imbalances, and for which an in-depth review would be needed. On the same date the Commission also adopted an opinion on Luxembourg’s 2023 d raft b udgetary p lan . The Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which the Council adopted on 16 May 202 3, as well as the proposal for the 2023 Joint Employment Report analysing the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights, which the Council adopted on 13 March 2023. (3) While the EU economies are showing remarkable resilience, the geopolitical context continues to have a negative impact. As the EU stands firmly with Ukraine, the EU economic and social policy agenda is focused on reducing the negative impact of energy shocks on both vulnerable households and companies in the short term, and on keeping up efforts to deliver on the green and digital transition, support sustainable and inclusive growth, safeguard macroeconomic stability and increase resilience in the medium term. It also focuses heavily on increasing the EU’s competitiveness and productivity. (4) On 1 February 2023, the Commission issued the Communication A Green Deal Industrial Plan for the Net-Zero Age 5 to boost the competitiveness of the EU’s net-zero industry and support the fast transition to climate neutrality. The plan complements ongoing efforts under the European Green Deal and REPowerEU. It aims to provide a more supportive environment for scaling up the EU’s manufacturing capacity for the net-zero technologies and products required to meet the EU’s ambitious climate targets , as well as ensuring access to relevant critical raw materials, including by diversifying sourcing, properly exploiting geological resources in Member States and maximising the recycling of raw material s . The plan is based on four pillars: a predictable and simplified regulatory environment, speeding up access to finance, enhancing skills, and open trade for resilient supply chains. On 16 March 2023, the Commission also issued the Communication Long-term competitiveness of the EU: looking beyond 2030 6 , structured along nine mutually reinforcing drivers with the objective to work towards a growth enhancing regulatory framework. It sets policy priorities aimed at actively ensuring structural improvements, well focused investments and regulatory measures for the long-term competitiveness of the EU and its Member States. The recommendations below help address those priorities.
(5) In 2023, the European Semester for economic policy coordination continues to evolve in line with the implementation of the Recovery and Resilience Facility. Fully implementing the recovery and resilience plans remains essential for delivering the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in recent years. The 2019, 2020 and 2022 country-specific recommendations remain equally relevant also for recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241 . (6) The REPowerEU Regulation 7 adopted on 27 February 2023 aims to rapidly phase out the EU’s dependence on Russian fossil fuel imports. This will contribute towards energy security and the diversification of the EU’s energy supply, while increasing the uptake of renewables, energy storage capacities and energy efficiency. The Regulation enables Member States to add a new REPowerEU chapter to their national recovery and resilience plans in order to finance key reforms and investments that will help achieve the REPowerEU objectives. They will also help boost the competitiveness of the EU’s net-zero industry as outlined in the Green Deal Industrial Plan for the Net-Zero Age and address the energy-related country-specific recommendations issued to the Member States in 2022 and, where applicable, in 2023. The REPowerEU Regulation introduces a new category of non-repayable financial support, made available to Member States to finance new energy-related reforms and investments under their recovery and resilience plans. (7) On 8 March 2023, the Commission adopted a communication providing fiscal policy guidance for 2024. It aims to support the preparation of Member States ’ stability and convergence programmes and thereby strengthen policy coordination 8 . The Commission recalled that the general escape clause of the Stability and Growth Pact will be deactivated at the end of 2023. It called for fiscal policies in 2023-2024 that ensure medium-term debt sustainability as well as raise potential growth in a sustainable manner. Member States were invited to set out in their 2023 stability and convergence programmes how their fiscal plans will ensure that the 3% of GDP deficit reference value is adhered to as well as plausible and continuous debt reduction, or for debt to be kept at prudent levels in the medium term. The Commission invited Member States to phase out national fiscal measures introduced to protect households and firms from the energy price shock, starting with the least targeted ones. It indicated that, if support measures needed to be extended because of renewed energy price pressures, Member States should target such measures much better than in the past towards vulnerable households and firms. The Commission proposed that the fiscal recommendations would be quantified and differentiated and be formulated on the basis of net primary expenditure, as proposed in its Communication on orientations for a reform of the EU economic governance framework 9 . It recommended that all Member States should continue to protect nationally financed investment and ensure the effective use of the Recovery and Resilience Facility and other EU funds, in particular in light of the green and digital transition and resilience objectives. The Commission indicated that it will propose to the Council to open deficit-based excessive deficit procedures in spring 2024 on the basis of the outturn data for 2023, in line with existing legal provisions. (8) On 26 April 2023, the Commission presented legislative proposals to implement a comprehensive reform of the EU's economic governance rules. The central objective of the proposals is to strengthen public debt sustainability and promote sustainable and inclusive growth in all Member States through reforms and investment s . The proposals aim at providing Member States with more control over the design of their medium-term plans, while putting in place a more stringent enforcement regime to ensure that Member States deliver on the commitments undertake n in their medium-term fiscal-structural plans. The objective is to conclude the legislative work in 2023. (9) On 21 April 2021 , Luxembourg submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines of Annex V to that Regulation. On 13 July 2021 , the Council adopted its Decision on the approval of the assessment of the recovery and resilience plan for L uxembourg 10 . The release of instalments is conditional on a decision by the Commission, taken in accordance with Article 24(5) of Regula tion (EU) 2021/241, that Luxembourg has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed. (10) On 28 April 202 3 , Luxembourg submitted its 2023 National Reform Programme and, on 27 April 202 3 , its 2023 Stability Programme, in line with Article 4(1) of Regulation (EC) No 1466/97 . To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2023 National Reform Programme also reflects Luxembourg ’s biannual reporting on the progress made in achieving its recovery and resilience plan. (11) The Commission published the 202 3 country report for Luxembourg 11 on 24 May 2023 . It assessed Luxembourg ’s progress in addressing the relevant country-specific recommendations adopted by the Council between 2019 and 2022 , and took stock of Luxembourg ’s implementation of the recovery and resilience plan. Based on this analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges. It also assessed Luxembourg ’s progress on implementing the European Pillar of Social Rights and on achieving the EU headline targets on employment, skills and poverty reduction, as well as progress in achieving the UN’s Sustainable Development Goals. (12) The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for Luxembourg and published its results on 24 May 2023 12 . It concluded that Luxembourg is not experiencing macroeconomic imbalances . In particular, v ulnerabilities relating to high house prices and high household debt have recently increased but overall seem to be contained so far and are expected to ease over the medium term. Strong population growth alongside increased mortgage credit, incentivised by fiscal support, has pushed up demand for housing, while supply has been restricted by the limited land available for construction and by land hoarding. The widening gap between housing demand and supply has resulted in strong house price increases with growing risks of house prices overvaluation and deteriorating affordability. House prices clearly cooled in late 2022, and the number of housing transactions declined sharply, as the rise in interest rates have led to a turn in the market. However, a sharp correction in house prices is not expected as incomes are holding up well and the supply shortage is expected to continue. Household debt is very high in terms of disposable income and has been increasing while borrowing cooled somewhat in late 2022. Households’ financial assets are also substantial, indebtedness increases towards the higher levels of income and wealth, and the banking sector is sound, which overall mitigates macro-financial risks. Additional policy efforts, including by stepping up and prioritising the adoption and implementation of recent measures, including recurrent tax es to increase the supply of buildable land , combined with the ongoing reform of land-use planning, could help to boost housing supply, including through the supply of affordable and social housing targeted to those most in need. The efficiency of the rental market could be improved too. In addition, reducing the mortgage interest deductibility, which was recently significantly increased, would reduce the fiscal incentives to borrow which supports high house prices. (13) Based on data validated by Eurostat, 13 Luxembourg’s general government surplus decreased from 0.7% of GDP in 2021 to 0.2% in 2022, while general government debt rose slightly from 24.5% of GDP at the end of 2021 to 24.6% at the end of 2022. (14) The general government balance has been impacted by the fiscal policy measures adopted to mitigate the economic and social impact of the increase in energy prices. In 2022, such revenue-decreasing measures included a reduction in taxes on products to lower consumer prices for petrol, diesel and heating oil by 7.5ct per litre; while such expenditure-increasing measures included the introduction of an energy tax credit 14 , aid for companies affected by rising energy prices and l imiting gas price increases. The Commission estimates the net budgetary cost of these measures at 0.5% of GDP in 2022. The general government balance has also been impacted by the budgetary cost of temporary protection to displaced persons from Ukraine, which is estimated at 0.1% of GDP in 2022. At the same time, the estimated cost of COVID-19 temporary emergency measures dropped to 0.1% of GDP in 2022, from 0.8% in 2021. (15) On 18 June 2021, the Council recommended that in 2022 Luxembourg 15 pursue a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. (16) According to the Commission estimates, the fiscal stance 16 in 2022 was supportive, at -0.9% of GDP , as recommended by the Council. As recommended by the Council, Luxembourg continued to support the recovery with investments financed by the Recovery and Resilience Facility. E xpenditure financed by Recovery and Resilience Facility grants and other EU funds amounted to 0 . 1% of GDP in 2022 (0.1% of GDP in 2021) . Nationally financed investment provided a neutral contribution to the fiscal stance. 17 Luxembourg therefore preserved nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) provided an expansionary contribution of 1.3 percentage points to the fiscal stance . This significant expansionary contribution included the additional impact of measures to mitigate the economic and social impact of the increase in energy prices (additional net budgetary cost of 0.5% of GDP) , as well as the costs to offer temporary protection to displaced persons from Ukraine (0.1% of GDP). At the same time, subsidies, other current expenditure and intermediate consumption also contributed (0.3% of GDP) to the growth in net primary current expenditure. Luxembourg therefore did not sufficiently keep under control t he growth in nationally financed current expenditure. The significant expansionary contribution of nationally financed current expenditure was only partially due to the measures to address the economic and social impact of the increase in energy prices, as well as the costs to offer temporary protection to displaced persons from Ukraine. (17) The macroeconomic scenario underpinning the budgetary projections in the Stability Programme is favourable in 2023 and thereafter . The government projects real GDP to grow by 2.4% in 2023 and 3.8% in 2024. By comparison, the Commission 2023 spring forecast projects a lower real GDP growth of 1.6% in 2023 and 2.4% in 2024, mainly due to lower growth contribution s from net exports in 2023 and domestic demand in 2024. 18 (18) In its 2023 Stability Programme, the government expects that the general government balance will deteriorate to a deficit ratio of 1.5% of GDP in 2023. The deterioration in 2023 mainly reflects additional measures to support household and corporate income s in the wake of high energy prices and inflation . According to the Programme, the general government debt-to-GDP ratio is expected to increase from 24.6% at the end of 2022 to 26.1% at the end of 2023. The Commission 2023 spring forecast projects a government deficit of 1.7% of GDP for 2023. This is slightly higher than the deficit projected in the Stability Programme, mainly due to somewhat lower tax revenue , according to the Commission forecast. The Commission 2023 spring forecast projects a slightly lower general government debt-to-GDP ratio, of 25.9% at the end of 2023. The difference is due to higher nominal GDP growth in 2023, according to the Commission forecast . (19) The government balance in 2023 is expected to continue to be impacted by the measures adopted to mitigate the economic and social impact of the increase in energy prices. They consist of measures extended from 2022 ( in particular , limiting gas price increases by subsidising household energy costs and network charges , stabilis ing electricity price s through subsidies to households, and measures to support businesses) and new measures , such as subsidies for heating supply through district networks and for large dwellings, as well as subsidies f or promoting self-consumption through photovoltaic electricity by companies. The net budgetary cost of the support measures is projected in the Commission 2023 spring forecast at 1.1% of GDP in 2023 . 19 Some measures in 2023 are targeted to the most vulnerable households or firms, while most measures do not preserve the price signal to reduce energy demand and increase energy efficiency. As a result, the amount of targeted support measures, to be taken into account in the assessment of compliance with the fiscal recommendation for 2023, is estimated in the Commission 2023 spring forecast at 0.6% of GDP in 2023 (compared to 0.4% of GDP in 2022). (20) On 12 July 2022, the Council recommended 20 that Luxembourg take action to ensure in 2023 that the growth of nationally financed primary current expenditure is in line with an overall neutral policy stance 21 , taking into account continued temporary and targeted support to households and firms most vulnerable to energy price hikes and to people fleeing Ukraine. Luxembourg should stand ready to adjust current spending to the evolving situation. Luxembourg was also recommended to expand public investment for the green and digital transitions, and for energy security taking into account the REPowerEU initiative, including by making use of the Recovery and Resilience Facility and other Union funds. (21) In 2023, the fiscal stance is projected in the Commission 2023 spring forecast to be expansionary (-1.5% of GDP), in a context of high inflation. This follows an expansionary fiscal stance in 2022 (-0.9% of GDP). The growth in nationally financed primary current expenditure (net of discretionary revenue measures) in 2023 is projected to provide an expansionary contribution of 1.3 percentage points to the fiscal stance. This includes the increased cost of the targeted support measures to households and firms most vulnerable to energy price hikes by 0.3% of GDP. T he expansionary contribution of nationally financed net primary current expenditure is therefore only partly due to the targeted support to households and firms most vulnerable to energy price hikes. The expansionary growth in nationally financed primary current expenditure (net of discretionary revenue measures ) is also driven by, among other factors, social benefits other than in kind , subsidies related to untargeted energy measures, permanent increases in public sector wages, a one-time contribution to the EU budget, and the reduction in VAT rates . In sum, the projected growth of nationally financed primary current expenditure is not in line with the recommendation of the Council. Expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to amount to 0.2% of GDP in 2023, while nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0.1 percentage points . Luxembourg plans to finance additional investment through the Recovery and Resilience Facility and other EU funds, and it is projected to preserve nationally financed investment. 22 It plans to finance public investment for the green and digital transitions, and for energy security, such as electrification of public transport, reinforcement of the tram and rail network, a climate and energy fund to support the acquisition of photovoltaic panels , digitalisation of public services and digital communication security (quantum technology) , which are partly funded by the Recovery and Resilience Facility and other EU funds. (22) According to the Stability Programme the general government deficit is expected to increase to 1.7% of GDP in 2024. The increase in 2024 mainly reflects the extension of support measures to cushion households and corporate incomes against the effects of the inflationary surge. The programme expects the general government debt-to-GDP ratio to increase to 27.5% at the end of 2024. Based on policy measures known at the cut-off date of the forecast, the Commission 2023 spring forecast projects a government deficit of 1.5% of GDP in 2024. This is slightly lower than the deficit projected in the programme, mainly due to a smaller increase in compensation of employees and social transfers , according to the Commission forecast . The Commission 2023 spring forecast projects a lower general government debt-to-GDP ratio, of 27.0% at the end of 2024. (23) The Stability Programme envisages the extension of the energy support measures until the end of 2024. The Commission currently assumes the net cost of energy support measures at 0.5% of GDP in 2024 23 , compared to 1.1% of GDP in 2023. These estimates hinge upon the assumption of no renewed energy price increases . The energy support measures that are currently planned to remain in place in 2024 do not appear targeted to vulnerable households or firms. Most of them do not fully preserve the price signal to reduce energy demand and increase energy efficiency. (24) Council Regulation (EC) No 1466/97 calls for an annual improvement in the structural budget balance toward the medium-term objective by 0.5% of GDP as a benchmark. 24 Taking into account fiscal sustainability considerations, 25 an improvement in the structural balance of at least 0.3 % of GDP for 2024 would be appropriate. To ensure such an improvement, the growth in net nationally financed primary expenditure 26 in 2024 should not exceed 4.8%, as reflected in this recommendation. At the same time, the remaining energy support measures (currently estimated by the Commission at 1.1% of GDP in 2023) should be phased out in in 2023, contingent on energy market developments and starting from the least targeted ones , and the related savings should be used to reduce the government deficit Based on Commission estimates, this would lead to a g rowth in net primary expenditure below the recommended maximum growth rate for 2024. However , according to the Commission 2023 spring forecast, the growth in net national financed primary current expenditure in 2023 is not in line with the recommendation of the Council. If this is confirmed, lower growth in net primary expenditure in 2024 would be appropriate.
(25) Assuming unchanged policies, the Commission 2023 spring forecast projects net nationally financed primary expenditure to grow at 2.9% in 2024, which is below the recommended growth rate. (26) According to the programme, government investment is expected to remain stable at 4.5% of GDP in 2023 and 2024. The programme refers to reforms and investments, that are expected to contribute to sustainable and inclusive growth. These include investments to foster the energy and digital transitions , which are also part of the Recovery and Resilience Plan. (27) The Stability Programme outlines a medium-term fiscal path until 2027. According to the programme, the general government deficit is expected to gradually decline to 1.0% of GDP in 2025 and to 0.8% by 2026, before slightly increasing to 0.9% in 2027. The general government deficit is therefore planned to remain below 3% of GDP over the programme horizon. According to the programme , the general government debt-to-GDP ratio is expected to increase from 27.5% at the end of 2024 to 29.0% by the end of 2027. (28) The impact of demographic trends on government spending will become more acute in the coming decades, as the number of pensioners per worker is expected to rise steadily due to the ageing population and the slowdown in net migration flows. In a scenario where there is no policy change, Luxembourg will face one of the EU’s sharpest increases in pension spending as a share of GDP, which is projected to double to around 18% of GDP by 2070, the highest in the EU. This will lead to a significant increase in government debt, putting the sustainability of government finances at risk. The recovery and resilience plan does not address the long-term sustainability of the pension system. Specifically, the plan does not address the negative effects of early retirement schemes and financial incentives to leave the labour market early, which contributes to the low rate of employment among older workers. Raising the effective retirement age would have a beneficial macroeconomic impact and the potential to reduce spending on pensions, since a higher rate of older workers in employment would support economic growth. The fight against aggressive tax planning in the EU is essential to: i) prevent distortion of competition between firms; ii) ensure fair treatment of taxpayers; and iii) safeguard government finances. Luxembourg is a small, open economy, with a large inte rnational financial sector, which to a significant extent explains the large financial flows. However, these flows also reflect the presence of many foreign- owned companies in the country , which are involved in intra-group treasury activities. A particular point of concern is the absence of withholding taxes , or equivalent measures on interest and royalty payments made to low or zero-tax jurisdictions beyond those countries included in the EU list of non-cooperative jurisdictions 27 . Outbound payments of interest and royalties from Luxembourg-based companies to third-country jurisdictions could be subject to little or no taxation if these payments are not taxed or taxed at a low level in the recipient jurisdiction. Luxembourg has taken some steps to fight aggressive tax planning. However, s o far these measures have been insufficient to address those features of the tax system , which c an be used by multinationals to engage in aggressive tax planning. (29) In accordance with Article 19(3), point (b) and Annex V, criterion 2.2 of Regulation (EU) 2021/241, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investment to be implemented by 2026. The implementation of Luxembourg’s recovery and resilience plan is underway. Luxembourg submitted its first payment request on 28 December 2022 , corresponding to 26 milestones and targets in the Council implementing Decision, for the disbursement of EUR 20 million under the recovery and resilience facility . The Commission published its positive preliminary assessment on 28 April 2023. The payment request is now discussed in the Council. The milestones and targets concerned include the entry into force of the “Housing Pact 2.0” reform , aimed at increasing the supply of affordable rental housing offered by municipalities , investments for the digitalisation of the public sector and for the development of ultra-secure communication , the upskilling of the workforce with the launch of the “FutureSkills” programme, as well as a reform on the procurement of clean vehicles . Luxembourg submitted an amendment of its plan on 11 November 2022, which was approved by the Council on 17 January 2023 . Luxembourg is expected to submit a R EP owerEU chapter and has already decided to transf er 128 . 5 million EUR from the Brexit Adjustment Reserve (BAR) to the RRF to finance its implementation . The swift inclusion of the new REPowerEU chapter in to the recovery and resilience plan will allow the financing of additional reforms and investments in support of Luxembourg's strategic objectives in the field of energy and the green transition. The systematic and effective involvement of local and regional authorities, social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the plan, to ensure broad ownership of the overall policy agenda. (30) The Commission approved all of Luxembourg’s cohesion policy programming documents in 2022. Proceeding with the swift implementation of the cohesion policy programmes in complementarity and synergy with the recovery and resilience plan, including the REPowerEU chapter, is key to achieving the green and digital transition, increasing economic and social resilience as well as achieving balanced territorial development in Luxembourg. (31) Beyond the economic and social challenges addressed by the recovery and resilience plan, Luxembourg faces a number of additional challenges , in particular the long-term sustainability of public finances mainly stemming from the pension system , legal loopholes that could be used by multinationals engaging in aggressive tax planning , vulnerabilities related to high house prices and household debt , weaknesses in the education system that add to inequality and issues related to energy policy and the green transition , including potential obstacles to the transition from fossil fuels and issues with the transport network . (32) Pupils ’ basic skills and overall performance depend largely on their socio - economic and linguistic background. Average levels in key knowledge and skills at age 15, as measured by the OECD Programme for International Student Assessment (PISA), are significantly lower in Luxembourg than the EU average. The gap between advantaged students and their disadvantaged peers is bigger in Luxembourg than any other EU country. The education system does not equip all pupils with the necessary basic skills to meet the country ’ s labour market needs. The language spoken in the national school system at primary level is Luxembourgish, while pupils learn to read and write in German. All subjects (except for French) are taught in German. This constitutes a very high demand for language skills in a country where only one in three pupils speaks Luxembourgish as their first language. The share of young people 18-24 who left education and training without completing upper secondary education increased from 6.3% in 2018 to 8.2% in 2022. In September 2022, Luxembourg launched a pilot project in four primary schools, where pupils start learning first in French and then in German. If extended to more schools, this approach could help improve the performance of pupils whose first language is not French . Luxembourg also increased its supply of public international school s : as of 2022/2023, 4% of the pupils at pre-primary and primary levels are enrolled in such schools, where they can choose between English, French or German as the language of instruction. If this option of teaching through one main language were extended to cover a larger part of the school population, it could substantially improve pupils ’ chances o f attaining better learning outcomes. (33) Luxembourg’s energy system is characterised by high import dependence and reliance on fossil fuels. The country is a large net importer of energy. It is almost entirely dependent on primary energy imports, with a dependency rate of 92% in 2021 . Oil provided 69% of Luxembourg’s energy mix, and natural gas 18%, while 12% came from renewable energy sources , reaching a capacity of 572 MW in 202 2 . Luxembo urg imports no oil from Russia . As regards gas, dependency on Russia is limited , as nearly 10 0% of the gas Luxembourg consumed was imported by pipelines from Belgium and Germany , flowing from Norway and the Netherlands . Luxembourg ’s consumption of natural gas has dropped by 26% in the period August 2022-March 2023, compared with the average gas consumption over the same period in the preceding five years, beyond the 15% reduction target. Luxembourg could keep pursuing efforts to temporarily reduce gas demand until 31 March 2024 28 . (34) While Luxembourg is highly interconnected in terms of both power and gas , further investment will be needed i n anticipation of growing renewable generation and power demand . Luxembourg has to address the challenge of insufficient housing supply while achieving its energy and climate targets. There is also a need to renovate the existing building stock. With 20.8% of the total energy saving potential (in terms of GWh), the residential building and renovation sector represents the second-largest source of cumulative energy saving potential by 2030. Around 89% of residential building stock uses heating systems based on fossil fuels (heating oil and natural gas ) . Municipalities will have a key role in this respect. Road traffic congestion weighs on the economy and on environmental sustainability, while transport accounts for a significant share of oil consumption and for 59% of total greenhouse gas emissions, which compares to an EU average of 24% in 2019. While Luxembourg adopted some relevant measures to improve sustainable transport , additional , more targeted interventions would substantially help to reduce oil dependence and greenhouse emissions . This is reflected in Luxembourg’s NECP, which sets a target of 40% of electric and plug-in for its vehicle fleet b y 2030. Luxembourg has set itself the target of becoming climate neutral by 2050. It has made considerable progress in recent years on renewable energies but remains one of the Member States with the lowest share . Further increases in ambition for reducing greenhouse gas emissions and increasing renewable energy and energy efficiency will be needed for Luxembourg to reach its 2030 energy targets – obtaining 25% of energy from renewables and reducing final energy consumption by 40% to 44%compared to 2007 . (35) Labour and skills shortages in sectors and occupations key for the green transition , including manufacturing, deployment and maintenance of net-zero technologies, are creating bottlenecks in the transition to a net-zero economy. High quality education and training systems that respond to changing labour market needs and targeted upskilling and reskilling measures are key to reduc ing skills shortages and promot ing labour inclusion and reallocation. T o unlock untapped labour supply, t hese measures need to be accessible , in particular for individuals and in sectors most affected by the green transition. Luxembourg has increased its efforts to upskill and reskill workers in declining and transforming sectors. Yet labour shortages persist in some occupations , including policy and planning managers. This is a possible bottleneck in the green transition and in the implementation of REPowerEU. (36) In light of the Commission’s assessment, the Council has examined the 202 3 Stability Programme and its opinion 29 is reflected in recommendation (1) below. (37) In view of the close interlinkages between the economies of euro area Member States and their collective contribution to the functioning of the Economic and Monetary Union, the Council recommended that euro area Member States take action, including through their recovery and resilience plans, to (i) preserve debt sustainability and refrain from broad-based support to aggregate demand in 2023, better target fiscal measures taken to mitigate the impact of high energy prices and reflect on appropriate ways to wind down support as energy price pressures diminish; (ii) sustain high public investment and promote private investment to support the green and digital transition; (iii) support wage developments that mitigate the loss in purchasing power while limiting second-round effects on inflation, further improve active labour market policies and address skills shortages; (iv) improve the business environment and e nsure that energy support to companies is cost-effective, temporary, targeted to viable firms and that it maintains incentives for the green transition; and (v) preserve macro ‐ financial stability and monitor risks while continuing to work on completing the Banking Union . For Luxembourg , recommendations ( 1 ), ( 2 ) and ( 4 ) contribute to the implementation of the first, second , third , fourth and fifth euro area recommendations. HEREBY RECOMMENDS that Luxembourg take action in 2023 and 2024 to: 1. Wind down the energy support measures in force by the end of 2023, using the related savings to reduce the government deficit. Should renewed energy price increases necessitate support measures, ensure that these are targeted at protecting vulnerable households and firms, fiscally affordable, and preserve incentives for energy savings. Ensure prudent fiscal policy, in particular by limiting the nominal increase in nationally financed net primary expenditure in 2024 to not more than 4.8%. Preserve nationally financed public investment and ensure the effective absorption of RRF grants and other EU funds, in particular to foster the green and digital transitions. For the period beyond 2024, continue to pursue a medium-term fiscal strategy of gradual and sustainable consolidation, combined with investments and reforms conducive to higher sustainable growth, to achieve a prudent medium-term fiscal position. Reduce risks related to the housing market, in particular by reducing mortgage interest deductibility, and by taking measures to increase the supply of buildable land. Address the long-term sustainability of the pension system, in particular by limiting early retirement options and increasing the employment rate for older workers. Increase action to effectively tackle aggressive tax planning, in particular by ensuring sufficient taxation of outbound payments of interest and royalties to zero/low-tax jurisdictions. 2. Proceed with the steady implementation of its revised recovery and resilience plan and swiftly finalise the REPowerEU chapter with a view to rapidly starting its implementation . Proceed with the swift implementation of cohesion policy programmes, in close complementarity and synergy with the recovery and resilience plan.
3. Improve the performance of the school education system and promote equal opportunities for all students, notably by adapting teaching to the needs of disadvantaged students and those from various linguistic backgrounds. 4. Reduce reliance on fossil fuels by accelerating the deployment of renewables, electricity transmission capacity, easing permitting procedures and invest ing in energy efficiency in both the residential and non-residential sectors. Support municipalities in developing detailed local plans for deploy ing renewable energy, including wind power and photovoltaics, and for district heating and cooling systems. Further promote electrification of transport and invest in public transport networks and infrastructure. S tep up policy efforts aimed at the provision and acquisition of the skills needed for the green transition . Done at Brussels, For the Council The President
(1) OJ L 209, 2.8.1997, p. 1.
(2) OJ L 306, 23.11.2011, p. 25.
(3) Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 e stablishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).
(4) COM(2022) 780 final.
(5) COM(2023) 62 final.
(6) COM(2023) 168 final.
(7) Regulation (EU) 2023/435 of the European Parliament and of the Council of 27 February 2023 amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans and amending Regulations (EU) No 1303/2013, (EU) 2021/1060 and (EU) 2021/1755, and Directive 2003/87/EC (OJ L 63, 28.2.2023, p. 1).
(8) COM(2023) 141 final .
(9) COM(2022) 583 final .
(10) Council Implementing Decision of 13 July 2021 on the approval of the assessment of the recovery and resilience plan for Luxembourg (ST 10155/ 21 ; ST 10155/ 21 ADD 1 ).
(11) SWD(2023) 616 final.
(12) SWD(2023) 638 final.
(13) Eurostat-Euro Indicators, 47/2023, 21.4.2023
(14) Payable tax credits can exceed the tax liability and affect non-taxpayers as well as taxpayers; therefore, they are classified as expenditure in national accounts (ESA 2010, articles 20.167 and 20.168).
(15) Council Recommendation of 18 June 2021 delivering a Council opinion on the 2021 Stability Programme of Luxembourg , OJ C 304, 16.2021, p. 73 .
(16) The fiscal stance is measured as the change in primary expenditure (net of discretionary revenue measures), excluding Covid-19 crisis-related temporary emergency measures but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other EU funds, relative to medium-term potential growth. For more details see Box 1 in the Fiscal Statistical Tables.
(17) Other nationally financed capital expenditure provided a contractionary contribution of 0 . 4 percentage points of GDP, due to a decline in ‘Other capital transfers’ mainly related to phasing out of business support and recovery assistance in the context of the C OVID -19 pandemic ( Recovery and solidarity fund for businesses ) .
(18) For nominal GDP the picture is slightly different; the Stability Programme forecast s nominal GDP growth rates of 4.7% in 2023 and 6.0% in 2024, while the Commission 2023 spring forecast projects a higher rate of 7.1% in 2023 , and a comparable rate of 5.9% in 2024.
(19) The figure represents the level of annual budgetary cost of those measures, including current revenue and expenditure as well as – where relevant – capital expenditure measures.
(20) Council Recommendation of 12 July 2022 on the National Reform Programme of Luxembourg and delivering a Council opinion on the 2022 Stability Programme of Luxembourg OJ C 334, 01.09.2022, p. 128 .
(21) Based on the Commission spring 2023 forecast, the medium-term (10-year average) potential output growth of Luxembourg, which is used to measure the fiscal stance, is estimated at 7 . 8% in nominal terms.
(22) Other nationally financed capital expenditure is projected to provide a neutral contribution to GDP.
(23) The Commission's definition of energy measures only includes fiscal policy measures directly affecting energy prices or providing temporary income support for energy consumption. General inflation support measures are not classified as energy measures, which explains a difference in the estimated budgetary cost of energy support measures between the Stability Programme and the Commission’s forecast.
(24) Cf. Article 5 of Council Regulation (EC) No 1466/97, which also requires an adjustment of more than 0.5% of GDP for Member States with a government debt exceeding 60% of GDP, or with more pronounced debt sustainability risks.
(25) The Commission estimated that Luxembourg would need a stable structural primary balance to ensure that government debt is kept at prudent levels in the medium term. This estimate was based on the Commission autumn 2022 forecast. The starting point for this estimate was the projected government deficit and debt for 2024 which assumed the withdrawal of energy support measures in 2024.
(26) Net primary expenditure is defined as nationally financed expenditure net of discretionary revenues measures and excluding interest expenditure as well as cyclical unemployment expenditure.
(27) Council Conclusions of 24 February 2022 on the revised EU list of non-cooperative jurisdictions for tax purposes, OJ C 103/01, 3.2.2022, p. 1.
(28) Council Regulation (EU) 2022/1369 and Council Regulation (EU) 2023/706
(29) Under Article s 5(2) and 9(2) of Council Regulation (EC) No 1466/97.