# C_2008049EN.01000101.xml

| 22.2.2008 | EN | Official Journal of the European Union | C 49/1 |
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22.2.2008

EN

Official Journal of the European Union

C 49/1

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COUNCIL OPINION

COUNCIL OPINION

of 12 February 2008

on the updated stability programme of Luxembourg, 2007-2010

(2008/C 49/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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(3) thereof,

1

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated stability programme of Luxembourg, which covers the period 2007 to 2010. |
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(1)

On 12 February 2008, the Council examined the updated stability programme of Luxembourg, which covers the period 2007 to 2010.

| (2) | Since the end of the 2001-2003 slowdown, Luxembourg is experiencing a new period of strong growth. On average, real GDP grew by 5,25 % and domestic employment by over 3 % a year in 2004-2007. In this context, Luxembourg has been able to bring its public finances back to surplus. Growth should remain strong during the period covered, even if it is forecast to slow down slightly in the coming years. However, despite the currently good condition of the economy and especially of public finances, the problem of population ageing will be particularly severe in Luxembourg and long-term sustainability is therefore a serious challenge. |
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(2)

Since the end of the 2001-2003 slowdown, Luxembourg is experiencing a new period of strong growth. On average, real GDP grew by 5,25 % and domestic employment by over 3 % a year in 2004-2007. In this context, Luxembourg has been able to bring its public finances back to surplus. Growth should remain strong during the period covered, even if it is forecast to slow down slightly in the coming years. However, despite the currently good condition of the economy and especially of public finances, the problem of population ageing will be particularly severe in Luxembourg and long-term sustainability is therefore a serious challenge.

| (3) | The programme contains two different scenarios for the macroeconomic and budgetary projections: a ‘central’ scenario and a ‘variant’. The ‘central’ scenario is presented by the programme as the reference scenario, on which its budgetary projections are based. Assessed against currently available information (2), it appears to be based on plausible growth assumptions. It envisages that real GDP growth will decrease from 6 % in 2007 to 4,5 % on average over the period 2008-2010. The programme's projections for inflation in 2008 appear to be on the low side, in view of the acceleration in consumer prices at the end of 2007 and of the recent hike in energy prices. The rise in labour costs in Luxembourg has significantly exceeded the EU average since the early 2000s and the programme projects it to remain rather strong over the period covered, which might progressively weaken the country's competitiveness. |
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(3)

The programme contains two different scenarios for the macroeconomic and budgetary projections: a ‘central’ scenario and a ‘variant’. The ‘central’ scenario is presented by the programme as the reference scenario, on which its budgetary projections are based. Assessed against currently available information (2), it appears to be based on plausible growth assumptions. It envisages that real GDP growth will decrease from 6 % in 2007 to 4,5 % on average over the period 2008-2010. The programme's projections for inflation in 2008 appear to be on the low side, in view of the acceleration in consumer prices at the end of 2007 and of the recent hike in energy prices. The rise in labour costs in Luxembourg has significantly exceeded the EU average since the early 2000s and the programme projects it to remain rather strong over the period covered, which might progressively weaken the country's competitiveness.

2

| (4) | For 2007, the general government surplus is estimated at 1,2 % of GDP in the Commission services' autumn 2007 forecast and at 1,0 % of GDP in the 2007 update of the stability programme, against a deficit of 0,9 % of GDP targeted in the previous update. The main reason for this large divergence with the target is a strong revision of public finance data in recent years, which resulted in a large upward shift of the series of government balances since 2005. This shift implies that Luxembourg has in recent years constantly been at its medium-term objective (MTO) for the budgetary position, which is an estimated structural deficit (i.e. a cyclically-adjusted deficit net of one-off and other temporary measures) of 0,75 % of GDP. This is a much better outcome than the plan in the 2006 update to achieve the MTO from 2007 onwards. Although the improvement in the general government balance in 2007 was half of what was planned in the 2006 update and the better-than-expected outcome is almost entirely due to the large revision in public finance data, the budgetary implementation in 2007 has thus achieved the objectives endorsed by the Council opinion of 27 February 2007 on the 2006 update (3). The Council notes that it is also consistent with the April 2007 Eurogroup orientations for budgetary policies. |
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(4)

For 2007, the general government surplus is estimated at 1,2 % of GDP in the Commission services' autumn 2007 forecast and at 1,0 % of GDP in the 2007 update of the stability programme, against a deficit of 0,9 % of GDP targeted in the previous update. The main reason for this large divergence with the target is a strong revision of public finance data in recent years, which resulted in a large upward shift of the series of government balances since 2005. This shift implies that Luxembourg has in recent years constantly been at its medium-term objective (MTO) for the budgetary position, which is an estimated structural deficit (i.e. a cyclically-adjusted deficit net of one-off and other temporary measures) of 0,75 % of GDP. This is a much better outcome than the plan in the 2006 update to achieve the MTO from 2007 onwards. Although the improvement in the general government balance in 2007 was half of what was planned in the 2006 update and the better-than-expected outcome is almost entirely due to the large revision in public finance data, the budgetary implementation in 2007 has thus achieved the objectives endorsed by the Council opinion of 27 February 2007 on the 2006 update (3). The Council notes that it is also consistent with the April 2007 Eurogroup orientations for budgetary policies.

3

| (5) | In view of these revised data, the current programme no longer envisages a budgetary consolidation like the previous one. The main goal of its medium-term budgetary strategy is now to maintain a nominal surplus of about 1 % of GDP on average and to continue to respect the MTO with a comfortable margin throughout the programme period. The headline surplus is projected to decrease from 1,0 % of GDP in 2007 to 0,8 % in 2008 as a result of cuts in personal income tax before gradually increasing thereafter. The primary surplus would follow a similar path. The increase in the surplus from 2007 to 2010 is planned to be achieved through a decrease by 0,9 percentage point of GDP in the expenditure ratio, more than compensating a decline by 0,7 percentage point of GDP in the revenue ratio. With the exception of 2008 for which they reflect the measures contained in the budget, these figures represent no-policy-change projections rather than targets reflecting the implementation of policy measures. |
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(5)

In view of these revised data, the current programme no longer envisages a budgetary consolidation like the previous one. The main goal of its medium-term budgetary strategy is now to maintain a nominal surplus of about 1 % of GDP on average and to continue to respect the MTO with a comfortable margin throughout the programme period. The headline surplus is projected to decrease from 1,0 % of GDP in 2007 to 0,8 % in 2008 as a result of cuts in personal income tax before gradually increasing thereafter. The primary surplus would follow a similar path. The increase in the surplus from 2007 to 2010 is planned to be achieved through a decrease by 0,9 percentage point of GDP in the expenditure ratio, more than compensating a decline by 0,7 percentage point of GDP in the revenue ratio. With the exception of 2008 for which they reflect the measures contained in the budget, these figures represent no-policy-change projections rather than targets reflecting the implementation of policy measures.

ratio

ratio

| (6) | The risks to the budgetary projections in the programme appear broadly balanced. They are based on a plausible macroeconomic scenario and seem attainable. In fact, outcomes could even be slightly better than projected in the programme due in particular to the prudence of revenue projections and the country's good track record in budgetary performance. |
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(6)

The risks to the budgetary projections in the programme appear broadly balanced. They are based on a plausible macroeconomic scenario and seem attainable. In fact, outcomes could even be slightly better than projected in the programme due in particular to the prudence of revenue projections and the country's good track record in budgetary performance.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO by a large margin throughout the period covered, as envisaged in the programme. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact throughout the period. The Council notes that it is also consistent with the April 2007 Eurogroup orientations. |
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(7)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO by a large margin throughout the period covered, as envisaged in the programme. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact throughout the period. The Council notes that it is also consistent with the April 2007 Eurogroup orientations.

| (8) | Luxembourg appears to be at medium risk with regard to the sustainability of its public finances. The long-term budgetary impact of ageing is among the highest in the EU, influenced notably by a very considerable projected increase in pension expenditure. The budgetary position in 2007 as estimated in the programme, which is better than the starting position of the previous programme, the low debt ratio, the significant assets accumulated in social security, and a structural primary surplus contribute to offsetting the projected long-term budgetary impact of ageing populations. However, this is not sufficient to cover the sizeable increase in age-related expenditure. Achieving high primary surpluses over the medium term and, as recognized by the authorities, implementing measures aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances. |
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(8)

Luxembourg appears to be at medium risk with regard to the sustainability of its public finances. The long-term budgetary impact of ageing is among the highest in the EU, influenced notably by a very considerable projected increase in pension expenditure. The budgetary position in 2007 as estimated in the programme, which is better than the starting position of the previous programme, the low debt ratio, the significant assets accumulated in social security, and a structural primary surplus contribute to offsetting the projected long-term budgetary impact of ageing populations. However, this is not sufficient to cover the sizeable increase in age-related expenditure. Achieving high primary surpluses over the medium term and, as recognized by the authorities, implementing measures aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances.

ratio

| (9) | The stability programme seems to be consistent to some extent with the October 2007 implementation report of the national reform programme. In particular, the measures in the stability programme are in line with the 2005 national reform programme and its October 2007 implementation report, for instance the projected increase in R&D expenditure and the new investment projects in rail and road infrastructures. The budgetary implications of those NRP reforms that have a direct budgetary impact are reflected in the stability programme's budgetary projections. |
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(9)

The stability programme seems to be consistent to some extent with the October 2007 implementation report of the national reform programme. In particular, the measures in the stability programme are in line with the 2005 national reform programme and its October 2007 implementation report, for instance the projected increase in R&D expenditure and the new investment projects in rail and road infrastructures. The budgetary implications of those NRP reforms that have a direct budgetary impact are reflected in the stability programme's budgetary projections.

| (10) | The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and with the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. In particular, no reform of the pension system has been initiated to date in order to enhance the sustainability of public finances. |
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(10)

The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and with the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. In particular, no reform of the pension system has been initiated to date in order to enhance the sustainability of public finances.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4). |
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(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4).

4

The overall conclusion is that public finances have gone back to surplus in a context of strong GDP and employment growth. Recently released revised data indicate that the deterioration in public finances has been significantly more limited than previously estimated. Consequently, Luxembourg has constantly achieved its MTO and the path for the general government balance in the programme is at least 1 % of GDP better in each year than in the previous update. While tax cuts will result in a small decrease in the surplus in 2008, the programme aims at maintaining a surplus of 1 % of GDP on average throughout the period. The macroeconomic scenario and budgetary targets of the programme seem plausible and budgetary outcomes might even be slightly better than planned. However, Luxembourg will have to support in the coming decades a particularly heavy burden resulting from population ageing and no corrective measures have been taken to date. This explains that the country is considered to be at medium risk as regards the long-term sustainability of its public finances, in spite of its currently sound budgetary position.

In view of the above assessment and of the very strong increase in age-related expenditure forecast for the coming decades, Luxembourg is invited to improve the long-term sustainability of its public finances by implementing structural reform measures, in particular in the area of pensions.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 |
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| Real GDP
  (% change) | SP Nov 2007 | 6,1 | 6,0 | 4,5 | 5,0 | 4,0 |
| COM Nov 2007 | 6,1 | 5,2 | 4,7 | 4,5 | n.a. |
| SP Nov 2006 | 5,5 | 4,0 | 5,0 | 4,0 | n.a. |
| HICP inflation
  (%) | SP Nov 2007 | 3,0 | 2,3 | 2,0 | 2,1 | 2,1 |
| COM Nov 2007 | 3,0 | 2,5 | 2,8 | 2,3 | n.a. |
| SP Nov 2006 | 2,9 | 1,4 | 2,0 | 2,0 | n.a. |
| Output gap (5)

  (% of potential GDP) | SP Nov 2007 | – 0,4 | 0,5 | 0,1 | 0,2 | – 0,8 |
| COM Nov 2007 (6) | – 0,2 | 0,0 | – 0,2 | – 0,6 | n.a. |
| SP Nov 2006 | – 0,3 | – 0,8 | – 0,5 | – 1,6 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Nov 2007 | n.a. | n.a. | n.a. | n.a. | n.a. |
| COM Nov 2007 | n.a. | n.a. | n.a. | n.a. | n.a. |
| SP Nov 2006 | n.a. | n.a. | n.a. | n.a. | n.a. |
| General government balance
  (% of GDP) | SP Nov 2007 | 0,7 | 1,0 | 0,8 | 1,0 | 1,2 |
| COM Nov 2007 | 0,7 | 1,2 | 1,0 | 1,4 | n.a. |
| SP Nov 2006 | – 1,5 | – 0,9 | – 0,4 | 0,1 | n.a. |
| Primary balance
  (% of GDP) | SP Nov 2007 | 0,9 | 1,2 | 1,1 | 1,2 | 1,5 |
| COM Nov 2007 | 0,9 | 1,3 | 1,2 | 1,5 | n.a. |
| SP Nov 2006 | – 1,3 | – 0,8 | – 0,2 | 0,3 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | SP Nov 2007 | 0,9 | 0,7 | 0,8 | 0,9 | 1,6 |
| COM Nov 2007 | 0,8 | 1,2 | 1,2 | 1,7 | n.a. |
| SP Nov 2006 | – 1,3 | – 0,5 | – 0,1 | 0,9 | n.a. |
| Structural balance (7)

  (% of GDP) | SP Nov 2007 | 0,6 | 0,7 | 0,8 | 0,9 | 1,6 |
| COM Nov 2007 | 0,8 | 1,2 | 1,2 | 1,7 | n.a. |
| SP Nov 2006 | – 1,3 | – 0,5 | – 0,1 | 0,9 | n.a. |
| Government gross debt
  (% of GDP) | SP Nov 2007 | 6,6 | 6,9 | 7,1 | 7,2 | 7,0 |
| COM Nov 2007 | 6,6 | 6,6 | 6,0 | 5,4 | n.a. |
| SP Nov 2006 | 7,5 | 8,2 | 8,5 | 8,5 | n.a. |
| Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

Real GDP

(% change)

SP Nov 2007

SP Nov 2007

6,1

6,1

6,0

6,0

4,5

4,5

5,0

5,0

4,0

4,0

COM Nov 2007

6,1

5,2

4,7

4,5

n.a.

SP Nov 2006

SP Nov 2006

5,5

5,5

4,0

4,0

5,0

5,0

4,0

4,0

n.a.

n.a.

HICP inflation

(%)

SP Nov 2007

SP Nov 2007

3,0

3,0

2,3

2,3

2,0

2,0

2,1

2,1

2,1

2,1

COM Nov 2007

3,0

2,5

2,8

2,3

n.a.

SP Nov 2006

SP Nov 2006

2,9

2,9

1,4

1,4

2,0

2,0

2,0

2,0

n.a.

n.a.

Output gap (5)

5

(% of potential GDP)

SP Nov 2007

SP Nov 2007

– 0,4

– 0,4

0,5

0,5

0,1

0,1

0,2

0,2

– 0,8

– 0,8

COM Nov 2007 (6)

6

– 0,2

0,0

– 0,2

– 0,6

n.a.

SP Nov 2006

SP Nov 2006

– 0,3

– 0,3

– 0,8

– 0,8

– 0,5

– 0,5

– 1,6

– 1,6

n.a.

n.a.

Net lending/borrowing vis-à-vis the rest of the world

vis-à-vis

(% of GDP)

SP Nov 2007

SP Nov 2007

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

COM Nov 2007

n.a.

n.a.

n.a.

n.a.

n.a.

SP Nov 2006

SP Nov 2006

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

General government balance

(% of GDP)

SP Nov 2007

SP Nov 2007

0,7

0,7

1,0

1,0

0,8

0,8

1,0

1,0

1,2

1,2

COM Nov 2007

0,7

1,2

1,0

1,4

n.a.

SP Nov 2006

SP Nov 2006

– 1,5

– 1,5

– 0,9

– 0,9

– 0,4

– 0,4

0,1

0,1

n.a.

n.a.

Primary balance

(% of GDP)

SP Nov 2007

SP Nov 2007

0,9

0,9

1,2

1,2

1,1

1,1

1,2

1,2

1,5

1,5

COM Nov 2007

0,9

1,3

1,2

1,5

n.a.

SP Nov 2006

SP Nov 2006

– 1,3

– 1,3

– 0,8

– 0,8

– 0,2

– 0,2

0,3

0,3

n.a.

n.a.

Cyclically-adjusted balance (5)

5

(% of GDP)

SP Nov 2007

SP Nov 2007

0,9

0,9

0,7

0,7

0,8

0,8

0,9

0,9

1,6

1,6

COM Nov 2007

0,8

1,2

1,2

1,7

n.a.

SP Nov 2006

SP Nov 2006

– 1,3

– 1,3

– 0,5

– 0,5

– 0,1

– 0,1

0,9

0,9

n.a.

n.a.

Structural balance (7)

7

(% of GDP)

SP Nov 2007

SP Nov 2007

0,6

0,6

0,7

0,7

0,8

0,8

0,9

0,9

1,6

1,6

COM Nov 2007

0,8

1,2

1,2

1,7

n.a.

SP Nov 2006

SP Nov 2006

– 1,3

– 1,3

– 0,5

– 0,5

– 0,1

– 0,1

0,9

0,9

n.a.

n.a.

Government gross debt

(% of GDP)

SP Nov 2007

SP Nov 2007

6,6

6,6

6,9

6,9

7,1

7,1

7,2

7,2

7,0

7,0

COM Nov 2007

6,6

6,6

6,0

5,4

n.a.

SP Nov 2006

SP Nov 2006

7,5

7,5

8,2

8,2

8,5

8,5

8,5

8,5

n.a.

n.a.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

1

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

2

(3)  OJ C 70, 27.3.2007, p. 24.

3

(4)  In particular, there are no data on sectoral balances with the exception of the general government.

4

(5)  Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.

5

(6)  Based on estimated potential growth of 4,8 %, 5,0 %, 5,0 % and 4,9 % respectively in the period 2006-2009.

6

(7)  Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off or other temporary measures for the period 2007-2010 in the most recent programme and in the Commission services' autumn forecast.

7

Sources:

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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