Council Opinion

of 7 March 2003

on the updated Stability programme of Luxembourg, 2001 to 2005

(2003/C 64/01)

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,

Having regard to the recommendation of the Commission

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 7 March 2003 the Council examined the updated stability programme for Luxembourg, which covers the period 2001 to 2005. The programme does not fully comply with the requirements of the code of conduct on the content and format of the programmes endorsed by the Ecofin Council on 10 July 2001; in particular it has been transmitted with a six week delay. The programme partly conforms with the recommendations of the BEPGs.

In 2002, real GDP growth decelerated further to an estimated 0,5 %, from 1,0 % in 2001, which is well below the forecast included in the 2001 stability programme. The slowdown is to a large extent due to adverse developments in financial services, which accounts for around a quarter of total value added. On the basis of a cautious macroeconomic scenario, which assumes a somewhat more muted recovery of economic activity than in the Commission Autumn 2002 forecast, real GDP growth is expected to pick up only gradually, to around 3 % in 2005.

The Council notes that government finances deteriorated markedly in 2002 as revenues decelerated in response to the combined impact of the tax reform and the economic slowdown, while expenditure growth remained very strong. Consequently, the general government budget balance is expected to show a deficit of 0,3 % of GDP in 2002, a sharp deterioration compared to the large surplus of 6,1 % of GDP in 2001(2). The general government balance is projected to remain in deficit by 0,3 % of GDP in 2003, to deteriorate slightly further in 2004 to a deficit of 0,7 % of GDP, and to reach a position close to balance in 2005, with a slight nominal deficit of 0,1 % of GDP. The underlying general government balance is expected to remain positive over the horizon covered by the stability programme. Consequently, the Council considers that Luxembourg continues to be in conformity with the requirement of the stability and growth pact to reach a budgetary position of close to balance or in surplus in the medium term.

The Council notes that sound management of public finances continues to be the guiding principle of the 2002 update; the Council welcomes the main elements of the budgetary framework currently in place, which inter alia encompasses the use of cautious macroeconomic projections as the basis for budgetary policy, as well as the principle to let net public sector lending be positive, to achieve a balanced budget for central government, and not to let the rise in current expenditure exceed the growth of total expenditure. The Council welcomes the reduction of the tax burden through the implementation of tax reform while aiming for a sound budgetary position in the medium term; in this context it encourages a future government to adhere to real expenditure ceilings that are compatible with achieving a budgetary position close to balance or in surplus in the medium term.

However, the Council expresses some concern over the rapid deterioration of the budget balance of the central government, which only accounts for part of the general government sector. The balance of central government was still in surplus by 2,6 % of GDP in 2001 but is projected to register a deficit of 2,2 % of GDP in 2002 and of 2,1 % of GDP in 2003, while the central government deficit is expected to deteriorate further to 2,8 % of GDP in 2004 and 2005. The Council notes that this is partly due to revenue shortfalls in response to the economic slowdown, while central government expenditure is projected to increase rapidly; although the starting position of public finances in Luxembourg is extremely sound, a continued fast increase of current expenditure might become a factor of risk should economic growth in the medium term slow significantly.

On the basis of current policies, the Council considers that public finances in Luxembourg are in a good position to meet the projected costs of an ageing population. However, the Council notes that the assessment of the sustainability of public finances in Luxembourg is very sensitive to developments as regards the number of cross-border workers. The Council considers that the commitment to sustain a balanced budget position in coming years is broadly appropriate in light of the projected budgetary impact of ageing populations, and welcomes measures to improve the attractiveness of third pillar private pensions.

(1) OJ L 209, 2.8.1997.

(2) More recent data communicated on 1 March show that the central government deficit in 2002 was only 0,1 % of GDP, resulting in a general government surplus of 2,6 % of GDP in 2002. However, this information came too late to be reflected in the Commission's appraisal.