(5)The General Escape Clause has been active since March 2020. In its Communication of 3 March 2021, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(4)Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any country-specific recommendations issued up to the date of submission of the modified plan.

(3)Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt for example through higher energy and food prices and weaker growth prospects. The higher energy prices weigh particularly on the most vulnerable households experiencing or at risk of energy poverty. The EU is also seeing an unprecedented inflow of people fleeing Ukraine. In this context, on 4 March 2022, the Temporary Protection Directive was triggered for the first time, granting displaced persons from Ukraine the right to legally stay in the EU, as well as access to education and training, labour market, healthcare, housing and social welfare.

(2)On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the reaffirmed joint commitment of the Porto Social Summit of May 2021 to further implement the European Pillar of Social Rights proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Luxembourg as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was adopted on 5 April 2022 by the Council, as well as the proposal for the 2022 Joint Employment Report analysing the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights, which was adopted by the Council on 14 March 2022.

(1)Regulation (EU) 2021/241 of the European Parliament and of the Council, which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transition, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility [was] updated on [XX] June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(6)Following the approach in the Council opinion of 18 June 2021 on the 2021 Stability Programme, the fiscal stance is currently best 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. Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed primary current expenditure (net of discretionary revenue measures and excluding COVID-19 crisis-related temporary emergency measures) and investment.

(7)On 2 March 2022, the Commission adopted a Communication providing broad guidance for fiscal policy in 2023, aiming at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, based on the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020-2022 to a broadly neutral aggregate fiscal stance would appear appropriate in 2023, while standing ready to react to the evolving economic situation. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate across Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its Semester spring package of late May 2022.

(8)With respect to the fiscal guidance provided on 2 March 2022, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transition and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second round effects via targeted and temporary measures; fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, and be differentiated across countries depending on their fiscal and economic situation, including as regards the exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)On 30 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 Luxembourg. The release of instalments is conditional on a decision by the Commission, taken in accordance with Article 24(5) of Regulation (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 29 April 2022, Luxembourg submitted its 2022 National Reform Programme and its 2022 Stability Programme, in line with Article 4 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 2022 National Reform Programme also reflects Luxembourg’s bi-annual reporting on the progress made in achieving its recovery and resilience plan.

(11)The Commission published the 2022 country report for Luxembourg on 23 May 2022. It assessed Luxembourg’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Luxembourg’s implementation of the recovery and resilience plan, building on the Recovery and Resilience Scoreboard. 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, including those emerging from Russia’s invasion of Ukraine. 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)On 20 July 2020, the Council recommended Luxembourg to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the pandemic, sustain the economy and support the ensuing recovery. It also recommended Luxembourg to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, based on data validated by Eurostat, Luxembourg’s general government balance improved from a deficit of 3.4% of GDP in 2020 to a surplus of 0.9% in 2021. The fiscal policy response by Luxembourg supported the economic recovery in 2021, while temporary emergency support measures declined from 2.4% of GDP in 2020 to 0.7% in 2021. The measures taken by Luxembourg in 2021 have been in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were temporary or matched by offsetting measures. Based on data validated by Eurostat, general government debt stood at 24.4% of GDP in 2021.

(13)The macroeconomic scenario underpinning the budgetary projections is cautious in 2022 and realistic thereafter. The 2022 Stability Programme projects real GDP to grow by 1.4% in 2022 and 2.9% in 2023. By comparison, the Commission’s 2022 spring forecast projects a real GDP growth of 2.2% in 2022 and of 2.7% in 2023. The difference of 0.8 percentage points in 2022 is mainly due to higher expectations for investments and a positive contribution of net exports to real GDP growth in the Commission’s forecast. In its 2022 Stability Programme, the Government expects that the headline balance will decrease to a deficit of 0.7% of GDP in 2022 and to 0.4 % in 2023. The decrease in 2022 mainly reflects higher expenditure on compensation of employees, investments and social benefits, while on the revenue side current taxes on income and wealth are projected to decline. According to the Programme, the general government debt-to-GDP ratio is expected to increase to 25.4% in 2022, and to rise to 25.8% in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission 2022 spring forecast projects a government deficit for 2022 of 0.1% of GDP and a surplus for 2023 of 0.1%. The Commission 2022 spring forecast projects a lower general government debt-to-GDP ratio, of 24.7% in 2022 and 25.1% in 2023.

Based on the Commission spring 2022 forecast, the medium-term (10-year average) potential output growth is estimated at 2.6%. However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can raise Luxembourg’s potential growth.

(14)In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency support measures are projected to decline from 0.7% of GDP in 2021 to 0.1% in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission spring 2022 forecast are estimated at 0.8% of GDP in 2022 and 0.2% of GDP in 2023. These measures mainly consist of an energy tax credit, social transfers to low-income households, cuts in indirect taxes on energy consumption, and subsidies on production. These measures have been announced as mostly temporary. However, in case energy prices remain elevated also in 2023, some of these measures could be continued. Some of these measures are not targeted, notably the across the board cut in excise duties for fuel in 2022. The government deficit is also impacted by the costs to offer temporary protection to displaced persons from Ukraine, which in the Commission 2022 spring forecast are projected at 0.1% and 0.2% of GDP in 2022 and 2023.

(15)On 18 June 2021, the Council recommended that in 2022 Luxembourg pursues a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserves nationally financed investment. It also recommended Luxembourg to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term, and at the same time, to enhance investment to boost growth potential.

(16)In 2022, based on the Commission’s 2022 spring forecast and including the information incorporated in Luxembourg’s 2022 Stability Programme, the fiscal stance is projected to be supportive at -1.3% of GDP as recommended by the Council. Luxembourg plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to remain stable compared to 2021. Nationally financed investment is projected to provide an expansionary contribution of 0.1 percentage point to the fiscal stance in 2022. Therefore, Luxembourg plans to preserve 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) in 2022 is projected to provide an expansionary contribution of 1.2 percentage points to the overall fiscal stance. This significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0.5 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0.1 % of GDP), while higher compensation of employees and social transfers are also projected to contribute (0.3 % of GDP) to the growth in net current expenditure.

(17)In 2023, the fiscal stance is projected in the Commission 2022 spring forecast at +0.5% of GDP on a no-policy change assumption. Luxembourg is projected to continue using the grants from the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. Nationally financed investment is projected to provide an expansionary contribution of 0.1% of GDP to the fiscal stance in 2023. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 0.5 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0.3 % of GDP).

(18)In the 2022 Stability Programme, the general government deficit is expected to gradually decline to 0.3% of GDP in 2024 and to 0.2% by 2025. The general government balance is thus planned to remain below 3% of GDP over the programme horizon. These projections assume slightly higher revenues and stable expenditure as a percentage of GDP. According to the Programme, the general government debt-to-GDP ratio is expected to increase by 2025, specifically with an increase to 26.2% in 2024, and a stabilisation at 26.2% in 2025. Based on the Commission’s analysis, debt sustainability risks appear low over the medium term.

(19)The COVID-19 crisis had a smaller impact on government finances than in other Member States, and relevant indicators are expected to improve in 2022. However, the impact of demographic trends on government spending will intensify over the next decades. In particular, this is because the number of pensioners per worker is expected to rise steadily due to the ageing population and the slowdown of net migration flows. Under a ‘no policy change’ scenario, Luxembourg will face one of the EU’s sharpest increases in pension spending, as a share of GDP by 2070. This would lead to a pension spending of around 18% of GDP (compared to 9% in 2019), among the highest in the EU. This will cause a significant increase in government debt, putting the sustainability of government finances at risk. Raising the effective retirement age would have the most beneficial macroeconomic impact, since this factor has the largest potential to reduce pension spending. In turn, a higher rate of older workers in employment would also support economic growth. The recovery and resilience plan does not address the long-term sustainability of the pension system, nor the negative effects of early-retirement schemes and the financial incentives to exit the labour market early, which explains the low employment rate of older workers. An early start with reforms aiming to limit early-retirement schemes and shifting older workers’ preferences to staying in employment for longer would enable a gradual implementation, increasing intergenerational fairness.

(20)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 integrated financial sector, which in large part explains the existence of large financial flows. However, these large financial flows also reflect the large presence in the country of foreign-controlled companies, which are involved in intra-group financing and treasury activities. A particular point of concern is the absence of withholding taxes – or equivalent measures on interest and royalty payments to low or zero-tax jurisdictions beyond those countries included in the EU list of non-cooperative jurisdictions. Outbound payments of interests and royalties from Luxembourg-based companies to non-EU 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. So far, however, measures have been limited and insufficient to address the outbound payment issue in the tax system, which could be used by multinationals to engage in aggressive tax planning.

(21)In accordance with Article 19(3), point (b), and Annex V, criterion 2.2, to Regulation (EU) 2021/241, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments to be implemented by 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Luxembourg by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a plan. In particular, these challenges relate to the health system’s resilience, labour market inclusion and investment in the green and digital transition, as well as the shortage of affordable housing and the institutional resilience of the anti-money laundering framework. The plan includes measures to increase the public supply of affordable housing. The plan also includes investments in renewable energy generation and sustainable transport, helping to progressively decarbonise the economy. Digital public services and a large public research and innovation project in quantum communication technologies would encourage business investment and boost productivity growth in the medium term. On anti‑money laundering and counter‑terrorist financing, the plan includes a combination of measures to improve transparency and strengthen the framework for the oversight of financial service providers. The skills strategy and training programmes set out in the plan, including a dedicated target for older workers, should help improve labour market inclusion.

(22)The implementation of the recovery and resilience plan of Luxembourg is expected to contribute to making further progress on the green and digital transition. Measures supporting the climate objectives in Luxembourg account for 61% of the plan’s total allocation, while measures supporting digital objectives account for 32% of the plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Luxembourg swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of 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.

(23)Luxembourg has not yet submitted the Partnership Agreement and the other cohesion policy programming documents. In line with Regulation (EU) 2021/1060 of the European Parliament and of the Council of 24 June 2021, Luxembourg shall take into account the relevant country-specific recommendations in the programming of the 2021-2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting the coordination, complementarity and coherence between these funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transition and balanced territorial development.

(24)Beyond the economic and social challenges addressed by the recovery and resilience plan, Luxembourg faces a number of additional challenges, notably related to growing inequality in the education system. Luxembourg’s education system is characterised by the use of three languages (Luxembourgish, German and French), as well as by a high number of pupils from diverse socio-economic and linguistic backgrounds. International test results suggest that pupils’ basic skills are lower than the EU average and are strongly linked to pupils’ socio-economic and linguistic backgrounds. In the 2018 survey of the Programme for International Student Assessment carried out by the Organisation for Economic Co‑operation and Development, Luxembourg recorded one of the EU’s largest score gaps in reading between advantaged and disadvantaged students. Inequalities are amplified by the multilingual schooling and the way pupils are separated into different school tracks at an early stage. The education system does not provide all pupils with sufficient multilingual and basic skills to meet the country’s labour market needs. Individualised support for pupils would help achieve full development potential and overall inclusion of all students. In line with the conclusions of the national observatory of school quality of 2020, there is room to improve the education system’s governance, further developing evaluation tools and measurable objectives promoting quality and equality of opportunity on both the formal and non-formal sides of the education system.