(3)The 2017 country report for Luxembourg was published on 22 February 2017. It assessed Luxembourg’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the recommendations adopted in previous years and Luxembourg’s progress towards its national Europe 2020 targets.

(2)As a country whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Luxembourg should ensure the full and timely implementation of the Recommendation for the euro area which is reflected in recommendation 2 below.

(1)On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester of economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission 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 carried out. On the same day, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area. That Recommendation was endorsed by the European Council on 9-10 March 2017 and adopted by the Council on 21 March.

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, and in particular Article 5(2) thereof,

(4)On 28 April 2017, Luxembourg submitted its 2017 National Reform Programme and its 2017 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

(5)The relevant country-specific recommendations have been taken into account in the Member States' programmes for the European Structural and Investment Funds (ESI Funds) covering the 2014-2020 period. As foreseen in the legislation governing the ESI Funds, where it is necessary to support the implementation of relevant country-specific recommendations, the Commission may request a Member State to review and amend its relevant ESI Funds programmes. The Commission has provided further guidelines on the application of those rules.

(6)Luxembourg is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Stability Programme the government plans a decrease in the headline surplus from 1.6% of GDP in 2016 to 0.2% of GDP in 2017, followed by a steady increase thereafter, reaching a surplus of 1.2% of GDP in 2021. The medium-term budgetary objective — a structural deficit of 0.5% of GDP — continues to be met with a margin throughout the programme period. According to the stability programme, the government debt-to-GDP ratio is expected to remain well below the Treaty reference value of 60% of GDP. The macroeconomic scenario underpinning these budgetary projections is plausible, with the exception of 2018 when it is markedly favourable and 2021 when it is markedly cautious. Based on the Commission 2017 spring forecast, the structural balance is forecast to register a surplus of 0.4% of GDP in 2017 and 0.1% of GDP in 2018, broadly in line with the stability programme and above the medium-term budgetary objective. Overall, the Council is of the opinion that Luxembourg is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018.

(7)Long-term fiscal sustainability concerns remain given the projected increase in ageing costs. Under the 2012 pension reform, an exercise to monitor and evaluate the sustainability of the pension system should be carried out every 5 years from the adoption of the reform. The government advanced the first evaluation to 2016. Although the review concluded that the pension system is still recording a recurrent surplus which allowed sizeable pension reserves to be accumulated, the pension system is expected to record a negative balance from 2023. According to the recent revised Eurostat population projections, the projected increase in population will be less significant than previously expected. This will have an impact on the dependency ratio, which will increase faster than previously expected and lead to a higher projected increase in public expenditure for pensions. There has been no progress in linking statutory retirement age to life expectancy, as previously recommended by the Council. Luxembourg stands out as the only Member State where no increase of the statutory retirement age has been laid down for the period between 2013 and 2060. Luxembourg has the Union’s highest projected increase in the share of dependent population by 2060. Luxembourg has made limited progress on early retirement. In July 2015, a draft law modifying early retirement schemes was presented to Parliament, where it is still pending. Overall, early retirement remains widespread and incentives to work longer remain limited. Following the revision of demographic prospects, Luxembourg faces further risks related to long-term care expenditure. This is already at one of the highest levels among Member States as a share of GDP and is projected to increase from 1.5 % to 3.2 % of GDP by 2060 (more than doubling from the current level). A project of reform of the long-term care insurance is still being discusses by the Parliament.

(8)The Luxembourg authorities have adopted a comprehensive tax reform that entered into force in January 2017. The reform introduced changes mostly in the area of direct taxation, both for individuals and corporations, aimed at gradually reducing the corporate income tax rate (with the goal of increasing competitiveness) and increasing the progressivity of personal income tax (with the goal of increasing fairness). At the same time, the increase in certain tax expenditures risks narrowing the tax base. To improve the predictability of tax revenues, there is scope to further broaden the tax base. This could be achieved in particular by revisiting the current low taxation on housing and making greater use of alternative sources. This could include ensuring more coherence between environmental taxation and the diversification objectives of the economy.

(9)The Luxembourg authorities have sought to diversify the economy, acknowledging the risks associated with heavy dependence on the financial sector. Reducing the economy’s reliance on the financial sector remains a central long-term challenge. To tackle this, the diversification analysis needs to be translated into specific measures with a clearly defined timeline. Given the country’s high labour costs, activities with higher added value offer the potential to unlock alternative sources of growth. The successful diversification of Luxembourg’s economy therefore depends to a large extent on sectors that are less sensitive to labour cost levels. These are largely based on research and innovation, which tend to be technology- and knowledge-intensive. Reducing or removing barriers to investment and innovation that limit economic development would unleash the potential for innovation and help diversification. While public investment is above the euro area average, private investment is underperforming. Sustaining a high level of investment is essential to maintaining growth prospects.

(10)Further expanding the already successful non-financial service sector could also help diversify the economy. High regulatory barriers remain in the business services sector, in particular for accountants, architects, engineers and lawyers. For all these professions, the business turnover rate is lower than both the EU average and the average rate for the overall economy. Restrictions on these professions may thus be harming the competitiveness of businesses in Luxembourg. These barriers include the wide scope of activities reserved for architects; reserving simple tasks such as payroll activities or preparation of tax declarations for highly qualified professionals; reserving legal advice for lawyers; and legal form and shareholding requirements, incompatibility rules and multidisciplinary restrictions for lawyers which may be disproportionate in relation to core principles, such as the independence of the profession, and to the corresponding supervisory arrangements.

(11)Targeted active labour market policies and lifelong learning programmes, in particular for older workers, whose employment rate remains among the lowest in the EU, are necessary to avoid negative impacts. Measures have been adopted to improve their employability and labour market attachment. A law on the reclassification of workers with working disabilities has been implemented since 1 January 2016, increasing the possibilities for such workers to remain longer on the labour market. However, a comprehensive strategy, following consultations with social partners, is yet to be put forward. The ‘age pact’, a draft law submitted to Parliament in April 2014 which aims to encourage firms with more than 150 employees to retain older workers, has still not been adopted. Upskilling opportunities through targeted active labour market policies and lifelong learning to support older workers will remain important for the success of such policies. Investment in skills is crucial to reap the full benefits of digitalisation and to maintain competitiveness.

(12)A substantial package of measures has been enacted to tackle the supply shortage in real estate, but its real impact has yet to be seen. Incapacity to access the land available for construction, which is mostly owned by private individuals, appears to be one of the main obstacles to increasing housing supply. Limited housing supply coupled with solid demand has led to a steady increase in housing prices. This contributes to explaining the trend towards increasing household indebtedness, which is mostly mortgage related. Moreover, despite substantial investment in transport infrastructure, tackling traffic congestion remains a challenge. This is all the more so as modern work practices, such as teleworking, are discouraged in the case of cross-border workers by the fiscal policies in neighbouring countries. Both housing and mobility challenges are likely to put additional strain on efforts to diversify the economy and increase competitiveness. They could also act as barriers to attracting high-skilled workers into the labour market.

(13)In the context of the European Semester, the Commission has carried out a comprehensive analysis of Luxembourg’s economic policy and published it in the 2017 country report. It has also assessed the Stability Programme and the National Reform Programme and the follow-up given to the recommendations addressed to Luxembourg in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Luxembourg, but also their compliance with EU rules and guidance, given the need to strengthen the EU’s overall economic governance by providing EU-level input into future national decisions.

(14)In the light of this assessment, the Council has examined the Stability Programme and is of the opinion that Luxembourg is expected to comply with the Stability and Growth Pact,

HEREBY RECOMMENDS that Luxembourg take action in 2017 and 2018 to:

1.Strengthen the diversification of the economy, including by removing barriers to investment and innovation. Remove regulatory restrictions in the business services sector.

2. Ensure the long-term sustainability of the pension system, limit early retirement and increase the employment rate of older people.

Done at Brussels,