Council opinion of 10 February 2004 on the updated stability programme of Luxembourg, 2002-2006
Date: 2004-02-10
Institutions: Council of the European Union
Subjects: Luxembourg, stability programme

19.2.2004

EN

Official Journal of the European Union

C 43/7

COUNCIL OPINION

of 10 February 2004

on the updated stability programme of Luxembourg, 2002-2006

(2004/C 43/05)

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 10 February 2004 the Council examined the 2003 update
of the stability programme of Luxembourg, which covers the
period 2002 to 2006. The updated programme complies with
the data requirements of the revised ‘code of conduct’ on the
content and format of stability and convergence programmes.

The budgetary strategy underlying the update is based on
maintaining balanced public finances in the medium term.
While the government
to cut public spending
intends not
drastically in the present period of weak economic growth,
measures have been taken to limit the growth rate of public
expenditure.

The update projects real GDP growth at 1,2 % in 2003, from
1,3 % in 2002. In 2004 growth is estimated to pick up to 2 %,
increasing to 3,8 % in 2006. Employment growth is expected
to decelerate to around 1 % in 2004 and to increase to slightly
above 2 % by 2006. HICP inflation is forecast to decrease
gradually to around 1,3 % in 2006. On the basis of currently
available information, the macroeconomic scenario underlying
the programme seems plausible for 2004 and 2005. However,
the growth projection for 2006 may be on the high side.

on public finances.
In cyclically adjusted terms, based on
Commission calculations according to the commonly agreed
methodology, there would be a stable surplus. In 2005, the
deficit would rise further to 2,3 % of GDP, and it would
decrease again to 1,5 % of GDP in 2006. In cyclically-adjusted
terms, a surplus would be maintained. The debt ratio is forecast
to decline somewhat over the time horizon covered by the
update, 5,2 % of GDP in 2004 to 4,4 % of GDP in 2006.

The balance of risks to the budgetary projections seems skewed
to the downside. This regards in particular the strength of the
expected cyclical upturn, and the feasibility of the planned
slowdown in expenditure in the baseline projection of the
update. Under adverse economic circumstances,
the 3 % of
GDP threshold may be breached, particularly in 2005. On
the other hand, the changes in the cyclically adjusted balance
indicate that the maintenance of a budgetary position close to
balance seems sufficiently established by the programme.

However, the estimate of the output gap and hence the cyclically-
adjusted balance present unusual margins of uncertainty due to
the special features of the economy of Luxembourg. In particular,
current estimates of the rate of potential growth in the medium
term may be on the high end of plausible outcomes. Although the
starting position of public finances is very sound, some expen-
diture restraint may be called for in order to ensure that public
expenditure remains in line with the revenue base in the medium
term. Further,
the ratio of public
investment to GDP would decline somewhat over the time
horizon covered, but would remain well above the EU average
at more than 4 % of GDP.

it has to be noted that

Luxembourg presents no risks of unsustainable public finances
in the long term. The debt to GDP ratio will remain very low
over the projection period, and the total net asset position is
even more favourable in view of the substantial financial assets
accumulated over past years with fiscal surpluses.

The update targets a general government deficit of 1,5 % of
GDP in 2004, a marked deterioration from the 0,6 % of GDP
deficit foreseen for 2003. This deterioration to a large extent
seems to reflect the lagged impact of the economic slowdown

The economic policies as reflected in the updated programme
are broadly consistent with the recommendations in the Broad
Economic Policy Guidelines, specifically those with budgetary
implications.

(1) OJ L 209, 2.8.1997.