Council Opinion of 18 January 2005 on the updated Stability Programme of Luxembourg, 2004-2007
Date: 2005-01-18
Institutions: Council of the European Union
Subjects: Luxembourg, economic convergence, multilateral surveillance, stability programme

1.4.2005

EN

Official Journal of the European Union

C 79/1

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(Information)

COUNCIL

COUNCIL OPINION

of 18 January 2005

on the updated Stability Programme of Luxembourg, 2004-2007

(2005/C 79/01)

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 surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particu-
lar Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 18 January 2005 the Council examined the updated stability programme of Luxembourg, which covers
the period 2004 to 2007. The update broadly complies with the data requirements of the revised ‘code of
conduct on the content and format of stability and convergence programmes’. In particular, some required
data on the macroeconomic assumptions are missing.

The update estimates real GDP growth at 4,4 % in 2004, from 2,9 % in 2003. In 2005 and 2006, growth
is projected to decelerate to 3,8 % and 3,3 % respectively, before reaccelerating to 4,3 % in 2007. On the
basis of currently available information, this scenario seems to reflect plausible growth assumptions.

The budgetary strategy underlying the update aims to slightly reduce the deficit to 1,0 % of GDP in 2005
from the 1,4 % of GDP estimated for 2004. In 2006 and 2007, the deficit would remain at the 2005 level
with both revenues and expenditure projected to remain constant as a percentage of GDP. It positively
contrasts with the 2003 update, which was based on a significantly less optimistic growth outlook than
that of 2004 and anticipated that the general government deficit would widen from 0,6 % of GDP in 2003
to around 2 % in the remainder of the programme period. In cyclically-adjusted terms, the Commission
services' calculations according to the commonly agreed methodology project that a surplus, amounting to
0,3 % of GDP, will emerge in 2005 and gradually rise to 2,0 % of GDP in 2007, reflecting an estimated
widening negative output gap. However, the estimates of output gaps and hence of cyclically-adjusted
balances present unusually large margins of uncertainty in the case of Luxembourg, due to the very specific
features of its economy, which calls for a very prudent use of such indicators. Over the time horizon
covered, the ratio of public investment to GDP would remain broadly constant, at about 5 % of GDP,
which is well above the EU average.

(1) OJ L 209, 2.8.1997, p. 1

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Official Journal of the European Union

1.4.2005

The risks to the budgetary projections in the programme appear broadly balanced. On the one hand,
revenue projections in Luxembourg are traditionally cautious, and the 2004 budgetary outcome might be
significantly better than currently estimated, which might perhaps entail a favourable base effect for the
remaining years of the programme. On the other hand, the programme projects a slowdown in the rise in
public spending, which has been particularly rapid in recent years, without detailing the measures that
should help achieve this. The budgetary stance in the programme seems to provide a sufficient safety
margin against breaching the 3 % of GDP deficit threshold with normal cyclical fluctuations. It also seems
sufficient to achieve the Stability and Growth Pact's medium-term objective of a position close to balance
within the programme period (from 2005) in cyclically-adjusted terms.

The debt ratio is extremely low and is even forecast to decline somewhat over the time horizon covered by
the update, from 5,0 % of GDP in 2004 to 4,5 % of GDP in 2007. The total net asset position is even
more favourable due to the substantial financial assets, estimated at about 50 % of GDP, accumulated over
past years through fiscal surpluses.

Luxembourg appears to be in a favourable position with regard to the long-term sustainability of its public
finances. The large net positive asset position can be expected to offset at least in part the future costs of
ageing. However, the ratio between contributors to and beneficiaries of the pension system will deteriorate,
even under a favourable scenario whereby employment growth keeps up with the exceptional rates
recorded in the last two decades. Therefore, some restraint is called for in order to ensure that government
spending remains in line with revenue and that the policy of accumulating reserves can be maintained,
together with the adoption of measures aiming at raising the currently low employment rate of residents,
especially older ones.

Comparison of key macroeconomic and budgetary projections

2004

2005

2006

2007

Real GDP
(% change)

HICP inflation
(%)

General

government

balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted

balance
(% of GDP)

Government gross debt
(% of GDP)

SP Nov 2004

COM autumn
2004forecast

SP Nov 2003

SP Nov 2004

COM autumn 2004

SP Nov 2003

SP Nov 2004

COM autumn 2004 (2)

SP Nov 2003

SP Nov 2004

COM autumn 2004 (2)

SP Nov 2003

SP Nov 2004 (1)

COM autumn 2004 (2)

SP Nov 2003 (1)

SP Nov 2004

COM autumn 2004 (2)

SP Nov 2003

4,4

4,0

2,0

2,6

3,0

1,5

– 1,4

– 0,8

– 1,8

– 1,2

– 0,6

– 1,6

– 0,7

0,4

0,9

5,0

4,9

5,2

3,8

3,5

3,0

3,2

2,3

1,3

– 1,0

– 1,6

– 2,3

– 0,9

– 1,4

– 2,1

0,3

0,3

1,0

5,0

4,8

5,0

3,3

3,6

3,8

1,5

1,6

1,2

– 0,9

– 2,0

– 1,5

– 0,8

– 1,8

– 1,5

1,4

0,7

2,2

4,6

4,7

4,4

(1) Commission services calculations on the basis of the information in the programme
(2) Finalised before the presentation of the 2005 budget
Sources:
Stability programme (SP); Commission services economic forecasts (COM); Commission services calculations

4,3

n.a.

n.a.

1,7

n.a.

n.a.

– 1,0

n.a.

n.a.

– 0,9

n.a.

n.a.

2,0

n.a.

n.a.

4,5

n.a.

n.a.