Recommendation for a COUNCIL RECOMMENDATION on Luxembourg’s 2013 national reform programme and delivering a Council opinion on Luxembourg’s stability programme for 2012-2016
Date: 2013-05-29
Institutions: European Commission
Subjects: Luxembourg, VAT, budget deficit, coordination of EMU policies, financial services, reduction of gas emissions, retirement conditions, stability programme, tax reform, wage determination, youth unemployment

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 366 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on Luxembourg’s 2013 national reform programme  

and delivering a Council opinion on Luxembourg’s stability programme for 2012-2016

{SWD(2013) 366 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on Luxembourg’s 2013 national reform programme  

and delivering a Council opinion on Luxembourg’s stability programme for 2012-2016 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

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 
policies1, and in particular Article 5(2) thereof, 
Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

(3) 

On  26  March  2010,  the  European  Council  agreed  to  the  Commission’s  proposal  to 
launch  a  new  strategy  for  growth  and  jobs,  Europe  2020,  based  on  enhanced 
coordination of economic policies, which will focus on the key areas where action is 
needed to boost Europe’s potential for sustainable growth and competitiveness. 

On 13 July 2010, on the basis of the Commission's proposals, the Council adopted a 
recommendation  on  the  broad  guidelines  for  the  economic  policies  of  the  Member 
States and the Union (2010 to 2014) and, on 21 October 2010, adopted a decision on 
guidelines  for  the  employment  policies  of  the  Member  States4,  which  together  form 
the  ‘integrated  guidelines’.  Member  States  were  invited  to  take  the  integrated 
guidelines into account in their national economic and employment policies. 

On 29 June 2012, the Heads of State or Government decided on a Compact for Growth 
and  Jobs,  providing  a  coherent  framework  for  action  at  national,  EU  and  euro  area 
levels using all possible levers, instruments and policies. They decided on action to be 
taken  at  the  level  of  the  Member  States,  in  particular  expressing  full  commitment  to 
achieving the objectives of the Europe 2020 Strategy and to implementing the country-
specific recommendations. 

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OJ L 209, 2.8.1997, p. 1. 
COM(2013) 366 final. 
P7_TA(2013)0052 and P7_TA(2013)0053. 
Council Decision2013/208/EU of 22 April 2013. 

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(4) 

(5) 

(6) 

(7) 

(8) 

On  6  July  2012,  the  Council  adopted  a  recommendation  on  Luxembourg’s  national 
reform  programme  for  2012  and  delivered  its  opinion  on  Luxembourg’s  updated 
stability programme for 2011-2015. 
On  28  November  2012,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2013  European  Semester  for  economic  policy  coordination. 
Also  on  28  November  2012,  the  Commission,  on  the  basis  of  Regulation  (EU)  No 
1176/2011  on  the  prevention  and  correction  of  macroeconomic  imbalances,  adopted 
the Alert Mechanism Report6, in which it did not identify Luxembourg as one of the 
Member States for which an in-depth review would be carried out. 

On  14  March  2013,  the  European  Council  endorsed  the  priorities  for  ensuring 
financial stability, fiscal consolidation and action to foster growth. It underscored the 
need  to  pursue  differentiated,  growth-friendly  fiscal  consolidation,  to  restore  normal 
lending conditions to the economy, to promote growth and competitiveness, to tackle 
unemployment  and  the  social  consequences  of  the  crisis,  and  to  modernise  public 
administration. 

On 26 April 2013, Luxembourg submitted its 2013 stability programme covering the 
period 2012-2016 and its 2013 national reform programme. In order to take account of 
their interlinkages, the two programmes have been assessed at the same time. 

Based  on  the  assessment  of  the  2013  stability  programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario  underpinning  the  budgetary  projections  in  the  programme  is plausible.  In 
particular,  the  programme  scenario  for  2013  is  very  close  to  the  2013  Commission 
spring  forecast,  while  for  2014  it  is  slightly  more  optimistic.  Medium-term  deficit 
projections  are  made  under  a  slightly  optimistic  growth  scenario,  above  potential 
growth. The objective of the budgetary strategy outlined in the programme is to bring 
the deficit from 0.8% of GDP in 2012 to 0.6% of GDP in 2014. However in the outer 
years of the programme period, the deficit is forecast to deteriorate to 1.3% of GDP 
both  in  2015  and  2016.  This  is  the  result  of  the  introduction  of  the  new  VAT  rules 
regarding electronic services, entering into force on 1 January 2015, which will bring 
Luxembourg  into  compliance  with  EU  rules.  According  to  these  rules,  the  VAT 
revenues  generated  from  e-commerce  activities  will  be  transferred  from  the  country 
where the supplier is located to that of the residence of the customer. The impact of the 
new rules is estimated by the authorities to lower tax revenues from VAT by 1.4% of 
GDP.  The  government  has  already  announced  that  the  standard  VAT  rate  will  be 
increased,  with  a  view  to  make  up  a  part  of  the  revenue  loss.  The  2013  Stability 
Programme  confirms  the  previous  medium-term  budgetary  objective  (MTO)  of  a 
structural surplus of 0.5% of GDP. The MTO is in line with the requirements of the 
Stability and Growth Pact. Based on both the 2013 Commission spring forecast as well 
as  on  the  (recalculated)  structural  budget  balance  in  the  programme,  Luxembourg  is 
expected  to  be  at  a  structural  surplus  of  0.1%  of  GDP,  which  is  below  the  MTO,  in 
2012, and is projected to achieve its MTO in 2013. However, Luxembourg is projected 
to depart again from its MTO starting from 2014 by 0.3% of GDP and even further in 
2015 and 2016. The national authorities have reiterated their objective to return to the 
MTO at the latest in 2017 so as to provide greater room for manoeuvre. At 20.8% of 
GDP in 2012, gross government debt is well below the Treaty reference value. 

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COM(2012) 750 final. 
COM(2012) 751 final. 

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(9) 

Luxembourg has been able to keep its public deficit below the 3% of GDP threshold 
over  the  past years,  therefore  avoiding entering the excessive deficit procedure. This 
has  been  due  more  to  buoyant  revenues  rather  than  to  expenditure  restraint. 
Specifically, in 2012, the growth rate of government expenditure, net of discretionary 
revenue  measures,  is  estimated  to  have  exceeded  the  expenditure  benchmark  as 
defined  in  the  Stability  and  Growth  Pact.  The  deviation  of  the  growth  rate  of 
government expenditure from the expenditure benchmark is estimated to reach 1.3%pp 
of  GDP,  above  the  threshold  of  0.5%  of  GDP  defined  in  Regulation  (EC)  1466/97. 
However,  to  qualify  this  deviation,  an  overall  assessment  needs  to  be  conducted, 
taking into account other factors: (i) the deficit deteriorated in structural terms by only 
0.2%  of  GDP  in  2012;  (ii)  the  economy  of  Luxembourg,  given  the  small  size  of  the 
country  and  its  degree  of  openness  is  very  volatile;  and  (iii)  according  to  the 
Commission  services'  spring  2013  forecast,  Luxembourg  should  attain  its  MTO 
already  in 2013. All  these elements point  to a non-structural  nature of the deviation. 
Still,  the  high  volatility  of  the  revenues  collected  by  Luxembourg's  general 
government, up to now resulting in higher-than-planned revenues, represents a risk for 
the  sustainability  of  public  finances.  To  better  address  these  risks,  both  the  debt  and 
expenditure  constraints,  should  be  established  in  law.  Moreover,  there  should  be  an 
identified monitoring body and predefined action in case of non-compliance. The entry 
into force on 1 January 2015 of the above-mentioned VAT package and its subsequent 
strong negative impact on tax collection illustrates the importance for Luxembourg to 
introduce  a  medium-term  budgetary  framework.  Specifically,  this  would  call  for  a 
particularly prudent fiscal stance in 2014.  

(10)  Currently,  less  than  a  third  of  tax  revenues  are  raised  from  consumption  taxes, 
partially owing to moderate standard and reduced VAT rates. Luxembourg ranks first 
in  the  EU  in  terms  of  the  number  of  categories  of  goods  and  services  covered  by 
reduced VAT rates. The presence of a large financial sector, exempted from VAT, also 
contributes  to  the  low  VAT  to  GDP  ratio.  Overall,  Luxembourg  has  scope  to  raise 
revenue by extending the standard VAT rate. In addition, the corporate tax system in 
Luxembourg  is  characterised  by  a  large  tax  bias  towards  indebtedness,  which 
contributes to a high private debt to GDP ratio. 

(11)  The Luxembourg pension reform adopted in December 2012 can only be considered a 
first step in the right direction. Even when taking into account most of the aspects of 
the  adopted  pension  reform,  Luxembourg  would  still  need  to  implement  long-term 
sustainability-enhancing  policies  equivalent  to  a  permanent  improvement  of  8.6 
percentage points of GDP in the primary balance to close the fiscal gap. Luxembourg 
therefore  needs  to  go  further  in  its  pension  reform.  The  introduction  of  a  cap  on 
pension adjustments based on real wage increases would increase pension reserves and 
linking the statutory retirement age to life expectancy would help ensure the long-term 
sustainability  of  the  pension  system.  Moreover,  the  possibilities  for  early  retirement 
should  be  reduced  and  it  should  be  made  more  attractive  to  work  longer  than  the 
minimum  required.  In  addition,  the  impact  on  fiscal  sustainability  of  long-term  care 
expenditure  is  projected  to  contribute  by  2.1  percentage  points  to  Luxembourg's 
sustainability gap. The expected increase in both the number of elderly and the number 
of dependents in Luxembourg is high compared to the EU average. 

(12)  Luxembourg’s current productivity is rather high. However, the room for manoeuvre 
in terms of productivity gains is getting smaller. Therefore, the growth of unit labour 
costs  should  be  limited  by  ensuring  a  better  correlation  between  wages  and 
productivity.  Luxembourg  has  taken  measures  to  moderate  wage  growth  by 

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modulating  the  indexation  system  between  2012  and  2014.  However,  this  reform  is 
only temporary and does not guarantee that wages will over time evolve in line with 
productivity. Productivity is not the same across all economic sectors, and the level of 
produtivity in the financial sector is almost twice as high as in the remaining part of 
the economy. There will be a significant risk to Luxembourg’s competitiveness from 
2015  onward,  when  the  automatic  indexation  system  will  again  be  applied  in  the 
normal  way.  Additional  measures  should  thus  be  taken  to  reform  the  wage  setting 
system in a more permanent way to avoid a further deterioration of competitiveness in 
the future. 

(13)  Luxembourg's  economy  is  heavily  dependent  on  its  financial  sector,  which  accounts 
for about 30% of total value added and 25% of collected fiscal revenues. To safeguard 
the  country's  future  competitiveness,  alternative  "competence  niches"  would  need  to 
be developed. However, the Luxembourgish research and innovation system remains 
very weak and Luxembourg is not on track to reach its R&D intensity target for 2020. 
The  performance  of  Luxembourg  on  the  indicators  on  cooperation  between  public 
research  institutions  and  firms  is  well  below  the  EU  average,  reflecting  the  current 
disconnections  between  the  private  sector  R&D  and  the  public  research  system. 
Luxembourg  should  counteract  the  declining  trend  of  its  R&D  intensity,  notably  by 
helping  boost  business  R&D  intensity.  The  development  of  a  more  targeted  smart 
specialisation strategy could play a crucial role in maximising the economic impacts of 
public  research  funding,  in  particular  through  ensuring  a  leverage  effect  on  private 
investments.  Such  a  targeted approach should be complemented  by  a  comprehensive 
horizontal policy focused on the development and growth of innovative firms. 

(14)  Youth  unemployment  remains  persistently  high  at  18 %  and  depends  heavily  on  the 
educational  level.  Young  residents  face  intense  competition  for  jobs  from  non-
residents, who are often more skilled. While Luxembourg has demonstrated a strong 
commitment  to  combat  youth  unemployment,  further  efforts  are  needed.  In  order  to 
maximise  returns,  measures  taken  should  be  made  part  of  a  comprehensive  reform 
strategy,  including  enhanced  activation  policies  to  combat  benefit  dependency. 
Luxembourg’s PISA performance testing on basic skills of young people is relatively 
weak.  Further  measures  are  needed  to  counteract  the  negative  tendency  in  reading, 
mathematics  and  science  observed  since  2006.  Further  efforts  should  be  made  to 
improve  and  target  education  resources  for  schools  with  disadvantaged  students  and 
increase  resources  available  for  language  support  and  remedial  classes.  The  specific 
challenges faced by people with a migrant background on the labour market should be 
further examined and addressed by targeted measures, including in respect of language 
skills.  Vocational  education  and  training  should  be  given  particular  attention  in  this 
context. Further measures should be taken to improve early childhood education and 
reduce  early  school 
the  migrant  population.  The 
in  particular  for 
employability  of  older  workers  should  be  improved,  including  through  skills 
upgrading.  

leaving, 

(15)  Luxembourg  is  committed  to  reducing  its  greenhouse  gas  emissions  in  the  non-ETS 
sectors by 20 % in 2020 compared to 2005 but is expected to fail to meet its target by 
27  percentage  points.  The  transport  sector  was  responsible  for  64 %  of  non-ETS 
emissions in 2010 and represents a key challenge for Luxembourg. Measures currently 
in  place  would  only  contribute  to  approximately  a  third  of  the  greenhouse  gas 
emission  reduction  necessary  to  meet  the  target.  Consequently,  measures  need  to  be 
significantly  stepped  up,  notably  by  increasing  fuel  taxation  so  as  to  reduce  the 
taxation  gap  with  neighbouring  countries.  The  vehicle  tax  reform  should  also  be 

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(16) 

(17) 

(18) 

accelerated. Luxembourg should continue with the implementation of projects which 
favour the use of public transport. It should introduce congestion charging on roads to 
encourage  a  shift  towards  public  transport.  Better  public  transport  connections  with 
neighbouring regions should be promoted. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Luxembourg’s  economic  policy.  It  has  assessed  the 
stability  programme  and  national  reform  programme.  It  has  taken  into  account  not 
only their relevance for sustainable fiscal and socio-economic policy in Luxembourg 
but also their compliance with EU rules and guidance, given the need to reinforce the 
overall economic governance of the European Union by providing EU-level input into 
future  national  decisions.  Its  recommendations  under  the  European  Semester  are 
reflected in recommendations (1) to (6) below. 

In  the  light  of  this  assessment,  the  Council  has  examined  Luxembourg’s  stability 
programme, and its opinion7 is reflected in particular in recommendation (1) below. 

In  the  context  of  the  European  Semester  the  Commission  has  also  carried  out  an 
analysis of the economic policy of the euro area as a whole. On this basis the Council 
has issued specific recommendations addressed to the Member States whose currency 
is  the  euro.  Luxembourg  also  should  ensure  the  full  and  timely  implementation  of 
these recommendations, 

HEREBY RECOMMENDS that Luxembourg should take action within the period 2013-2014 
to: 

1. 

2. 

3. 

4. 

5. 

Preserve  a  sound  fiscal  position  and  remain  at  the  medium-term  objective  so  as  to 
ensure  the  long-term  sustainability  of  public  finances,  in  particular  by  taking  into 
account  implicit  liabilities  related  to  ageing.  Strengthen  fiscal  governance  by 
adopting a medium-term budgetary framework covering the general government and 
including multi-annual expenditure ceilings, and by putting in place the independent 
monitoring of fiscal rules. 

Take  measures  to  address  the  debt-bias  in  corporate  taxation  and  extend  the 
application of the standard VAT rate. 

Curb  age-related  expenditure  by  making  long-term  care  more  cost  effective,  in 
particular  through  a  stronger  focus  on  prevention,  rehabilitation  and  independent 
living, strengthening the recently adopted pension reform, taking additional measures 
to  curb  early  retirement  and  increasing  the  effective  retirement  age,  including  by 
linking the statutory retirement age to life expectancy. 

Beyond the current freeze, take further structural measures, in consultation with the 
social partners and in accordance with national practices, to reform the wage setting 
system, including wage indexation, to improve its responsiveness to productivity and 
sectoral  developments  and  labour  market  conditions  and  foster  competitiveness. 
Step-up efforts to diversify the structure of the economy, fostering private investment 
in research, notably by developing cooperation between public research and firms. 

Step  up  efforts  to  reduce  youth  unemployment  by  improving  the  design  and 
monitoring  of  active  labour  market  policies.  Strengthen  general  and  vocational 
education to better match young people’s skills with labour demand, in particular for 
people  with  migrant  background.  Take  resolute  action  to  increase  the  participation 

7 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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rate  of  older  workers,  including  by  improving  their  employability  through  lifelong 
learning. 

6. 

Step up measures to meet the target for reducing non-ETS greenhouse gas emissions, 
in particular by increasing taxation on energy products for transport. 

Done at Brussels,  

For the Council 
The President 

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