Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Luxembourg and delivering a Council opinion on the 2016 stability programme of Luxembourg
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Luxembourg, budget deficit, early retirement, economic disparity, economic policy, economic reform, employment policy, population ageing, stability programme, tax reform

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 336 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Luxembourg  and delivering a Council opinion on the 2016 stability programme of Luxembourg  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Luxembourg 

and delivering a Council opinion on the 2016 stability programme of Luxembourg 

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, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey4, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on 17-18 March 2016. On 26 November 2015, on the basis of Regulation (EU) No 
1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report5,  in  which 
Luxembourg was not identified as one of the Member States for which an in-depth 
review  would  be  carried  out.  On  the  same  day,  the  Commission  adopted  a 
recommendation for a Council recommendation on the economic policy of the euro 
area6.  That  recommendation  was  endorsed  by  the  European  Council  on  18-19 
February  2016  and  adopted  by  the  Council  on  8  March  2016.  As  a  country  whose 
currency is the euro and in view of the close interlinkages between the economies in 

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OJ L 209, 2.8.1997, p. 1. 
COM(2016) 336 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 
COM(2015) 692 final. 

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(2) 

(3) 

(4) 

(5) 

(6) 

the  economic  and  monetary  union,  Luxembourg  should  ensure  the  full  and  timely 
implementation of those recommendations. 
The country report for Luxembourg7 was published on 26 February 2016. It assessed 
Luxembourg’s progress in addressing the country-specific recommendations adopted 
by  the  Council  on  14  July  2015  and  Luxembourg's  progress  towards  its  national 
Europe 2020 targets.  

On 29 April 2016, Luxembourg submitted its 2016 national reform programme and 
its  2016  stability  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application of the measures linking the effectiveness of the European Structural and 
Investment Funds to sound economic governance8. 

in 

Luxembourg is currently in the preventive arm of the Stability and Growth Pact. In 
its 2016 stability programme, the government plans to achieve a balanced budget in 
2017 and small surpluses thereafter, reaching 0.4 % of GDP by 2020. The medium-
term budgetary objective will continue to be met throughout the programme period. 
However, in its stability programme, Luxembourg announces that the medium-term 
budgetary objective will change from a structural surplus of 0.5% of GDP until 2016 
to  a  structural  deficit  of  0.5%  of  GDP  as  from  2017.  According  to  the  stability 
programme,  the  government  debt-to-GDP  ratio  is  expected  to  gradually  increase  to 
23.5% of GDP in 2020. The macroeconomic scenario underpinning these budgetary 
projections is plausible, with the exception of 2017 and 2018 when it is favourable. 
Based on the Commission 2016 spring forecast, the structural surplus is projected to 
decrease  to  1.4  %  of  GDP  in  2016  and  further  to  0.3%  of  GDP  in  2017,  thereby 
remaining  above  the  medium-term  budgetary  objective.  Possible  future  deviations 
would  be  assessed  against  the  requirement  to  maintain  the  structural  balance  at  the 
medium-term budgetary objective, bearing in mind the need to ensure the long-term 
sustainability  of  public  finances,  notably  in  the  area  of  pensions.  Based  on  its 
assessment of the stability programme and taking into account the Commission 2016 
spring forecast, the Council is of the opinion that Luxembourg is expected to comply 
with the provisions of the Stability and Growth Pact.  

The Luxembourg authorities have announced the main lines of a comprehensive tax 
reform that should enter into force in 2017. The reform foresees amendments mostly 
in  the  area  of  direct  taxation,  both  for  individuals  and  corporations.  It  aims  at  a 
gradual  reduction  in  the  corporate  income  tax  rate  (with  the  aim  of  increasing 
competitiveness) and increased progressivity of personal income tax (with the aim of 
increasing  fairness).  At  the  same  time,  the  increase  of  certain  tax  expenditures,  in 
particular  with  regard  to  housing,  risks  narrowing  the  tax  base.  Some  international 
developments  may  also  affect  the  design  of  the  Luxembourg  tax  system  and 

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SWD(2016) 84 final. 
COM(2014) 494 final. 

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highlight  the  fragility  of  at  least  a  share  of  the  fiscal  revenues.  To  ensure  their 
predictability, there is scope for further broadening of the tax base, in particular by 
revisiting the currently low taxation on housing property and making greater use of 
alternative  sources,  including  environmental  taxation.  In  that  respect,  the  repeal  of 
the intellectual property box allows some broadening of the corporate tax base. The 
adoption  and  implementation  of  the  tax  reforms  will  continue  to  be  monitored 
closely under the European Semester.  

The  Luxembourg  authorities  have  sought  to  diversify  the  economy,  acknowledging 
the  risks  associated  with  heavy  dependence  on  the  financial  sector.  Given  the  high 
level  of  labour  costs  in  the  country,  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 those sectors that are 
less  sensitive  to  labour  cost  levels.  They  are  largely  based  on  research  and 
innovation,  which  tend  to  be  technology-  and  knowledge-intensive.  Further 
expansion  of  the  already  successful  non-financial  service  sector  could  also  help 
diversify  the  economy.  Reducing  or  removing  existing  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. The analysis in the country 
report shows that Luxembourg is the country with the most restrictive regulation in 
the EU for business services and retail establishment. The main restrictions concern 
shareholding  requirements,  voting  rights  and  multidisciplinary  limitations  in  the 
business services sector as well as operational and establishment requirements in the 
retail sector.  

The  continuous  increase  in  house  prices  in  recent  decades,  together  with  projected 
strong population and  employment dynamics over the coming years,  could  become 
an obstacle to the envisaged increase in population and labour force. That prospect is 
all  the  more  likely  as  the  economy  depends  largely  on  the  input  of  high-skilled 
workers from the neighbouring countries, who represent around one-third of overall 
employment. The dynamism of residential real estate prices is driven by a mismatch 
between  demand  and  supply,  in  particular  the  lack  of  available  and  affordable 
housing.  Insufficient  availability  of  land  for  new  construction  and  suboptimal 
administrative performance regarding procedures to grant building permits hinder the 
flexibility of housing supply. An important part of the tax subsidies available under 
current  policies  are  also  likely  to  be  capitalised  into  house  prices,  given  the  rigid 
housing supply. Efforts aimed at providing social housing at affordable prices could 
also  be  stepped  up.  The  current  housing  market  not  only  deters  households  from 
establishing  their  residence  in  Luxembourg  but  also  exacerbates  the  problem  of 
traffic  congestion  and  pollution.  The  new  demographic  projections  in  the  2015 
ageing report also add pressure to remove bottlenecks to investment in the fields of 
transport and housing and should be reflected in the four forthcoming sectoral plans 
on housing, transport, economic activity zones and green landscapes. 

Achievement  of economic  diversification  may be  constrained by the fact  that wage 
developments  in  some  sectors  may  not  be  in  line  with  productivity  developments. 
This further limits the sectors that can be targeted, mainly to those with high added 
value. Over the last decade, unit labour costs in Luxembourg have grown faster than 
in most euro area Member States. Economy-wide automatic wage indexation plays a 
role  in  limiting  wage  variation  across  sectors  and  may  prevent  labour  productivity 

(7) 

(8) 

(9) 

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(10) 

(11) 

(12) 

differentials  from  being  taken  into  account.  However,  the  protracted  low  inflation 
environment  has  delayed  the  triggering  of  the  automatic  wage  adjustment  and 
contributed 
to  moderate  wage  developments.  In  parallel  with  weak  wage 
developments  and  the  surge  in  output,  cost-competitiveness  losses  have  abated.  In 
that context, monitoring of wage developments is warranted.  

Age-related liabilities remain a risk in the long term, in particular as regards pension 
costs. Luxembourg has made limited progress in relation to closing the gap between 
the statutory and effective retirement age, by limiting early retirement. In July 2015, 
a  draft  law  modifying  early  retirement  schemes  was  presented  to  the  parliament. 
However,  while  one  scheme  has  been  abolished,  accessibility  conditions  for  other 
pre-retirement  schemes  have  been  eased.  A  law  on  the  reclassification  of  workers 
with working disabilities was adopted in July 2015 and has been implemented since 
1  January  2016.  The  law  increased  the  possibilities  for  workers  with  working 
disabilities  to  remain  in  the  labour  market  and  consequently  implies  a  reduction  in 
the number of people entering an early retirement scheme. Early retirement remains 
widespread and incentives to work longer are limited. A real strategy on age policy 
to keep older workers longer in employment and provide incentives and skills to get 
them  back  to  work  is  still  missing.  The  'age  pact',  aiming  at  fostering  retention  of 
older workers by firms with more than 150 employees, is still being discussed in the 
parliament. 

According  to  the  2012  pension  reform,  an  exercise  to  monitor  and  evaluate  the 
sustainability of the pension system should be carried out every five years from the 
adoption  of  the  reform.  The  government  confirmed  its  intention  to  advance  the 
evaluation  to  2016,  rather  than  2017  as  originally  planned,  and  created  a  Pension 
Working Group tasked with carrying out the evaluation. 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  further 
raising of the statutory and early retirement ages has been laid down for the period 
between 2013-2060. In the 2015 Ageing Report, the projected increase in age-related 
expenditure is revised downward, but the revision is almost exclusively explained by 
more favourable demographic projections, in a context where no new reforms have 
been adopted. Even after the revision, the projected increase in pension expenditure 
remains  the  highest  in  the  EU.  Moreover,  Luxembourg  faces  risks  related  to  the 
expected  increase  of  long-term  care  expenditure,  one  of  the  highest  as  a  share  of 
GDP of all Member States. This, in turn, seems to be driven by the highest projected 
increase in the share of dependant population by 2060 in the EU. Preparatory work 
on a reform to ensure the long-term sustainability of the long-term care insurance has 
been carried out. 

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 
2016  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  socio-economic  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.  The  recommendations  under  the  European  Semester  are  reflected  in 
recommendations 1 and 2 below. 

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(13) 

In the light of this assessment, the Council has examined the stability programme and 
is  of  the  opinion9  that  Luxembourg  is  expected  to  comply  with  the  Stability  and 
Growth Pact. 

HEREBY RECOMMENDS that Luxembourg take action in 2016 and 2017 to: 

1. 

2. 

Ensure  the  long-term  sustainability  of  public  pensions  by  further  limiting  early 
retirement,  by  linking  the  statutory  retirement  age  to  life  expectancy  and  by 
increasing incentives to work longer. 

Remove  barriers  to  investment  and  innovation  that  limit  economic  development  in 
the business services sector. Address bottlenecks that hamper housing investment. 

Done at Brussels, 

For the Council 
The President 

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

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