While the budget for 2021 was necessarily exceptional because of the COVID-19 crisis, it seems that the exception is becoming the rule in these turbulent times. This was confirmed by the Finance Minister’s speech entitled “A crisis budget in a time of crisis” when tabling the 2023 financial year State budget bill (and the multi-annual 2022-2026 financial programming bill), if any doubt might still have lingered. The Prime Minister’s State of the Nation address the previous day had set the tone.
Characterised as responsible, realistic and supportive, is the 2023 budget really these things?
Realistic? Although preference was given to a prudent approach, the way the budgetary situation develops will mainly depend on how the crisis evolves, as the Minister of Finance herself admits. Luxembourg is not immune to the serious deterioration in macro-economic conditions worldwide, as geopolitical and price tensions do not seem to be improving. Public debt is expected to reach a record level of 29.5% in 2026, despite the prospects of positive growth and assumptions that seem to betray a great deal of wishful thinking on inflation (2.5% in 2024 in the scenario used as the basis for the draft budget, which would avoid prolonging the heavy cost to the public finances of an energy price cap into 2024). The slightest shock (on energy inflation, for example, such as simply maintaining gas and electricity prices at their level “without an energy cap” until the beginning of 2024) will therefore push public debt above 30% – a ceiling that is certainly particular to Luxembourg, but highly symbolic – and could ultimately threaten Luxembourg’s AAA rating, which, in the words of the Minister of Finance, would be financial suicide.
If total Central Administration revenue is to grow by no less than 5% over the forecasts for 2022 (EUR 24.5 billion in 2023 vs. EUR 23.3 billion in 2022), this will mainly be due to a booming labour market and consequently revenue from tax withholdings on wages and salaries increasing by 15.7%. Knowing that all direct taxes account for 48% of total revenue, if the employment market were to be hit, for example by widespread layoffs of the kind observed in many other countries, this could destabilise this aggregate. In the current difficult climate, employment growth is also threatened by cyclical factors (risk of economic recession) and by structural factors (workforce shortages, legislation on teleworking that is disadvantageous to Luxembourg, lack of housing, mobility problems, especially for cross-border workers, etc.).
What is more, these revenues will still not offset the nearly 11% surge in expenditure in 2023 (EUR 27.3 billion in 2023 vs. EUR 24.6 billion in 2022). The Central Administration deficit of EUR 2.8 billion carries in its wake the Public Administration balance, which has plunged to EUR -1.8 billion. The deficit in this aggregate is likely to widen structurally due to the decline in the Social Security Administration surplus:
future imbalances in our pension system will have to be resolved much more quickly than the political authorities expected.
For all these reasons, even more than in other years, the projections for expenditure, revenue and balances must be viewed with extreme caution. In addition, the documents stress the importance of the “good” initial budgetary situation, which allows Luxembourg to react to the crisis (the cost of the energy cap, in particular). This is why it is important to show budgetary vigilance in the years to come, despite the somewhat turbulent situation; this can be done chiefly by establishing priorities.
Supportive? Yes and no. Without question, the budget shows solidarity “here and now” in terms of helping households, especially the most disadvantaged, which are particularly exposed to the energy crisis. This is demonstrated by, for example, the significant increase in social inclusion income (Revenu d’inclusion sociale – REVIS) and the social minimum wage planned from January 2023 (+3.3%). The measures adopted in Solidaritéitspak 1.0 and 2.0 are largely directed towards the most vulnerable households. They include the energy allowance and the increase in the cost-of-living benefit (measures extended until December 2023); the introduction, as part of the package announced at the end of March 2022, of an energy tax credit making it possible to “overcompensate” for the impact of the postponement to April 2023 of the indexation tranche due in July 2022; and the reduction in VAT and the doubling from November 2022 of the diesel subsidy for households.
In addition to these targeted measures, there is the cap on the increase in the price of gas at 15% and the stabilisation of the electricity price. This latter measure, which is extremely costly to the public finances, is lacking in social selectivity and does not really encourage large sections of the population to contribute to the goal of reducing energy consumption.
The “supportive” aspect is much more difficult to detect when it comes to companies, the smaller ones in particular. There is a danger that the aid contemplated as part of the two Tripartites and the budget will not meet the challenges ahead, especially if the uncertain circumstances we face deteriorate further. The economic barometer (Baromètre de l’Economie) for H2 2022, presented at the end of October by the Chamber of Commerce, reports a significant drop in business confidence and grave concerns about companies’ profitability, especially in trade and industry. The pressure on margins stems in part from the explosion in energy and labour costs, but also from factors such as high absenteeism and the proliferation of various kinds of leave. The chief consequences of this are a sharp decline in companies’ ability to make the investments necessary to succeed in their digital and environmental transition and to become more resilient in the face of new challenges.
Responsible? The support promoted in the draft budget seems short-sighted. In fact, it is much shakier, if not to say frankly non-existent, over a medium-term perspective; this resolutely contradicts the much-vaunted principle of responsibility, since a social safety net worthy of the name needs to be funded. Otherwise, it risks making the lives of whole sections of the population more precarious, while threatening the longer-term balance of our public finances and our AAA rating.
However, if we are to believe the 2023 draft budget, the social security surplus will continue to shrink, amounting to just 0.7% of GDP in 2026, compared with 1.3% from 2020 to 2022, and 1.9 % of GDP before the COVID-19 crisis (i.e., in 2019). In 2001, it stood at almost 3% of GDP. According to the recent technical assessment of the general pension scheme prepared by the Luxembourg General Social Security Inspectorate (IGSS), this decidedly unfavourable trend will, in the absence of reforms, continue in the years to come. This represents a potential social time bomb, the effect of which will be further compounded by the rising cost of housing, both purchased and rented. It will also be necessary to evaluate in detail the direct and indirect, desired and collateral effects of the recently announced housing measures (property tax, land-use tax, limits on depreciation, tax on unoccupied housing, etc.), as these measures could have counterproductive effects in a market that is still under stress.
The Government’s responsibility towards companies is also to create a pro-business framework, promoting a dynamic, coherent and qualitative policy of economic diversification which will buttress the economic growth so necessary to the Luxembourg socio-economic model. Are the aspects emphasised in the budget, particularly in terms of digital infrastructure, capable of fulfilling these ambitions? This is something the Chamber of Commerce will certainly be examining in light of its recent work on the digitisation of the public sector.
One of the key elements contributing to any proactive and forward-looking policy, however, is high investment. And even if this is raised from 4.2% of GDP in 2022 to 4.6% in 2023, it is slated to decrease subsequently, to 4.2% in 2026. Not exactly extraordinary bearing in mind the current stagnation. And even less so if we compare this trend to that of salary expenditure, which is expected to rise from 10.2% of GDP in 2022 to 10.8% in 2026, reflecting the difficulty faced by public authorities in further simplifying administrative procedures for citizens and companies and digitising public services more systematically and quickly. Greater simplification and speedier digitisation would allow the State to reduce somewhat the significant need for civil service recruitment included from year to year in the budget document.
Supporting companies in these successive, mounting periods of crisis is also a responsibility that cannot be evaded. However, the measures contained in the budget do not seem to bring any more predictability and certainty to companies than did the tripartite agreement signed on 28 September. However, a safety margin in the budget would have been welcome to compensate for any future deterioration in socio-economic conditions that might require increased support. After numerous crises, with their ensuing economic slowdown, fiscal room for manoeuvre is rapidly eroding, while the accumulation of reserves during the years of strong economic growth was not sufficiently substantial.