2024 national budget: a matter of responsibility 

In politics, intentions are often expressed through proposals or plans, and decisions through a budget. So the budget vote is always the highlight of the political year, a time for the government to show a coherent approach to making things better for the country, its citizens and its businesses.

Six months after the parliamentary election, MPs are now preparing to vote on the national budget for 2024. The bill is a special one, covering only the period from 1 May to 31 December under the law of provisional twelfths drawn up by the previous coalition government. This makes it a transitional budget that reflects both the direction of the former government and the initial choices made by the new coalition. 

The vote comes at a time when the economic and geopolitical situation remains unstable. Although some economies have proved very resilient to crises, significant challenges persist: lingering inflation, pressure on supply chains, shortages of skilled labour, etc. Struggling under the weight of energy costs, Europe is experiencing real difficulty, as seen in the recession that hit its economic powerhouse, Germany, in 2023. 

With an economy that is very open, especially to its European neighbours, Luxembourg “imports” and therefore feels the full impact of these troubles. They come on top of home-made challenges relating to overregulation, surging wage costs due to certain mechanisms, and the crisis affecting a housing sector that was already on its knees, to give just three examples. The country stopped growing several years ago and actually saw its GDP decline by 1% in 2023. Against this backdrop of high uncertainty and volatility, it is particularly hard to make predictions. The 2024 budget assumed 2% GDP growth in 2024 before an acceleration in 2025 and 2026. This is rather optimistic.

The IMF is expecting a rate closer to 1.5% for Luxembourg this year, while the European Commission doubts it will exceed 1.3%. So when analysing the 2024 budget and long-term financial plan, one must factor in considerable uncertainty as the level of growth could affect revenues, the budget balance and therefore debt. The moment of economic and fiscal truth will come when the 2025 budget and new long-term plan are submitted, as they will have to taken into account the latest macroeconomic forecasts. 

End the scissors effect 

A scissors effect emerged in Luxembourg in 2022. Since then, central government spending has been rising faster than revenues, on a trajectory that is unsustainable in the long run. This effect is still visible in 2024: central government spending will increase by 7.6%, but revenue by just 7.1%. What is behind this? The government is highlighting the various Solidaritéitspäck measures, which will cost €1.3bn in 2024. But these one-off items are not responsible for unbalancing our long-term public finances.

The real structural problem is the spiralling of operating costs, which are often described as rigid or incompressible. Between 2022 and 2027, central government spending will rise from 31.55% to 33.95% of GDP, i.e. more than two percentage points in five years. This brisk pace is largely due to the surge in employee remuneration, which will climb above the €7bn mark for the first time this year, having been just €3.2bn in 2015. That was when, for every €100 the government spent, €20.54 went on paying its staff. A decade later in 2025, this amount will reach €24.56, over €4 higher. 

Largely fuelled by the widespread and automatic index-linking of wages, but also the rate of new recruitment, this increase is worrying. Another item is also set to rise very quickly: military spending. In line with its commitments, Luxembourg will raise its defence budget to 1% of its GDP in 2028, i.e. €994m, up from €573m in 2023. We need to take a smart and pragmatic look at the “return on investment” in the defence and related industries, in the broadest sense (communication services, cybersecurity, specialist technologies, etc.).

Responsibly, the government has announced its intention to start tapering the scissor effect in 2025. It expects to do this by limiting the rise in central government spending to 4.5% in 2025, then 3.6% in 2026 and 3.9% in 2027. Its ambition is laudable but still has to be realised. This will require a degree of political courage, but there is real, documented potential to save money through digitalisation and administrative simplification. We should view this necessary attempt at redressing our public accounts as an opportunity to modernise the administration, eliminating silos and pointless red tape.

Contain debt and create headroom 

Cutting spending is about improving the budget balance. The central government balance is expected to be €-1.9bn in 2024, while the public administration balance (which includes central government, local authorities and social security) is predicted to be €-987m. Whenever the balance is negative, the country (central government) is automatically forced to borrow money to keep going. So public debt will swell even further in 2024 to reach €22.25bn, or 26.5% of GDP. If the current trend continues, it will hit €26.58bn in 2027, or 27.3% of GDP. The threshold of 30% could be breached if GDP growth is weaker than expected (-0.5 pp), which doesn’t seem unlikely given the latest forecasts available from international bodies. Successive governments have long cited this 30% mark as a ceiling. Breaking through it could threaten the AAA rating but more than anything else, and perhaps in the much more immediate future, it could dangerously knock investors’ confidence in the stability of public finances and Luxembourg’s ability to honour its liabilities. The country must do whatever it takes to prevent any loss of confidence and credibility, so as to avoid increasing the burden and tightening the conditions of public debt refinancing.

This attempt to control spending is not just about containing debt but, much more generally, restoring some fiscal headroom. Doing so would enable us to absorb future economic shocks. The events of recent years have shown how severe they can be, and how they can require a quick response that eats into the public finances.

Moreover, it is because Luxembourg had given itself some headroom in the past that it was able to withstand the Covid crisis. This leeway will also allow us to invest much more ambitiously in the diversification of our economy and dual environmental and digital transition. To this end, the 2024 budget includes a number of positive signs, with a welcome boost for investment in these areas. 

Ensure the sustainability of our social model 

Budget forecasts also raise questions about the future of our social model. As the population is ageing and pension contributions are being made for a relatively shorter period of time, the social security surplus started to dwindle in 2023, and is set to fall from €1.055bn in 2023 to €861m in 2024 and €261m by 2027. There could even be a deficit in 2027 if the employment situation were to deteriorate. Looking at these figures, can anyone deny that our pension system is unsustainable? By 2070, retirement-related expenditure could double to 18% of GDP. The ageing population also weighs very heavily on sickness and maternity insurance, which is already in the red.

The challenges of demographic change also concern employment and housing. They are immense. The government wants to launch a broad consultation on these issues, pensions in particular. Society will have its say – businesses first and foremost. It’s about collective responsibility. 

Responsibility: the key to tackling the challenges that lie ahead. We will have to show responsibility if we are to get the budget back on track, breathe life into our economy and keep financing a generous social model. Basically, guarantee our future collective prosperity. 

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