On perusing the hundreds of pages of the two draft bills on the 2027 budget and the multi-annual programme, presented on 7 October by the Minister for Finance, it becomes clear that 2027 will be a historic year for the Luxembourg economy. For the first time, our GDP is expected to exceed the symbolic threshold of 100 billion euros. One might be tempted to welcome this. However, we must acknowledge that, for many years now, the increase in GDP in value terms has been driven more by inflation than by real growth. What the budget also tells us is that, in 2027, our public expenditure will exceed the 50 billion euro mark for the first time.
The first figure reflects how far our economy has come. The second should make us question the path we are currently taking. The Government advocates a ‘resolutely counter-cyclical’ policy to support an economy facing moderate growth and a particularly uncertain international environment. This reasoning is valid. Luxembourg is, of course, not an island: wars, geopolitical tensions, the fragmentation of world trade, increased competition between the major powers, structurally higher energy prices in Europe and anaemic growth in the eurozone are having a direct impact on an economy as open as ours.
Indeed, STATEC forecasts real growth of just 1.9 per cent in 2027, following 1.2 per cent this year. For the fourth consecutive year, Luxembourg’s GDP growth is set to remain below that of the eurozone, whereas, over the period 2000 – 2019 as a whole, Luxembourg’s growth had been around twice as high.
The issue surrounding the 2027 budget is therefore not whether the State should support the economy. It must do so, as circumstances demand it. The real issue is how to target and prioritise support, and how to prevent a temporary support policy from gradually turning into a permanent increase in the State’s influence over the economy. This is where the crucial debate begins: the shift from a culture of spending to a culture of prioritisation.
It is worth taking a step back to look at developments over recent years. In 2000, public expenditure accounted for around 38 per cent of Luxembourg’s GDP. In 2010, it stood at 42 per cent. It is now approaching 50 per cent. Even more worrying is that the projected trajectory shows no real sign of reversal. After peaking at 49.9 per cent in 2027, the ratio would still stand at 49.2 per cent of GDP in 2030, provided that GDP growth reaches 2.4 per cent, as forecast by STATEC.
Expenditure regularly revised upwards
The problem is obviously not that the state spends money. The state must invest, ensure social cohesion, provide education, protect its citizens, build infrastructure and support transitions. The problem arises when expenditure increases sustainably faster than the wealth needed to finance it, to the point of gradually making the entire budget less flexible. And it is also increasing faster than what was approved a year earlier: projected expenditure for 2026 is expected to exceed the expenditure approved for the same year by 1.6 billion euros!
The Government rightly emphasises a historically high level of public investment. However, for central government, direct and indirect investment is projected to reach €4.47 billion in 2027 – 0.7 per cent less than in 2026 – whilst total expenditure is expected to rise by 6.5 per cent. The share of investment in total expenditure is projected to fall from 13.8 per cent in 2025 to 12.4 per cent in 2027, and then to 12.2 per cent in 2030. At the same time, public sector pay is projected to rise by 6 per cent in 2027, cash social benefits by 10 per cent and benefits in kind by 11.7 per cent.
The current economic climate may certainly justify a counter-cyclical policy aimed at supporting purchasing power. However, in a particularly open economy such as Luxembourg’s, action should focus more on the supply side, notably through investment that strengthens competitiveness, productivity and, consequently, businesses’ potential for wealth creation.
This paradox is worth highlighting: we are investing heavily, but it is mainly current expenditure that is rising. Yet it is precisely investment expenditure (infrastructure, digitalisation, research, energy, housing, etc.) that paves the way for our future productive capacity. In the long term, the best way to safeguard public investment is therefore not to constantly increase the budget, but to better control the factors that make it inflexible.
Improved accounts … thanks to revenue
The public deficit forecast for 2027 may, at first glance, seem more reassuring. It is projected to fall from 1.1 per cent to 0.6 per cent of GDP, a reduction of 570 million euros. This is positive. But let us again look at what is driving this improvement: expenditure is rising by 6.3 per cent, whilst revenue is increasing by 7.5 per cent.
Some forecasts are particularly optimistic. Revenue from the corporate income tax (IRC) is projected to rise from €3.8 billion in 2026 to €4.75 billion in 2027, an increase of 25 per cent. The budget attributes this trend to the expected economic climate, the strong performance of the financial sector, and also to the accelerated processing of backlogged tax returns. The ‘Pillar 2’ minimum tax, for its part, is expected to generate €200 million, compared with €80 million this year.
It is all well and good if revenue meets expectations. However, a principle of prudence should guide any budgetary policy: revenue can disappear very quickly. Structural expenditure, on the other hand, is much less likely to do so.
Especially as the consolidated deficit masks three very different realities. In 2027, central government would still be running a deficit of 1.95 billion euros, whilst local authorities would post a surplus of 459 million and the social security system a surplus of 920 million (largely the result of increased contributions and transfers from central government). Central government would therefore not return to balance; its deficit would even increase slightly in absolute terms compared with 2026.
Nor can Social Security be regarded as a sustainable source of budgetary comfort. Its surplus would fall from 920 million euros in 2027 to 147 million in 2030, driven by a powerful negative scissors effect between revenue and expenditure. Owing to an ageing population, the number of pensioners is expected to rise twice as fast as employment over the next four years, with the latter growing at a much slower rate than in the past.
The silent billion
These are the first signs of constraints that will only intensify: an ageing population, healthcare, long-term care, defence, housing, the energy transition and new European decisions. And, from 2028 onwards, these will be compounded by a reform of personal taxation, the budgetary cost of which is estimated at 880 million euros in the first year, rising to nearly one billion per year by 2030.
There is another figure in the budget that deserves closer attention: interest on the debt. Luxembourg’s public debt would remain below the symbolic threshold of 30 per cent of GDP under the central scenario, but would exceed it as early as 2028 if growth were half a percentage point lower than forecast. There is nothing alarming at this stage. However, in absolute terms, our debt would still rise from 23.75 billion euros in 2025 to 33.70 billion in 2030.
Under the combined effect of the rise in outstanding debt and the increase in bond yields, interest payments will rise from €316 million in 2025 to €657 million in 2027, and then to €959 million in 2030. Nearly one billion euros a year to service the debt: that is almost as much as the annual cost of the forthcoming tax reform. This billion would not fund the construction of housing, transport infrastructure or a research laboratory. It would be the budgetary cost of our past choices.
Moving from simply adding up the figures to making trade-offs
None of this means that the 2027 budget is devoid of sound policy directions. The further reduction in the corporate income tax (IRC), with the top rate falling from 16 per cent to 15 per cent, would undoubtedly improve tax competitiveness. The increase in the tax credit for certain digital and energy investments, from 18 per cent to 21 per cent, would encourage business transformation. These are two measures we welcome.
A development that appears more modest, but which could herald a genuine change in approach, is the cap on the ‘numerus clausus’ at 999 posts. This commendable restraint comes after a 53 per cent increase in staff numbers across government ministries and departments between 2015 and 2026, and at a time when more than 2,000 posts had been requested by government departments for 2027.
This is a responsible trade-off. It is not a question of seeking to shrink the state. It is about acknowledging that its resources are not infinite and that, consequently, any new priority must also lead us to question the old ones. The potential of digitalisation and artificial intelligence must also be integrated into the organisation and management of human resources within the civil service and state administrations.
Our budgetary approach should henceforth be summed up in three verbs: cap, assess, reallocate.
Cap the growth in expenditure so that it does not exceed nominal GDP growth, except in duly justified exceptional circumstances. Evaluate public policies on the basis of their outcomes rather than the resources they consume. Reallocate resources when schemes have outlived their usefulness, when they yield too few results, or when new priorities become more urgent.
The interminable housing crisis facing our country offers a highly relevant testing ground in this regard. Public policy can no longer be measured solely in terms of the billions of euros mobilised. It must be measured in terms of the number of projects undertaken, planning permissions granted and, ultimately, homes built. It is this shift in perspective that must now be applied to all public policy.
Luxembourg does not need a programme of austerity. It needs something more ambitious and more demanding: to learn to make choices. For a long time, the growth of our economy and our revenue has allowed us to add new expenditure without really questioning the old. But the world is changing. Needs will continue to rise whilst resources will become scarcer. We will not be able to meet all these challenges by piling up expenditure indefinitely.
For controlling public expenditure is not the enemy of our collective ambition. It is now a prerequisite for it.
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