On October 8, while presenting the 2026 budget proposal to Parliament, Finance Minister repeatedly referenced Luxembourg’s social model, community living, and solidarity policies. He emphasized that growth and social cohesion go hand in hand, and rightfully so.
But while social cohesion is a noble goal, it cannot be decreed by a budget. It must be built, brick by brick, on the foundation of a solid, competitive, and value-creating economy. The budget is merely a lever to achieve this — a lever that needs the driving force of growth to be effective.
And that’s where the problem lies.
At the time of the 2025 budget vote, a growth rate of 2.7% was still expected for 2025. We now know it will not exceed 1% this year and 2% next year. This follows the recession of 2023 and the weak GDP growth of 0.4% recorded in 2024 — far below the past 20-years average of +2.9%. The slight recovery anticipated for 2026 is also highly uncertain and fragile. First, because the geopolitical and financial environment is marked by significant risks and heightened volatility. Second, because national indicators are poor. Confidence, activity, profitability: economic agents remain cautious. As for employment, it is growing slowly butis mainly driven by the public sector.
Naturally, the 2026 budget reflects this growth stagnation. At first glance, it ticks the right boxes. The public deficit is expected to be limited to –0.4% of GDP, or €408 million (an improvement of €298 million), with public debt controlled at 27% of GDP.
On paper, everything looks fine. But behind these reassuring figures, the underlying dynamics are concerning. Last year, anticipating stronger growth, the Government had outlined a virtuous budgetary path, with revenues growing faster than expenditures and a gradual reduction in the public deficit. The new trajectory is far less reassuring. Although revenue growth should outpace spending growth in 2026 for public administrations, the scissors effect will turn negative again in 2027, leading to a public deficit exceeding 1% of GDP by 2029. If economic conditions worsen slightly (with annual growth half a point below forecast), the deficit could plunge to –2.6%, and debt could reach 30.5% of GDP.
Two Areas of Concern
This budgetary situation calls for particular vigilance in two areas.
First, we must acknowledge that our revenues are largely volatile and dependent on external factors. This sometimes brings pleasant surprises, as in 2024, with a 24% increase in corporate income tax revenue linked to a taxpayer who made exceptionally high profits in 2022. The increase in revenues compared to the budgeted amount even reached 29.4% for the capital income withholding tax, thanks to a single taxpayer who accounted for 30% of total revenue. Also worth noting are tobacco excise duties (which rose sharply) and fuel excise duties (which have begun to decline), both expected to decrease in the near future.
Second, and even more concerning, is the evolution of public spending. According to the budget, public expenditure will reach 48.3% of GDP in 2026 — an all-time high, even compared to 2020, when the State heavily supported the economy during the Covid crisis. In 2000, it was just 38% of GDP; in 2010, 42%; and in 2019, 43%. In a quarter-century, the State has expanded its role in the economy by 10 percentage points of GDP !
The Worrying Rigidity of Spending
Luxembourg is not over-indebted, but it is stuck in budgetary rigidity. Nearly half of expenditures are now inflexible: salaries, social transfers, pensions, subsidies. Just in public sector salaries, €11 billion will be spent in 2026 — 11.6% of GDP, compared to 9.2% in 2016. While real growth barely hovers above zero, the public wage bill is soaring. For the central government alone, full-time equivalents rose from 24,289 in 2016 to 34,445 in 2024 — a 42% increase. Meanwhile, the population grew by only 18.3%, and jobs by 25.1%. For 2026, the budget sets a numerus clausus of 1,599.75 FTEs, up from 1,350 in 2025. And let’s not dwell here on the recent public sector wage agreement, which further increases costs, in a context where public employment already competes with the private sector for recruitment.
Let’s be clear: the issue is not spending itself, but spending more wisely in a context of minimal or stagnant growth. We still live like a country with 3% growth, while growth is on pause. In our model, the State is now growing much faster than the economy it administers. Before the budgetary situation becomes problematic, Luxembourg must ask the same question many mature economies are already asking: do we want a State that does everything, or a State that does better?
Stated Priorities, But Few Visible Trade-Offs
In this budget, the Government outlines legitimate priorities: defense, housing, ecological transition, poverty reduction. No one disputes their importance. But for a budget to be credible, it must be based on choices. In his State of the Nation address, the Prime Minister had emphasized that the increase in defense spending (+€494 million between 2025 and 2026) would be partly funded by “a redefinition of spending priorities.” Yet in the budget, these redefinitions are barely reflected. Spending is up; investment is rising (which is excellent news), but there is no clear identification of savings or areas of inefficiencies.
The result: every new ambition — however legitimate and relevant — becomes an additional weight on a scale that is already hard to balance. Will we still be able, in the near future, to add two major commitments that have been politically announced but are surprisingly absent from multiannual programming? I’m referring to the increase in defense spending to 3.5% of GNI by 2035 (the budget only plans for 2% until 2029) and the individualization of income tax, estimated to cost €800–900 million per year.
We have long urged successive governments to better control public spending because we believe that in this crisis-ridden world, in this fragile Europe, Luxembourg’s budgetary strength remains its main competitive advantage. But our AAA rating is not guaranteed forever. It is even less so given the looming costs of population aging on our public finances, as I detailed in a previous post on this blog.
Transforming the Country
Still, it would be unfair to claim that this budget — which is highly proactive in terms of investment — does not project our country into the future. In many respects, it reflects the Government’s desire to continue modernizing and transforming the country, notably by leveraging the creativity and innovation potential of companies.
Some figures to illustrate this: €2 billion invested over four years in affordable housing, €1.3 billion in digitalization, an additional €100 million in 2026 for the special fund promoting research, and a €150 million bond issue over three years to finance defense efforts, with a tax incentive.
By emphasizing the need for a stable tax framework, a strong financial center, and continued strategic investments in energy transition, research, and infrastructure — while reaffirming its commitment to simplifying regulations and addressing the housing crisis — the Government is charting a course: that of an investing State focused on modernization. But this budget also reveals a risk — that of a State expanding faster than it reforms, confusing action with expansion.
The challenge now is not to spend more, but to spend better. Luxembourg must rediscover the discipline that has always been its strength: rigorous management in service of an open economy. Because we can only share the wealth we have first created.