The duty to seduce

 In the run-up to elections, the various political parties’ programmes tend to include proposals whose medium- and long-term cost to society and taxpayers, as well as the associated sources of funding, aren’t clearly defined. Sometimes simplistic solutions are put forward, such as making capital or legal entities contribute more. Occasionally, the argument is put forward that in Luxembourg, taxing labour and individuals is a greater burden than taxing capital and companies. This clearly misleading idea stems from a biased analysis of the direct and indirect tax contributions of economic players and of Luxembourg’s current attractiveness in terms of taxation for legal entities and companies. The idea is also based on the mistaken conviction that investors who have chosen the Grand Duchy will subsequently be unable to move to where the grass is greener. More than any other European Union member state, Luxembourg’s prosperity depends on its ability to attract foreign talent and investors.

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The reforms we need to become more attractive and competitive 

Attractiveness and competitiveness are two sides of the same coin. Good performance and a favourable ranking on these two indicators are pre-requisites for strong and steady corporate growth. This is especially true within the Luxembourg economy, which is small in size and particularly outward-facing. One indicator with a direct influence on companies’ performance and the attractiveness and competitiveness of an economy is productivity. 

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Inflation and indexation: a diabolical combination

Recent forecasts from the international institutes predict that advanced countries will see hardly any growth at all in 2023, but that activity will bounce back in 2024. The main reasons for this pause in growth for the current year are: the lag in the effects of soaring energy prices, which have eroded household purchasing power and corporate profitability; and the impact of rising interest rates, which have reduced household consumer spending and investment.

In the current tense and unpredictable geopolitical situation, Luxembourg is also expected to see a similar scenario: a slowdown in activity in 2023, a rebound in 2024, and then a stabilisation of the rate of expansion at around 3%, according to STATEC[1]. Unemployment is forecast to increase slightly over the entire period, while inflation would only return to normal levels from 2025. Moreover, if policy remains unchanged, public finances would be marked by an unprecedented deficit, estimated at -2.2% of GDP in 2023. In the run-up to the tripartite committee meeting on 3 March, a few months before the general election, political measures with a significant impact on public spending can be anticipated. If these measures prove unselective, their effects would be inefficient and their costs to the community and future generations would be extremely high, putting additional pressure on State finances.

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An electoral year in a context like no other

Forecasting is not an exact science, but in economics it is an indispensable exercise. Anticipating trends in order to make the best decisions (especially political ones) at the right time is of the utmost importance. The work of prediction draws on the lessons we have learned from the past and the challenges posed by the present.

At the start of this year, the Council of the European Union’s analysis and research team compiled and summarised some 20 predictive studies for 2023 carried out by various media outlets, research institutes, think tanks and insurance companies from around the world. This is valuable work, as it gives us an overview of the challenges we face.

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The promotion of foreign trade and internationalisation of Luxembourg companies in a changing world – some reflections on the background

Luxembourg’s economy is distinguished by being extremely open internationally (share of exports and imports in GDP) and, on the basis of this indicator, ranks among the most open in the world (as are Singapore, Hong Kong, etc.). This is explained by the considerable weight in its foreign trade of exports of services, nearly 50% of which are of a financial nature. But the fact remains that foreign trade in goods also plays a decisive role in the creation of economic value and Luxembourg companies are increasingly adopting the path of selling their products to clients residing abroad – an obvious choice, since the chances of increasing sales are limited within the confines of the home market. The business plans of many companies established in Luxembourg are exclusively targeted at international markets and the Grand Duchy offers numerous advantages as an international platform for developing import/export activities with partners located throughout the globe.

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Budget 2023: truly responsible, realistic and supportive?

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?

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National Reform Programme, National Stability Programme, Technical Review of the General Pension Insurance Scheme: A good time to take a look at the country’s challenges 

Being an economic analyst in these times is a challenge. And for good reason: in recent months, the global economic situation has been riddled with a series of significant shocks that have regularly changed forecasts. After, ‘everything depends on vaccination rates’, and ‘everything depends on price trends’, came, ‘everything depends on the situation in Ukraine’. Indeed, beyond the dramatic human consequences of this new crisis that has blindsided the entire world, the invasion of Ukraine has a much greater global impact than we could have imagined: increased shortages of electronic materials and raw materials in general, scarcity of basic food products, and more. Above all, this international crisis is right on the heels of a previous international crisis that already greatly weakened the economic fabric. 

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Moving from a linear economy to a circular economy

Russia’s recent invasion of Ukraine on 24 February has led to a further surge in energy and commodity prices. The price of a barrel of Brent crude oil has quickly gone above USD 100, the first time this has happened since 2014, reaching almost USD 150 at the start of the 10th week of the year. As for wheat, last Friday it reached an unprecedented EUR 393 per tonne on the European market Euronext, compared to EUR 284 per tonne in November 2021. [1]

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A rise in prices for the long haul

With an annual inflation rate[1] estimated at 4.1% in December 2021 and 3.6% in January 2022[2] by STATEC, the rise in prices continues at a sustained rate, threatening the consolidation of the Luxembourg economy and weighing on the costs borne by companies. The effect on their competitiveness is undeniable, with the latter seeing their margins and profitability decline, and as a consequence, their capacity for innovation and investment reduced in the medium run, particularly in the digital and environmental transitions. In the long run, this can have a negative impact on the growth potential of the economy, leading to the fear that companies will fail, resulting in a loss of tax revenue for the State, a decrease in the attractiveness of Luxembourg, and a hindrance to economic diversification. In order to counter this vicious circle before it takes hold, it is time for action.

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