The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic Survey of Luxembourg 2006 published on 5 July 2006.
The Luxembourg economy has regained its footing after the sharp slowdown at the start of the decade and is now growing at around its trend rate of 4-4½ per cent. The financial-services sector, which accounts for nearly one-third of economic activity, has benefited from the return of confidence in capital markets. Nonetheless, there are signs that the conditions for long-term economic growth are becoming less favourable. Output growth has not returned to the extraordinarily fast rates of the 1980s and 1990s, the dynamism of real incomes has declined, productivity growth has slowed, the fiscal situation has deteriorated and inflation has remained higher than in the main trading partners. This Survey analyses these challenges and outlines measures to prepare for changing times.
A worrying sign of strain is the deterioration of the fiscal position, caused by the rapid growth in public expenditure. The authorities have rightly announced that they will bring the budget back to balance by the end of the current legislature, i.e., in 2009 at the latest. To achieve this goal, it will be important to rein in the growth of public salaries and social benefits. This should start in earnest in the 2007 budget.
Another source of concern is the weakening of the pension system, which appears unsustainable under present rules. This results from the maturing of the system as well as the forthcoming increase in average effective replacement rates. The government should undertake reforms to put the pension system back on a sustainable path. These include indexing the age of retirement to life expectancy, reducing incentives for early retirement and pre-funding future pension promises by accumulating a large, actively-managed pension reserve.
Despite strong employment growth, unemployment is rising. Employers prefer to recruit cross-border workers, who accept lower salaries than residents. To reverse these trends, labour market institutions that drive up reservation wages should be reformed, in particular high unemployment replacement incomes. In addition, activation measures are to be reinforced and a review of the public employment service (ADEM) has been commissioned with a view to restructuring it to match job-seekers and job vacancies more effectively.
Enhanced human capital development would strengthen productivity growth and improve lower-skilled residents’ employment prospects. There is considerable scope to improve education achievement and attainment, which are below the OECD average, especially for children of immigrants and low socio-economic backgrounds. While much has been done to help these children cope with Luxembourg’s trilingual education system, more could still be done. There are other reforms that would improve education outcomes, notably reducing selection at early ages and avoiding widespread recourse to grade repetition.
Strengthening product market competition would also help to lift productivity growth. Institutions to enforce competition were recently established, but they do not seem to have a sufficiently broad mandate to impose significant changes. Anti-competitive practices in professional services need to be tackled. In retail trade, barriers to entry should be eased and shop opening hours liberalised so as to reap the benefits of a potentially fast expanding sector.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Luxembourg 2006 is available from:
For further information please contat the Luxembourg Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by David Carey, Ekkehard Ernst and Stefaan Ide under the supervision of Patrick Lenain.