Growth is projected to remain robust at just below 3%, notwithstanding the shift in the EU VAT regime for e-commerce (which makes Luxembourg less attractive for certain export-oriented activities) and higher domestic VAT rates (introduced to partially offset the loss of revenue from e-commerce). Lower oil prices, a weaker euro and an ongoing recovery in the euro area will support exports and investment. The higher VAT will boost prices in 2015, and the backward-looking wage indexation could add to upward price pressures in 2016.
The government is determined to keep the debt-to-GDP ratio low. This effort would be facilitated by introducing more effective spending control, including a spending ceiling for the general government in the medium-term budgeting framework. Structural reforms should focus at bringing people back to work by adjusting the tax and benefit system and enhancing active labour market policies. Structural reforms in education would improve the attainment of students from disadvantaged backgrounds and raise the pool of workers able to work in the higher value-added activities.
Going forward, gross fixed investment will contribute positively to GDP growth. The share in GDP of non-residential gross fixed investment is above the OECD average. On the other hand, investment in knowledge-based capital, including overall and business spending on research and development, is lower than in many other OECD countries, pointing to unexploited growth and employment potential. Stepping up investment in knowledge-based capital and unlocking enterprise innovation can help Luxembourg raise productivity and keep its high living standards.