Chapter 1: Challenges facing the Luxembourg economy
Luxembourg has been growing at between 4% and 6% per year since the last OECD Survey in 2006, which is faster than almost all other OECD countries. As a consequence, the already substantial positive per capita income gap vis-à-vis the best-performing economies in the OECD has widened further. Growth has been mainly driven by a good, albeit slowing, productivity performance, while labour utilisation has decelerated. The financial sector has remained a reliable source of economic expansion, creating jobs mostly filled by cross-border workers and expatriates. By contrast, the number of residents employed in the sector has declined. The financial sector has brought other benefits to the country in the form of dynamic tax receipts, which have allowed a sustained increase in public sector employment and other categories of government spending. On the other hand, there has been little demand for low-skilled residents, explaining the relatively modest declines in the unemployment rate. Outside the financial sector, the deteriorating productivity record is related to a disappointing performance in a number of domestically-oriented service sectors, reflecting strict labour-market interventions and competition-hampering regulations. In the longer term, it is doubtful that the financial sector can continue to grow at such an impressive rate and support the rest of the economy. As a consequence, maintaining the generosity of public services will increasingly depend on boosting public sector efficiency rather than by expanding public sector employment. Along similar lines, if the large fiscal sustainability gap is left unattended, the financing of future ageing-related costs will either require abrupt increases in social security contribution and tax rates or drastically cutting benefits or other public services.
Chapter 2: Can the financial sector continue to be the main growth engine?
The financial sector has emerged as the main economic engine over the past two decades. The comparative advantages of placing financial activities in Luxembourg have mostly been in terms of low taxation and an adaptive legislative and regulatory framework. As a result, Luxembourg is today one of the main international centres for investment funds. Besides the sector’s direct and indirect employment effects, the most important effect is the large tax revenue generating capacity of the sector, accounting directly for over 20% of aggregate tax revenues. On the other hand, these tax revenues are very volatile as the sector is highly sensitive to developments in international financial markets. Indeed, past downturns in international financial markets have tended to lead to a sharp slowdown of growth in the economy as well as in revenues, pointing to potential large risks associated with the current turmoil in international financial markets. Besides these short-term considerations, a lower trend growth rate of the sector is likely over the medium term. The main activities of the sector are in middle and back offices financial administration, which with new IT technologies, will tend to be increasingly outsourced. At the same time, the sector is having problems in attracting highly specialised talent to enter higher value front office activities. Over the longer term, international competition will continue to exert pressures that may eventually erode Luxembourg’s position. The extent of the decline in the sector’s trend growth depends on the ability to maintain and expand the attractiveness of investing and working in Luxembourg. Achieving this will depend on being able to adjust tax, infrastructure, and housing policies to attract foreign talent while updating and increasing the transparency of financial sector regulation.
Chapter 3: Adapting fiscal policies to slower tax revenues
In recent years, budget outcomes have tended to be better than expected, reflecting dynamic revenues and slightly stronger-than-anticipated growth in spending. As a result, the current fiscal position is better than in many other OECD countries. In the short-term, the mildly expansive fiscal stance is appropriate in view of the deteriorating economic outlook. On the other hand, the already substantial estimate of the fiscal sustainability gap is being revised upwards, reflecting updated OECD estimations of future health care spending. Addressing the gap requires a broad-based strategy, including prefunding, contribution base broadening, and controlling ageing-related costs. Particularly important is early action to avoid a snowball effect in public debt. To improve the link between short-term budget developments and long-term fiscal challenges, the government should strengthen the framework for fiscal policy, including a clearer separation between statistics compilation, macroeconomic projections and budget preparation, and introduce multi-year spending ceilings. Future tax revenues will be less dynamic, which requires an improvement in public sector efficiency to maintain present public service standards.
Chapter 4: Healthy and wise: enhancing cost efficiency in health care
Luxembourg devotes large financial resources to health care, offering nearly unrestrained access to a modern medical system. Despite comprehensive coverage, the health status of the population is only average by international comparison. Quality indicators also lag behind those of best-performing countries and patients do not appear overly satisfied. At present, the health care insurance system is close to financial balance, thanks to rising prime-age cross-border workers, who rejuvenate the demographic structure by around three years. Yet, spending growth is set to accelerate with the graying of the population. Between 2005 and 2050, health and long-term care public spending is projected to increase from 7% of GDP to almost 14% of GDP in the absence of restraining measures, which would put Luxembourg among the largest health care spenders in the OECD. Therefore, the challenges facing policymakers are both to increase the quality and the cost efficiency of health services. There is no simple policy to address these challenges and reforms in various directions will be needed, such as more preventive care. A policy that is likely to bring significant payoffs is to encourage the sickness funds to act as “wise” buyers of services, rather than mere payers. For instance, they should make more frequent use of cost-efficiency analyses of services rendered and encourage accountability in order to allow patients to make more informed choices and to seek care in hospitals or ambulatory care where quality is combined with cost consciousness. This would imply removing barriers to seeking care from hospitals in neighbouring countries, which have generally lower costs. Paying for hospital services on the basis of output-related activity would go in this direction. Finally, patients could become more responsible users of health care services if their co-payments were raised where appropriate.
Chapter 5: Educated and successful: increasing student abilities by giving schools more autonomy
A heterogeneous student population with more than a third of all pupils having foreign citizenship presents a major challenge to the education system. The resulting difficulties in allocating resources according to local school conditions continue to weigh on educational performance in international comparison. Relative to the OECD average, Luxembourg students have accumulated a lag of almost half a year of schooling at the end of lower secondary education, partly due to the strong focus on German and French language education. As indicated in the previous Survey, curricula focus strongly on language competencies, but even in this core area of the education system students do not perform satisfactorily. The failure to achieve a better educational performance imposes a substantial cost on young people. First, school leavers have increasingly difficulties in finding a job. Second, the rate of early school leavers remains high, reflecting the low expectations of students themselves of integrating into the labour market. Also, disparities across students are large with those with an immigration or a low socio-economic background performing particularly poorly. The authorities have started to address some of these problems. School curricula are currently being reworked and early tracking is being eased. However, in order to allow schools to adapt to local conditions of their student population, they need to be held accountable for their results and have sufficient autonomy to select their own instruments to achieve these results. Moreover, incentives for high-quality teaching need to be strengthened, linking part of the wage progression to regular performance evaluations.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Luxembourg 2008 is available from:
For further information please contact the Luxembourg Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Jens Christian Høj, Ekkehard Ernst, Arnaud Bourgain and Patrice Pieretti under the supervision of Patrick Lenain. Research assistance was provided by Laure Meuro and secretarial assistance by Heloise Wickramanayake.