Remarks by Angel Gurría
10 July 2019 - Luxembourg
(As prepared for delivery)
Dear Ministers, Dear Ambassador, Ladies and Gentlemen,
I am very pleased to be here today, together with Ministers Pierre Gramegna and Sam Tanson, to present the latest OECD Economic Survey of Luxembourg. Before I begin, I would like to thank their Ministries, the Ministry of Finance and the Ministry of Housing, for their support during the preparation of this Survey.
Luxembourg is a country with many strengths, one that ranks among the top-performing OECD countries in a number of domains. It enjoys an exceptionally high degree of economic prosperity and an excellent quality of life, with most citizens enjoying a healthy work-life balance, good housing and supportive social connections.
Gender gaps in the labour market are among the lowest across the OECD and thanks to overall sound policies and institutions, the financial sector remains competitive and has made inroads into new areas, such as fintech and green finance. In addition, Luxembourg remains open and plural, deeply interconnected with neighbouring countries and a new home to many immigrants from all over the world.
The economy, underpinned by strong employment growth, expanded by 2.6% in 2018 and is expected to continue growing by 2% and 2.5% in 2019 and 2020 respectively.
Luxembourg cannot, however, take prosperity for granted. It faces a number of challenges which, if not surmounted, could threaten the enviable situation in which it finds itself today. I will focus my remarks on the two key challenges our Survey examines in detail: reviving productivity growth and making housing more affordable.
Let me start with productivity. In Luxembourg, the level of productivity -- that is, output produced per worker -- is very high. However, the growth of productivity has been disappointing, even more than in other advanced European economies. In fact, the level of labour productivity in the economy as a whole (GDP per hour worked) is not only some 6% lower than its pre-crisis peak but is no higher than it was in the year 2000. This can be largely traced to services, where less productive firms have tended to fall further behind.
To help viable firms catch up, our Survey highlights the importance of addressing skill shortages. This is especially important as regards digital skills, where surveys indicate that Luxembourg has particularly acute shortages. Only about a quarter of firms in Luxembourg provide training to their workers to upgrade their ICT skills. It is also essential to make sectors like professional services, which are relied on by firms in all parts of the economy, more competitive and efficient. Furthermore, improving the insolvency regime would help speed up resource reallocation from non-viable firms to more productive uses. Stronger productivity growth also requires leading firms, those at the frontier, to become more innovative, through higher R&D investment and more widespread adoption of cutting-edge technologies.
The second challenge identified in our Survey is that of affordable housing. Sometimes it is success itself that creates new problems. Strong population growth, mainly reflecting the number of foreign workers attracted by a buoyant economy, has kept housing demand growing for many years. When coupled with supply-side restrictions, such as limited use of land available for construction and cumbersome zoning restrictions, the imbalance between demand and supply stokes house price inflation. This makes housing unaffordable for many people, especially among the poorer parts of the population. Increasing the supply of affordable housing is therefore key to achieving more inclusive growth.
It is therefore essential to boost construction of new housing. One way is to make it more expensive to hold unused land, for example by introducing land value taxes on land zoned for housing construction, or by imposing sanctions for failing to use building permits. Higher recurrent taxes on real estate, based on up-to-date valuations reflecting the market price of the property, could also help to reduce the number of vacant dwellings.
Another problem is urban sprawl, which has important environmental costs. New housing construction should therefore focus on increasing density, namely by constructing higher buildings, in particular around transport hubs.
The stock of social rental housing in Luxembourg is small, despite recent efforts by social rental management companies, and often not allocated to those who are most in need. To increase the stock, the state should directly finance land acquisition by public companies that build social rental housing. Furthermore, to facilitate the construction of rental housing, the support for owner-occupied housing should be aligned with the support for rental housing, for example by phasing out or reducing mortgage interest deductibility. To better allocate the stock of social rental housing, recurrent means-testing of social tenants is necessary.
Ladies and Gentlemen,
Luxembourg’s resilience, inclusion, strong well-being and robust growth are an example for many OECD economies in Europe and beyond. As ever, there is no shortage of risks and challenges, but you can count on the OECD to continue working with, and for, Luxembourg to deliver Better Policies for Better Lives. Many thanks for your attention.