Meeting with Luxembourg Parliamentary Committee on Economic Affairs - 2015 OECD Economic Survey


Remarks by Angel Gurría,

Secretary-General, OECD


Friday 27 March 2015

(As prepared for delivery)

Text also available in French


Monsieur le Président de la Commission, Parliamentarians, Ladies and Gentlemen,


I am delighted to be here to discuss the 2015 Economic Survey of Luxembourg. This morning we presented the Survey to the press with Minister Gramegna and I am now delighted to share some of its main findings and recommendations with you, the legislators of Luxembourg. 


Let me start with a little confession. I’ve probably launched over a hundred surveys in the last nine years. There haven’t been many other occasions where I could stand up and say: things are looking good! This is one of those seldom occasions.



A prosperous open economy with a strong financial sector


Even after very tough years, Luxembourg is still one of the most prosperous countries in the OECD. The economy, including its financial sector, has weathered the crisis well and growth has picked up, supported by sound macroeconomic policies. GDP per capita is the highest in the OECD and most wellbeing indicators, including health status and work-life balance, are significantly above the OECD average.  Inequality of household disposable incomes is also relatively low by international comparison.


The financial and insurance sector is an important source of Luxembourg’s high incomes and employment. The value added share of this sector is about 27%, well above other OECD financial centres such as Switzerland or the United Kingdom (around 10½ and 8¼ per cent).Luxembourg is now the world’s second largest investment fund centre after the United States.


Luxembourg’s economy was quick to come back after the crisis, thanks to ­the relatively high resilience of the financial sector and robust growth of IT and professional services. This success story is set to continue. Economic growth is likely to remain well above the euro area average. We have projected growth of 2 ¼ per cent in 2015 and more than 2 ½ per cent in 2016 in Luxembourg. In fact growth may well be even stronger.


These are significant achievements indeed, but as any country, Luxembourg also faces some important challenges.



Luxembourg is still facing important challenges


Firstly, the economy still depends heavily on its financial sector. This creates potential vulnerabilities for output, employment and government revenues. It is therefore essential to strengthen the performance and resilience of the financial sector. Our Survey recommends the authorities to continue with a comprehensive approach to risk assessment that accounts for the various financial linkages between banks and other financial intermediaries such as investment funds. This will help protect the domestic economy from external shocks.


It also recommends to continue securing effective cross-border resolution of banks, including for non-European bank groups. To this end, the authorities should continue to cooperate with regulators in other jurisdictions outside the EU.


A second key challenge is the need to foster growth in innovative industries. Productivity growth has slowed to low levels, while structural unemployment has more than doubled since 2000, standing at around 6%. A more diversified economy could help to raise productivity and employment growth and reduce vulnerabilities.


Given the relatively high labour costs, Luxembourg’s future comparative advantages are likely to lie in higher value-added and skill-intensive activities. Yet, there is evidence that business investment in knowledge-based capital has been lower as a share of GDP than in many other OECD countries. Enterprise R&D spending declined from 1.4% of GDP in 2007 to 1% in 2012, widening the gap with the OECD and EU averages.


The government’s enterprise cluster initiative is providing R&D support and infrastructure investment in areas like bio-health, but given limited resources we recommend more ongoing evaluation of the programmes to ensure effectiveness. It’s also important that the initiative remains open to new sectors.


For growth to be innovative, education policy has to be a priority. We recommendproviding schools with more autonomy in choosing teachers and in budgetary matters. Specifically, we also recommend reducing the largely ineffective practice of grade repetition.


Our study identifies a third key challenge, related to fiscal pressures in the medium-term. The government’s comprehensive spending review and tax measures have secured a sound fiscal position. However, age-related spending is due to rise by about 5¼ percentage points of GDP by 2030. This would be the highest increase in age-related spending in the OECD. Doubts about the sustainability of Luxembourg’s low-debt fiscal position would pose a risk since the large financial sector depends on the market’s trust in financial and fiscal stability.


To deal with this challenge, we propose two parallel tracks: At the national level, we recommend strengthening fiscal planning by introducing a spending review mechanism and linking it to the medium-term budgeting framework. A spending ceiling could also help break the upward trend of spending. The new Fiscal Council could evaluate how well budgets are adhering to the medium-term budgets and spending ceilings. To address age-related fiscal pressures we recommend increasing the effective age of pension entitlement and identifying efficiency gains in the health care system.


At the international level, we recommend that Luxembourg continue to actively participate in international negotiations on co-ordinated action to combat tax avoidance and evasion. Luxembourg is already participating in our OECD Base Erosion and Profit Shifting (BEPS) Project and is amending its patent box regime so that it complies with the nexus approach to BEPS.


Luxembourg, one of the “Early Adopters” of the new global standard on automatic exchange of information also reports that it has acted on all of the recommendations made in the Phase-2 review by the OECD Global Forum on Transparency and Exchange of Information. We will keep working with Luxembourg to upgrade its tax transparency regulations, which will increase incentives for banks to further refine their business models, benefitting Luxembourg’s financial sector in the medium term.


Monsieur le Président, Parliamentarians, Ladies and Gentlemen, I would like to congratulate the Luxembourg government for its effective steering of the national economy through a very difficult period. Luxembourg is one of the great success stories of the OECD. Prospects are bright. But as the US President John F. Kennedy liked to say “the time to repair the roof is when the sun is shining”. Reform is a constant challenge, a state of mind. Luxembourg has to keep making the necessary policy repairs to remain competitive, to diversify the economy and to promote more innovative and inclusive growth. 


As always, the OECD stands ready to help you in this endeavour. Together, let’s design, deliver, and implement better policies for better lives in Luxembourg!


Thank you.