This 2012 Article IV Consultation highlights that economic growth in Luxembourg slowed in 2011 amid the euro area sovereign debt crisis. Reflecting sluggish external demand, economic activity is expected to further weaken, with growth projected to decline to ½ percent in 2012. Executive Directors have welcomed the continued stability of Luxembourg’s economy despite the turbulence in the euro area. They have commended the authorities on measures taken to strengthen the financial sector and to implement recommendations from the Financial Stability Assessment Program update.
This Selected Issues Paper analyzes the fiscal position and significant challenges for Luxembourg. Luxembourg’s fiscal position is currently sound, however, fiscal safety buffers are being eroded. The country’s healthy fiscal position will be challenged by forthcoming revenue losses as well as rapid trend growth in expenditures. An overall strategy to address this coming deterioration is needed. Beyond the planned value-added tax increase, recurrent property taxes are a possible additional source of revenue. On expenditures, social benefits should be an area of focus, and reforms of these benefits should also aim to reduce disincentives to work.