Luxembourg
Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
21 Jun 1996
eISBN:
9781451824230
Language:
English
Keywords:
ISCR; CR; government; Luxembourg government; Luxemburg; GDP; surplus; aggregate demand; labor market; steel industry; partner country development; deutsche mark; railway company
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This paper analyzes economic developments in Luxembourg during the 1990s. Economic performance continues to be exceptional in Luxembourg. Growth averaged 6 percent during 1980s, well above the European average, while the inflation and unemployment rates ranked among the very lowest. In 1994, Luxembourg was the only European industrialized country to run a general government surplus. Luxembourg also had the lowest debt-to-GDP ratio, the largest current account surplus, and possibly the highest real saving in this group. These successes are attributable at least in part to the skillful management of policy to facilitate structural change.

Abstract

This paper analyzes economic developments in Luxembourg during the 1990s. Economic performance continues to be exceptional in Luxembourg. Growth averaged 6 percent during 1980s, well above the European average, while the inflation and unemployment rates ranked among the very lowest. In 1994, Luxembourg was the only European industrialized country to run a general government surplus. Luxembourg also had the lowest debt-to-GDP ratio, the largest current account surplus, and possibly the highest real saving in this group. These successes are attributable at least in part to the skillful management of policy to facilitate structural change.

I. Introduction

Economic performance continues to be exceptional in Luxembourg (Chart 1). Growth averaged 6 percent over the last decade, well above the European average, while the inflation and unemployment rates ranked among the very lowest (Chart 2). In 1994, Luxembourg was the only European industrialized country to run a general government surplus. Luxembourg also had the lowest debt-to-GDP ratio, the largest current account surplus, and possibly the highest real saving in this group.

CHART 1
CHART 1

LUXEMBOURG: International Comparisons of Fundamentals

Citation: IMF Staff Country Reports 1996, 047; 10.5089/9781451824230.002.A001

Source: IMF Basic Economic Outlook; Luxembourg data; and OECD, Economic Outlook.Country are BE=Belgium, DNK=Denmark, FIN=Finland, FRA=France, DEU=Germany, IRE=ireland. NLD=Nethcrlands. NOR=Norway, PRT=Portugal. ESP=Spain. SWE=Sweden.
CHART 2
CHART 2

LUXEMBOURG: Long-Term Economic Performance

Citation: IMF Staff Country Reports 1996, 047; 10.5089/9781451824230.002.A001

Source: IMF, World Economic Outlook.

These successes are attributable at least in part to the skillful management of policy to facilitate structural change. Luxembourg has utilized the institutional advantages available to governments of small territories to retain its rank among the most prosperous nations. Moreover, policies favorable to investment have facilitated a move away from the declining steel industry towards the financial sector, other market services, and new industrial sectors like telecommunications. Indeed, growth in financial and other market services have sustained rapid expansion of GDP despite the strong decline in the steel industry (Chart 3).

CHART 3
CHART 3

LUXEMBOURG: Shares in GDP and Employment

(In percent)

Citation: IMF Staff Country Reports 1996, 047; 10.5089/9781451824230.002.A001

Source Bulletin du STATEC. No. 81/ In 1995 prices.2/ Including mining.

Employment growth has been commensurately strong; indeed, it has exceeded domestic labor supply, leading to a marked increase in the number of foreign workers. In line with changes in the composition of output, employment has risen strongly in the financial sector and other market services, while declining in the steel sector.

The fiscal situation has been very strong, with a general government surplus averaging about 1 ½ percent of GDP during 1991–95. The central government budget has from time to time incurred small deficits, which were more than offset by a surplus in the social security funds. Government debt is negligible at around 6 percent of GDP, less than one-third of the reserves of the social security system.

II. Real Sector Developments

1. Goods markets

a. Demand and supply 1/

Recent revisions to GDP estimates by the national statistical agency (STATEC), which provide wider coverage of economic activity, suggest that growth was even stronger than earlier reported. GDP growth in Luxembourg has averaged around 6 percent over 1985–95. Value added was revised upwards in services, including transportation, communications, and banking. Despite slower during the 1990s, Luxembourg has continued to outperform other European countries.

For an open economy such as Luxembourg, with exports plus imports at over 175 percent of GDP, partner country developments have a substantial impact on domestic growth prospects. However, given the small size of the economy, and the concentration of activity in just a few sectors, the influence of developments abroad is often rather idiosyncratic and highly variable.

This absence of “averaging” in a small economy implies that developments in aggregate demand show little quantitative relation with developments in partner countries (Table 1, Chart 4). Thus, GDP growth slowed in 1994 and 1995 despite the upturn elsewhere in Europe. On the external side, an increase in goods exports was overshadowed by the slowdown in the export of financial services; the import of jet aircraft also contributed to a temporary deterioration of the foreign balance. On the domestic side, there was a sharp downturn in gross fixed investment, reflecting the completion of a steel mill and the winding down of startup investments in the communications satellite industry. Private consumption, though far steadier from year to year than other components of demand, has shown a tendency to decline in proportion to GDP, with the share in 1995 almost 4 percentage points lower than in 1992. By contrast, public consumption grew in line with GDP and has remained broadly constant at 9 percent of output.

Table 1.

Aggregate Demand and Supply

(Percentage changes)

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Sources: STATEC, Note de Conjoncture; and staff estimates.

Includes energy, water and construction.

CHART 4
CHART 4

LUXEMBOURG: Contributions To Real GDP Growth

(In Percent)

Citation: IMF Staff Country Reports 1996, 047; 10.5089/9781451824230.002.A001

Sources: Luxemburg Authorities and staff calculations.1/ Agriculture, mining, manufacturing, and construction.

On the supply side, the continued expansion of market services has accounted for almost all of the growth in 1993–94 and almost three-fourths in 1995. Viewed in a longer term perspective, this was a continuation of the process of transformation of the production structure since the mid-1970s, with the decline of the steel sector and Luxembourg’s rise to prominence as an international financial center. Over the period 1985–95, the share of market services in GDP has risen by 11 percentage points to 65 percent, while the share of industry has fallen from 22 to 16 percent. Other supply side developments include the growth of commerce (benefitting from a central geographical location and lower indirect tax rates relative to neighboring countries), media and communications (deriving competitive advantage from a liberal regulatory framework and the gradual lifting of broadcasting restrictions at the EU level), and transportation.

Real value added in banking and insurance, however, has slowed substantially as the sector entered a period of consolidation. Double-digit growth rates experienced until the early 1990s have given way to more modest expansions of 6 ½ and 4 percent in 1994 and 1995, respectively. While construction activity remained stable at its earlier level and commerce posted minor gains, industrial output rose by 3 ½ percent in 1995 after two years of negative growth. The declining trend of production in the steel sector was more than compensated for by growth in new and more dynamic manufacturing sectors, notably chemicals, paper and plastic. The growth of these new industries reflects, to a considerable degree, the active industrial diversification policy pursued by the authorities. Among the stated aims of this policy are adaptation to technological change, job creation, fostering regional balance, maintenance of the share of industry in total value added, and keeping employment at acceptable levels. Instruments of this policy have included direct subsidies from the budget and financing at preferential rates.

b. Prices 1/

Consumer price inflation was higher than in Belgium and France in 1992–93, reflecting both the EU-wide harmonization of indirect taxes and the large share of goods imported from Germany, where demand and price pressures were still strong following unification (Table 2). Once these special factors had played themselves out, inflation leveled off rapidly in 1994–95 (Table A4).

Table 2.

Consumer Price Index

(percentage changes)

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Source: STATEC, Note de Conjoncture; IFS Statistics.

Within the consumer price index, the contribution of individual components has changed among the various years. In contrast to earlier years, health care inflation moderated, especially in 1995, while food products, rent, and utilities contributed relatively more to inflation.

2. Labor market

a. Employment and unemployment 1/

Strong economic growth was associated with rapid job creation, averaging 3 ½ percent per year since the mid-1980s (Chart 5, Table 3); this allowed the rate of unemployment in Luxembourg to remain low, especially in comparison with other industrial countries. The decline of the steel sector and rapid growth of the financial sector have significantly altered the sectoral composition of employment. While industry and market services accounted for about 35 percent of total employment in the 1970s, the share of employment in services had increased to over 50 percent by mid-1990s.

Table 3.

Employment and Unemployment

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Source: STATEC, Note de Conjoncture.
CHART 5
CHART 5

LUXEMBOURG: Labor Market Developments

Citation: IMF Staff Country Reports 1996, 047; 10.5089/9781451824230.002.A001

Source: Luxembourg Authorities and staff calculations.

Employment growth has far exceeded the domestic labor force. However, Luxembourg has been able to draw heavily on foreign labor thanks to the nearly complete lack of restrictions on employment of individuals from bordering regions. This recourse to foreign workers has helped to prevent overheating during periods of strong economic growth; it has also cushioned the impact on the domestic labor market of economic restructuring, especially in the steel industry. Non-resident foreign workers account for almost all of the increase in employment since 1991: about 26 percent of wage earners commute regularly from neighboring countries. About 51 percent of commuters hail from France, 31 percent from Belgium, and 18 percent from Germany.

Under these conditions, unemployment has remained very low. In addition, the duration of unemployment is short. As of mid-1995, about 21 percent of job seekers were able to find a job after being registered for only one month and 39 percent after 3 months; only about 15 percent were still looking for a job after 12 months and could be classified as long-term unemployed. However, unemployment, and especially long-term unemployment, have shown a tendency to increase in recent years, possibly reflecting in part the abuse of unemployment and other social benefits. The authorities introduced legislation in 1993, for the first time explicitly targeting the long-term unemployed, that channels subsidies to firms that hire unemployed workers. Though the budgetary cost are small, these measures could adversely affect the employment prospects and job skills of younger persons.

b. Wages and productivity 1/

In line with economic growth, wage growth has slowed substantially since 1993 from the high increases in 1991 and 1992; average wage growth fell from 6.6 percent in 1992 to 3.9 percent in 1995. This broad pattern is reflected in most industries, although wage growth in the financial sector continued to increase very rapidly until 1994 by 11.2 percent. In contrast, wages in the steel sector grew less rapidly than the economy-wide average in 1994 and 1995. Labor compensation and unit labor costs in industry also moderated from 1993 onwards. These developments are most pronounced in the steel sector where labor compensation has been falling throughout the 1990s and unit labor costs have also declined since 1993.

3. External developments 2/

Luxembourg’s external current account in 1994 and 1995 continued to develop in line with a pattern established over the last fifteen years. At over 10 percent of GDP, the current account surplus remains very high. The surplus reflects the sustained increase in the services balance, which more than offsets a substantial trade deficit.

This composition of the current account is attributable to the profound structural changes the economy has undergone since the early 1970s. Depressed world demand for steel durably reduced the level of goods exports, while imports were boosted by private consumption, as well as by large investments in transport equipment, which have a heavy import content. The growing surpluses recorded in a number of industrial sectors (metals, plastics and tires, for example) did not suffice to offset rising structural deficits for several other items (energy, agro-food, capital goods and transport equipment). As a result, the trade deficit has remained large, peaking at 15 percent of GDP in 1991 (Chart 6). The offsetting emergence of substantial net services exports is attributable mainly to the continuing expansion of the financial sector. The strong underlying growth of investment income from foreign assets has made the largest contribution to the surplus on factor services. 1/ The surplus in non-factor services has also been increasing.

CHART 6
CHART 6

LUXEMBOURG: Current Account Balance and Components

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 047; 10.5089/9781451824230.002.A001

Source: STATEC, Note de Conjoncture.

Despite a real appreciation of the franc during 1994, the last year for which detailed data for Luxembourg are available, exports and imports of goods both rose sharply as large quantities of low-grade steel were imported from France and re-exported to other EU countries. Although the surplus on investment income declined, the surplus on non-factor services stabilized on account of stronger revenues from the communications satellite sector. Relatively small outflows on account of net private and public transfers (2 ½ percent of GDP) did not alter this broad picture. Overall, the structural current account surplus remained in excess of 10 percent of GDP.

Balance of payments and trade data for the Belgian-Luxembourg Economic Union (BLEU) during the first half of 1995 suggest that Luxembourg’s external position remained strong in 1995. Exports and imports from EU countries rose by 7 percent and 4.2 percent respectively during the first quarter of 1995. However, the slowdown in Germany and the disruption caused by strikes in France—two major trading partners of Luxembourg—are likely to have dampened exports in the third and fourth quarter of 1995. By contrast, the surplus on investment income has probably remained buoyant, reflecting the build-up of foreign assets brought about by a persistent current account surplus.

There have been important changes in the composition of Luxembourg’s trade in goods. First, there has been a sharp fall in the share of metals in total exports, from over 70 percent in the early 1970s to just over 35 percent in 1994. Second, the gradually increasing diversification of the economy, strongly furthered by policy, has been associated with a growing share in exports of certain products, notably machinery. On the import side, there has been a decline in share of mineral and oil products from around 25 percent in the mid-1970s to 12 percent in 1994, reflecting the downward trend in the real price of oil and the decline in imports of ore. The marked increase in the share of capital goods is attributable to the considerable strength of private and public investment.

Regarding the direction of Luxembourg’s foreign trade, EU countries account for some 80–90 percent. Belgium and Germany are the most important sources of Luxembourg’s imports. On the export side, there has been a relative decline of exports to Belgium, while France’s share has been increasing. Germany, France, and Belgium remain the largest markets for Luxembourg’s exports.

4. Monetary and exchange rate developments 1/

Luxembourg entered into a monetary association with Belgium in 1922. 2/ Monetary policy for the association as a whole is managed by the Belgian central bank. The Luxembourg Monetary Institute (IML) has a limited role, which consists mainly in (1) bank supervision and (2) the issue of currency. The latter is subject to a ceiling that is periodically set jointly with Belgium, and which currently stands at around Lux F 5.5 billion. The sole monetary policy instrument at the disposal of the IML is an administrative ceiling on domestic credit (which has never been used).

In preparation for stage 3 of EMU, the legislation governing the IML is being modified to meet the requirements of the Maastricht Treaty. A draft law laying out the functions, objectives, and policy instruments at the disposal of the IML was submitted to Parliament for approval in October. This legislation would (1) widen the missions of the IML to include the definition and implementation of monetary policy (with price stability as the principal objective), the conduct of foreign exchange operations, and the promotion of the smooth functioning of payment systems; (2) make the IML independent in all monetary policy matters and decisions; (3) modify the composition and powers of the governing bodies of the IML (the management and the council); and (4) create a committee in the IML charged with advising the Government on proposed regulations governing prudential supervision of the financial sector.

These modifications would transform the IML into a fully fledged central bank of Luxembourg, capable of operating as a member of the European System of Central Banks. In particular, the IML will have at its disposal the full range of monetary policy instruments specified by the Maastricht Treaty, though direct credit control will no longer be available. The Luxembourg authorities also plan to introduce secondary legislation to ensure full compliance with the Maastricht Treaty as regards the prohibition of monetary financing of budget deficits. 1/

The link to the deutsche mark, achieved indirectly via the monetary association with Belgium, has been of central importance in safeguarding monetary stability; and Luxembourg has enjoyed a stable exchange rate against the deutsche mark for much of 1995 (Chart 7). Despite a slight depreciation against the dollar in the second half of 1995, the franc appreciated against the dollar by 8.9 percent during the year as a whole.

CHART 7
CHART 7

LUXEMBOURG: Nominal and Real Exchange Rates

(May 1990=100)

Citation: IMF Staff Country Reports 1996, 047; 10.5089/9781451824230.002.A001

Source: IMF, international Financial Statistics.

There is no money market in Luxembourg francs, so short-term interest rates are equal to those for the Belgian franc. However, there is a substantial private market for bonds denominated in Luxembourg francs. The issuance of these bonds increased sharply in recent years (to a record Lux F 360 billion in 1994) as borrowers—mainly from Belgium—took advantage of relatively low interest rates, attractive swap conditions, and strong demand from retail investors, many of them moving out of short-term positions. The yield on these securities has often been lower than the yield on Belgian bonds (Chart 8), possibly reflecting investor confidence in the stability of financial conditions in Luxembourg.

CHART 8
CHART 8

LUXEMBOURG: Interest Rates

Citation: IMF Staff Country Reports 1996, 047; 10.5089/9781451824230.002.A001

Sources: IMF. Treasurer’s Department and International Financial Statistics.1/ Three-month money market rate.2/ Yield on 10-year benchmark government, bond (or equivalent).

In isolation from information on monetary developments in the monetary association with Belgium, the separate monetary and credit aggregates calculated for Luxembourg are of limited interest as guides for policy; they should be taken only as indicators of the activities of the banking system. 2/ Ml (currency plus sight deposits) grew by 14.8 percent in 1994, while M2 (fixed term deposits, saving books, and short-term bills up to one year) decreased by some 12 percent; as a result M3H (money, quasi-money, and foreign currency deposits) fell by 7.8 percent to Lux F 744.1 billion. 3/ On the credit side, there was a decrease of credit to households in 1994, which was compensated to some extent by an increase of credit to the local public sector.

III. Public Finances 1/

General government finances in Luxembourg have been in surplus during the last decade (Table 4 and Chart 9). During 1985-90, the surplus averaged over 4 percent of GDP; during 1991–95, the average has fallen to just under 1 ½ percent of GDP. Almost all of the deterioration is attributable to a decline in central government receipts, while expenditures remained broadly constant as a percent of GDP. There is also a tendency for the surplus of the social security funds to decline. Local governments, which in the past were close to balance, have tended to incur small deficits since 1991. Data on the consolidated revenue and expenditure of the general government are not available, though net financial balances at different levels of government are.

Table 4.

General Government Finances 1/

(In percent of GDP)

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Source: Ministry of Finance; staff estimates.

Annual averages.

Including Special Funds (see below).

Excluding borrowings.

Excluding amortization and participations.

CHART 9
CHART 9

LUXEMBOURG: Public Finances 1/

(In Percent of GDP)

Citation: IMF Staff Country Reports 1996, 047; 10.5089/9781451824230.002.A001

Source: IMF, World Economic Outlook1/ Data for 1995 are from the budget.2/ Excluding special funds.

Luxembourg’s fiscal performance compares favorably with other EU countries. The surplus of the general government was 2 percent of GDP in 1994 and is estimated at 1 percent for 1995, compared with an EU average deficit of 4.9 percent of GDP. Luxembourg has also successfully kept its public debt ratio low; it currently stands at about 6 percent of GDP, while the EU average is more than 65 percent of GDP.

1. Central government

The central government consists of two sub-sectors: the State and special funds. 1/ The central government showed surpluses averaging 2 ¼ percent of GDP over 1985–90. During the 1990s, there have generally been small deficits. Total receipts in 1991–95 averaged 32 ¼ percent of GDP, falling by a little under 2 percent of GDP from the average of 1985–90. 2/ In 1995, the deficit amounted to ½ percent of GDP, with receipts and expenditures estimated at 31 ½ and 32 percent, respectively.

The decline in the share of receipts in GDP has been the net result of several factors. The tax reform initiated in 1991 and completed in 1993 contributed to a decline in income tax receipts; however, strong growth buoyed corporate tax receipts after 1992, leaving overall direct taxation unchanged for the period as a whole. 3/ Indirect taxes rose by about 1 percent of GDP, as increased excise earnings from the sharing of receipts in the Belgium-Luxembourg Economic Union (BLEU) compensated for variations in VAT receipts. Indirect and excise tax rates were increased in two steps in 1992 and 1993. 4/ The transformation of the public telecommunications firm into a private enterprise in 1992 resulted in a marked decline in non-tax receipts from this source (over 2 ½ percent of GDP). With regard to expenditure, an expansionary stance was adopted in 1992–93 in the face of a cyclical slowdown; spending on pensions, family allowances, and residential investment was increased.

a. Budget of the State

The financial surplus the State averaged about 1 ½ percent of GDP over the period 1985–90; it vanished during 1991–95 (Table 5). The budgeted deficit of the State amounted to somewhat more than ¾ percent of GDP in 1995, with receipts at about 25 ½ percent of GDP. However, both receipts and expenditure were higher than budgeted. 1/ The deficit, however, was smaller than budgeted (Lux F 0.2 billion against a budgeted amount of Lux F 1.8 billion), reflecting stronger than anticipated economic growth. 2/

Table 5.

Budget of the State

(In billions of Lux F)

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Source: Luxembourg authorities.

The draft 1996 budget envisaged an overall deficit of Lux F 0.4 billion. The stated aim of the budget is to consolidate the public finances focusing on “specific and selective adjustments, of limited scope.” Revenue is expected to increase by 6 ⅔ percent relative to the final budget for 1995. 3/ No significant tax policy measures are envisaged, given the breadth of the 1991 tax reform. Among tax receipts, direct taxes are expected to amount to 52 percent of total, indirect taxes to 39 percent and other receipts to 9 percent.

Expenditure in 1996, as in previous years, was set in accordance with the “budgetary norm”. This norm is intended to reflect medium-term real economic growth prospects. Together with an assumption about price and wage increases, it determines an “ex ante” nominal ceiling for the growth rate of expenditure in the State budget. For purposes of comparison, the norm is also evaluated “ex post”, based on actual rather than anticipated GDP growth and inflation (Chart 10, Table 6).

CHART 10
CHART 10

LUXEMBOURG: Evolution of Budgetary Norms

(1985=100)

Citation: IMF Staff Country Reports 1996, 047; 10.5089/9781451824230.002.A001

Sources: Luxembourg Authorities and staff calculations.
Table 6.

Evolution of the Budgetary Norm for Expenditure

(Annual percentage changes)

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Source: STATEC and Ministry of Finance; staff calculations.

b. Special funds

The overall balance of the special funds does not exhibit any particular tendency; rather, it reflects a measure of flexibility exercised in the management of expenditure across years. The receipts of these funds consist primarily of budgetary transfers, though some funds have other sources of revenue (such as the unemployment fund, which receives the solidarity tax). Some of the funds are also allowed to borrow independently of the budget (the highway fund, for example). With gross expenditures amounting to about 6 percent of GDP in 1995, these funds perform a variety of functions: channeling transfers to local governments, road construction, other public investment, implementation of labor market measures, and environmental protection. Investment accounts for about one-third of the funds’ expenditures. For 1996, budgeted expenditures amount to a little over Lux F 37 billion, a nominal increase of 13 percent, reflecting the onset of a multi-annual public investment program aimed mainly at improving the transportation infrastructure.

2. Social security

Expenditure of the system has expanded rapidly in recent years, and its share in GDP has risen slightly, from 20.4 percent in 1990 to 21.2 percent in 1994 (Table 7). Pensions, health care benefits, and family allowances are the three most important components, accounting for 91 percent of total social security expenditures in 1994, with unemployment and accident insurance making up much of the rest (Table 8). The shares of the different components in overall expenditure have been rather stable since 1990, with a slight rise in family allowances in 1993–94 being offset by decreases in pension and health care expenditures. 1/

Table 7.

Social Security Expenditure

(In percent of GDP)

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Source: Inspection Generale de la Sécurité Sociale, Rapport Général sur la Sécurité Sociale.
Table 8:

Composition of Social Security Expenditure

(In percent of total)

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Source: Inspection Générale de la Sécurité Sociale, Rapport Général sur la Sécurité Sociale.

The social security system is financed by contributions, government transfers, and income from reserves. The share of contributions in total revenue has declined slightly to 53.1 percent in 1994, partly reflecting reductions in employer contributions to stimulate employment. Government transfers account for 41 percent of total revenue and have risen steadily since 1990, thus offsetting the declining share of contributions and income derived from reserves (Table 9).

Table 9.

Social Security Revenue

(In percent of total)

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Source: Inspection Générale de la Sécurité Sociale, Rapport Général sur la Sécurité Sociale. 1994.

Table 10 provides a European perspective on the different revenue sources of social security. On average, European governments transferred around 30 percent of total revenue in 1993. Compared to this average, the Luxembourg government contributes about 10 percentage points more to social security. The high degree of government funding offsets the significantly lower contributions from employers.

Table 10.

Financing Social Security: A European Perspective

(In percent)

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Source: Inspection Générale de la Sécurité Sociale, Rapport Général sur la Sécurité Sociale. 1994.

a. Pensions

In recent years, the Luxembourg government has embarked on a reform of the pension scheme of public sector employees. 1/ The principal intention of this reform is to harmonize public and private sector pensions. The changes made in late 1995 are (1) a suspension of automatic indexation of pensions to wages, and (2) an increase by 1 percentage point per year in the contribution rate paid by public employees, from 3 percent to 8 percent in 1999 (the rate paid by private sector employees). 2/

b. Health care

A comprehensive overhaul of the health care system—guided by a desire to increase the transparency of the cost structure—was initiated in 1992. Several measures have already been implemented. In 1994, a new classification of medical treatments was introduced, and the schedule of allowable rates was modified accordingly. Moreover, a central organization was charged with accounting and with negotiating rates; previously, this had been the responsibility of nine independent insurance funds. In 1995, the financing rules for hospitals were modified. Individual hospitals now receive budgets which, in addition to a lump sum amount, are based on their size and structure. Further work is planned to develop patients’ and doctors’ profiles.

The Government plans to introduce a new fund to finance long-term nursing care, organized according to principles similar to those guiding health insurance. Funding will be provided for the construction of new long-term care facilities, in order to reduce long waits for accommodation. Some steps will also be taken to make home care more attractive. The financing for this scheme has not yet been decided, although a wage-based contribution is under discussion.

IV. Structural Issues

The importance of the steel sector has steadily declined since the 1970s. 1/ A medium-term restructuring plan adopted in February 1993 entails continuing job cuts, totalling 2,000 over 1993–1995, through attrition and early retirement. Other aspects of this restructuring plan include increased specialization, to be mainly achieved via production shifting between Arbed and its French affiliate Usinor-Sacilor, and the adoption of the more capital-intensive electrical furnace technology. A further restructuring plan was adopted in early 1996; it involves more reductions in the workforce, a leaner management structure, a streamlined production structure concentrating on heavy products, and closer tie-ups with steel manufacturers in Belgium and France.

The Luxembourg government has identified the satellite and audiovisual industry as an important sector for future growth. In the audiovisual sector, the focus has been on processing, disseminating and distributing programs from abroad to television markets in surrounding countries. Compagnie Luxembourgeoise de Télédiffusion (CLT), a private company in which a national investment bank, the Société Nationale de Credit et d’Investissement, has taken an indirect stake, manages television networks available to viewers in Germany, France, and the Benelux. In return for a new license to operate its television and radio networks—granted to CLT in January 1995 by the Luxembourg government—the company has committed itself to locate a significant portion of its activities in Luxembourg. As to the satellite sector, the Société Européenne des Satellites (SES), a private company that runs the ASTRA system of television satellites, has launched several new satellites and further expansion is planned, with three new satellites to be launched by 1998.

As part of a comprehensive review of its telecommunications policy, new legislation will come into effect in 1996 which implements EU directives on the liberalization of the telecommunications sector and aims to create a more competitive environment. The development of new networks and services will be subject to a licensing and declaration regime, which is intended to facilitate market entry by new competitors while guaranteeing universal service. Electro-magnetic spectrum will be distributed on a first-come, first-served basis for a nominal fee. These measures should further stimulate an already vigorous market in telecommunications. The cellular phone business is thriving, although only 24 of the 124 available channels can be used everywhere, with the use of the remaining channels restricted to the interior. ISDN services are currently available everywhere; there are 4,000 lines in use, mostly for commercial and scientific purposes. Internet providers are not subject to price regulation in Luxembourg.

Like many other European governments, the Government faces the task of restructuring the railways in order to stem financial losses and comply with European Union guidelines. Transfers to the railway company, which is fully owned by Government, amounted to Lux F 10.6 billion in 1994, some 2 percent of GDP. The railway company is also heavily indebted; the Government intends to gradually take on this debt over the next decade. In accordance with an EU directive, a law was passed in May 1995 to separate operating expenditures (for which the railway company remains responsible) from capital and pension expenditures (which are the responsibility of the Government).

In 1993, the Government decided to raise the level of official development assistance (ODA) to 0.7 percent of GDP by the year 2000. In 1994, the level was 0.34 percent of GDP. The ratio has increased more slowly than expected, reflecting faster-than-anticipated economic growth. ODA is channeled to recipients through multilateral institutions and, over the last decade, bilaterally. Lux Development, a government agency, coordinates bilateral development aid for twelve target countries, mostly in Africa. While this list is quite stable, there are changes from time to time depending upon political conditions in the target countries. Recently, a greater emphasis has been given to health, housing, education, and to small-scale enterprises in the informal sector.

Table A1.

Luxembourg: Expenditure Components of GDP in Constant Prices

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Source: STATEC. National Income Accounts (revised series).

Preliminary.

Estimate.

Table A2.

Luxembourg: Value Added by Sector in Constant Prices

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Source: STATEC.

Preliminary.

Estimate.

Imputed production of bank services for residents’ consumption.

Table A3.

Luxembourg: Indicators of Economic Activity

(Percentage changes) 1/

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Sources: STATEC; and staff calculations.

Calculated from monthly averages.

For 1995, January-August, relative to the same period of the previous year.

For 1995, January-June, relative to the same period of the previous year.

Thousands of cubic meters.

Table A4.

Luxembourg: Consumer Prices

(Monthly inflation, in percent: unless otherwise noted)

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Source: STATEC.
Table A5.

Luxembourg: Employment and Unemployment

(In thousands; unless otherwise noted)

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Source: STATEC; and Inspection Générate de la Sécurité Sociale.

Estimate.

In percent of the labor force.

Table A6.

Luxembourg: Structure of Employment by Industry

(In percent of total; unless otherwise noted)

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Source: STATEC; and Inspection Générate de la Sécurité Sociale.
Table A7.

Luxembourg: Average Wage by Industrial Sector

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Source: STATEC.

Estimate.

Table A8.

Luxembourg: Labor Costs in Industry

(Percentage changes)

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Source: STATEC.
Table A9.

Luxembourg: Current Account Developments

(In billions of Lux F; unless otherwise noted)

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Source: STATEC, Note de Conjoncture.
Table A10.

Luxembourg: Trade by Commodity Group

(In percent of total)

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Source: Bulletin du STATEC.
Table A11.

Luxembourg: Direction of Trade

(In percent of total)

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Source: Bulletin du STATEC.
Table A12.

Luxembourg: Selected Monetary Aggregates

(Inbillions of Lux F; end of period)

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Source: Institut Monétaire Luxembourgeois, Bulletin Trimestriel; data provided by the authorities; and staff calculations.

Money, quasi-money, and foreign currency deposits.

Table A13.

Luxembourg: Representative Interest Rates

(Period averages: in parcent)

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Sources: IMF, International Financial Statistics; STATEC, Indicateurs Rapides; and data provided by the authorities.

Money market rate in Belgium.

Weighted average yield to maturity of all bonds with a date-to-maturity over 5 years.

Table A14.

Luxembourg: Exchange Rates and Competitiveness

(Index May 1985 = 100)

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Sources: International Monetary Fund, International Financial Statistics: and staff calculations.

Adjusted by relative consumer prices.

Table A15.

Luxembourg: Government Finance

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Sources: Ministry of Finance; and staff calculations.

Estimate.

Consolidates balances for central government (taking into account borrowings, amortization, and net partipation and loans), special funds, local governments and social security funds.

Excluding gendarmerie and police.

Table A16.

Luxembourg: National Presentation of Central Government Budget and Outturns 1/

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Sources: Luxembourg authorities; and staff calculations.

Including borrowing, debt redemption and transfers to Special Funds.

Budget Définitif.

Figures for GDP outturns reflect the baseline national accounts revision published in early 1996.

Table A17.

Luxembourg: Structure of Central Government Expenditure

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Source: Ministry of Finance; and staff calculations.

Preliminary.

Budget.

Table A18.

Luxembourg: Tax Structure

(In percent of total receipts)

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Sources: Ministry of Finance; and staff calculations.

Preliminary.

Budget.

Table A19.

Luxembourg: Transactions of Selected Special Funds

(In millions of Lux F)

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Source: Ministry of Finance; and staff calculations.

Budget.

Table A20.

Luxembourg: Gross Public Debt

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Source: Ministry of Finance; and staff calculations.

Excluding social security reserves.

Table A21.

Luxembourg: Pensions

(In billions of Lux F unless otherwise noted)

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Source: Inspection Générale de la Sécurité Sociale, Rapport général sur la sécurité sociale. and data supplied by the authorities.

Covers employees in the private sector.

Covers public sector employees.

Table A22.

Luxembourg: Health Insurance

(In billions of Lux F unless otherwise noted)

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Sources: STATEC; Note de conjoncture: and Inspection Générale de la Sécurité Soclale, Rapport Général sur la sécurlté sociale.

Estimate.

National definition of GDP.
1/

See also Tables A1–A3.

1/

See also Table A4.

1/

See also Tables A5 and A6.

1/

See also Tables A7 and A8.

2/

Balance of payments statistics are compiled by the Belgian National Bank in the context of the Belgium-Luxembourg Economic Union (BLEU). In 1994, STATEC began collecting separate current account data. However, there are no separate capital account data for Luxembourg. See Tables A-A11.

1/

By contrast, the labor income component of net factor services has been in deficit, reflecting the increasing share of foreign workers in Luxembourg’s labor force.

1/

See Tables A12–A14.

2/

The two currencies are at par. The Belgian franc circulates freely and is accepted as legal tender in Luxembourg (the reverse is not true). The monetary association was renewed in 1992 and runs until 2002. However, the protocol on the monetary association with Belgium stipulates that if Stage 3 of EMU starts before 2002, the monetary association with Belgium would be replaced by EMU. Thus, Luxembourg could adopt the common currency at the beginning of Stage 3 even if Belgium were not immediately in a position to do so.

1/

According to the current statute of the IML, the Government is the counterpart of Luxembourg’s monetary base. Thus the coins and notes issued by the IML could be viewed as claims on the government, and hence as interest-free monetary financing.

2/

The correlation of these aggregates with nominal GDP or inflation is virtually non-existent.

3/

The fact that the Belgian franc is accepted as legal tender makes it difficult to estimate the holdings of cash of Luxembourg residents. In compiling its statistics, the IML assumes that their liquidity preference is equal to that of Belgian residents.

1/

See Tables A15–A22.

1/

There are more than 20 special funds carrying out specific tasks. The special funds are not subject to the regular budget procedure.

2/

These figures must be treated with some care, as consistent data on receipts and expenditures is not available in Luxembourg. In particular, national accounts data are not available; it has also not been possible to eliminate all double counting of budgetary transfers to the special funds.

3/

The tax reform involved an increase in the minimum income subject to taxation, replacement of non-linear by linear progressivity, and a reduction in the top marginal rate by 6 percentage points to 50 percent. The impact on revenue of these changes is estimated at about ¾ percent of GDP. The corporate tax burden was also reduced (by cutting the rate from 41 percent to 39 percent, providing for loss carryover, increasing capital depreciation allowances, permitting the deduction of social contributions when calculating the tax base, and eliminating of the corporate capital tax).

4/

The standard VAT rate was increased from 12 to 15 percent in 1992. In order to reduce the impact on the price level, some items were reclassified to fall under reduced rates, as allowed by EC directives.

1/

Revenue includes borrowing, while expenditure includes amortization and participations. The references to budgetary figures are to the final budget (“budget définitif”). Expenditures in the approved budget (“budget vote”) were increased by about Lux F 467 million for hiring of additional permanent staff (Lux F 27 million). There was also an additional allocation (Lux F 440 million) to bolster the finances of the family welfare fund.

2/

A detailed breakdown of receipts and expenditure components is not yet available.

3/

The draft budget also provides for extraordinary “revenues” in the form of loans totalling Lux F 4 billion for the financing of extraordinary expenditure (Lux F 1 billion), and for the highway fund (Lux F 3 billion).

1/

It is important to note that revised GDP figures have been used to calculate the shares in GDP. If the old GDP figures had been used, social security expenditures would been seen as rising significantly relative to GDP.

1/

See Chapter I of the accompanying papers on Selected Background Issues for a detailed description of the rules governing the Luxembourg pension system.

2/

It is worth noting that the increase in the contribution rate is being accommodated by a concomitant increase in gross salaries. Moreover, contributions by pensioners will decline by 1 percentage point per year, from 3 percent of the gross pension in 1994 to 0 percent in 1997.

1/

It is difficult to overstate the historical importance of the steel sector for the Luxembourg economy. Until the 1960s, steel accounted for about half of industrial production, two-thirds of exports, and a quarter of GDP in Luxembourg.

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Cover IMF Staff Country Reports
Luxembourg: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1996: Issue 047
Publisher:
International Monetary Fund
ISBN:
9781451824230
ISSN:
1934-7685
Pages:
59
DOI:
https://doi.org/10.5089/9781451824230.002
CHART 1

LUXEMBOURG: International Comparisons of Fundamentals
CHART 2

LUXEMBOURG: Long-Term Economic Performance
CHART 3

LUXEMBOURG: Shares in GDP and Employment

(In percent)
CHART 4

LUXEMBOURG: Contributions To Real GDP Growth

(In Percent)
CHART 5

LUXEMBOURG: Labor Market Developments
CHART 6

LUXEMBOURG: Current Account Balance and Components

(In percent of GDP)
CHART 7

LUXEMBOURG: Nominal and Real Exchange Rates

(May 1990=100)
CHART 8

LUXEMBOURG: Interest Rates
CHART 9

LUXEMBOURG: Public Finances 1/

(In Percent of GDP)
CHART 10

LUXEMBOURG: Evolution of Budgetary Norms

(1985=100)