Abstract
This 2004 Article IV Consultation highlights that the Luxembourg authorities are adjusting policies to the growth slowdown, although major new initiatives are on hold in the run-up to the June 2004 general election. Tax cuts, high expenditure, and weak activity are estimated to have caused a general government deficit in 2003. Executive Directors have welcomed indications that real GDP growth is rebounding, following an unusually long period of sluggish activity. However, they have stressed that medium-term growth prospects are now less buoyant in comparison with the exceptional growth performance of the past decade.
1. This supplement reports on data on the fiscal outcome for 2003 that has become available since the issuance of the staff report. Other economic indicators continued to evolve broadly in line with staff projections. The new information does not change the thrust of the staff appraisal.
Fiscal developments and outlook
2. According to data submitted by the authorities to Eurostat, the general government deficit was contained to 0.1 percent of GDP in 2003, about 0.8 percentage point of GDP lower than the staff’s projection and 0.5 percentage point below the earlier official estimate (Table). However, as elaborated below, much of the overperformance is likely to be temporary and the authorities are maintaining the 2004-06 Stability Program (SP) targets. The modest revenue overperformance in relation to the staff’s projections (but not to the SP)—stemming from higher VAT and excise tax receipts—does not materially alter the staff’s revenue projections for 2004-06. Expenditure, however, was appreciably lower as major investment projects were delayed, contrary to the authorities’ and the staff’s assumptions. At this stage, there are no plans to cancel these projects. Considering further that social spending grew faster than the staff’s projection in 2003, the staff continues to believe that the SP medium-term targets remain at risk (including, possibly, a temporary breach of the Maastricht 3 percent ceiling in 2005), unless the plans for discretionary spending are scaled down or entitlement programs reformed.
Luxembourg: General Government Finances, 2003-03
(In percent of GDP, unless otherwise indicated)
SP refers to the authorities’ Stability and Growth Program update of November 2003.
See Staff Report, Table 2.
Notification to Eurostat by STATEC.
Luxembourg: General Government Finances, 2003-03
(In percent of GDP, unless otherwise indicated)
| 2002 | 2003 | |||||
|---|---|---|---|---|---|---|
| SP 1/ | Staff Est. 2/ | Update 3/ | SP 1/ | Staff Est. 2/ | Update 3/ | |
| Revenue | 46.7 | 46.7 | 47.0 | 47.1 | 46.4 | 46.6 |
| Expenditure | 44.2 | 44.2 | 44.3 | 47.7 | 47.4 | 46.8 |
| Balance | 2.4 | 2.4 | 2.7 | -0.6 | -1.0 | -0.1 |
| Memorandum items: | ||||||
| Social expenditure growth (in percent) | 10.6 | 10.6 | 10.4 | 9.3 | 9.3 | 9.8 |
| Gross debt | 5.7 | 5.7 | 5.7 | 4.9 | 4.9 | 4.9 |
SP refers to the authorities’ Stability and Growth Program update of November 2003.
See Staff Report, Table 2.
Notification to Eurostat by STATEC.
Luxembourg: General Government Finances, 2003-03
(In percent of GDP, unless otherwise indicated)
| 2002 | 2003 | |||||
|---|---|---|---|---|---|---|
| SP 1/ | Staff Est. 2/ | Update 3/ | SP 1/ | Staff Est. 2/ | Update 3/ | |
| Revenue | 46.7 | 46.7 | 47.0 | 47.1 | 46.4 | 46.6 |
| Expenditure | 44.2 | 44.2 | 44.3 | 47.7 | 47.4 | 46.8 |
| Balance | 2.4 | 2.4 | 2.7 | -0.6 | -1.0 | -0.1 |
| Memorandum items: | ||||||
| Social expenditure growth (in percent) | 10.6 | 10.6 | 10.4 | 9.3 | 9.3 | 9.8 |
| Gross debt | 5.7 | 5.7 | 5.7 | 4.9 | 4.9 | 4.9 |
SP refers to the authorities’ Stability and Growth Program update of November 2003.
See Staff Report, Table 2.
Notification to Eurostat by STATEC.
3. The draft law that broadens the scope for the investment of social security assets (see Staff Report, §14) has recently been passed.
Other issues
4. In accordance with IMF Executive Board Decision 144-(52/51) dated August 14, 1952, the authorities formally notified the Fund on April 15, 2004, of a number of measures taken for the preservation of national and international security, in conformity with various EU Council regulations that give rise to exchange restrictions subject to Fund jurisdiction. In addition to the measures listed in the Staff Report (Appendix I), restrictions relating to Somalia (per EU Council Regulation No. 147/2003), the Democratic Republic of Congo (per EU Council Regulation No. 1727/2003), and the assets of some residents of Kuwait and Iraq are in place; however, restrictions relating to Angola, mentioned in the Staff Report, are no longer in place.