Beginning the report, the OECD found that Luxembourg has been growing at between 4% and 6% per year since the last OECD Survey in 2006, which is faster than almost all other OECD countries.

As a consequence, the already substantial positive per capita income gap vis-à-vis the best-performing economies in the OECD has widened further.

The financial sector has brought other benefits to the country in the form of dynamic tax receipts, which have allowed a sustained increase in public sector employment and other categories of government spending.

Additionally, the financial sector has emerged as the main economic engine over the past two decades.

The comparative advantages of placing financial activities in Luxembourg have mostly been in terms of low taxation and an adaptive legislative and regulatory framework. As a result, the OECD observed, Luxembourg is today one of the main international centres for investment funds.

Besides the sector’s direct and indirect employment effects, the most important effect is the large tax revenue generating capacity of the sector, accounting directly for over 20% of aggregate tax revenues.

However, the OECD observed that these tax revenues are very volatile, as the sector is highly sensitive to developments in international financial markets.

In recent years, budget outcomes have tended to be better than expected, reflecting dynamic revenues and slightly stronger-than-anticipated growth in spending. As a result, the current fiscal position is better than in many other OECD countries.

In the short-term, the mildly expansive fiscal stance is appropriate in view of the deteriorating economic outlook.

On the other hand, the already substantial estimate of the fiscal sustainability gap is being revised upwards, reflecting updated OECD estimations of future health care spending.

Addressing the gap requires a broad-based strategy, including prefunding, contribution base broadening, and controlling ageing-related costs. Particularly important is early action to avoid a snowball effect in public debt.

To improve the link between short-term budget developments and long-term fiscal challenges, the OECD recommended that the government should strengthen the framework for fiscal policy, including a clearer separation between statistics compilation, macroeconomic projections and budget preparation, and introduce multi-year spending ceilings.

Future tax revenues will be less dynamic, which requires an improvement in public sector efficiency to maintain present public service standards, the Economic Survey concluded.