The Organisation for Economic Cooperation and Development (OECD) on Tuesday published its 2008 Economic Survey of Luxembourg.
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.
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