Released last week, the Survey found that although Luxembourg rebounded quickly from the pandemic, persisting inflationary pressures and labour market shortages remain an obstacle to economic growth.
Few OECD countries rebounded as strongly after the pandemic as Luxembourg. But now that the pandemic appears all but managed, the government has turned its attention to dealing with the economic fallout of the war in Ukraine.
With headline inflation in Luxembourg having reached 8.8% in October 2022, Luxembourg is feeling the impact of slowing economic activity in Europe. The The Survey’s findings suggest that this economic slowdown will persist for a while and projects Luxembourg’s GDP to grow at 1.5% in 2023, compared to this year’s 1.7%.
According to the Survey, the inflationary pressures, as well as a tight labour market, are pushing Luxembourg to adopt a more resilient approach.
In the shorter term, “support for energy efficiency investments and allowances for disadvantaged households are better targeted than price caps and can help reduce energy demand,” said OECD Secretary-General Mathias Cormann, who presented the Survey alongside economy minister Franz Fayot, finance minister Yuriko Backes and energy minister Claude Turmes.
If Luxembourg wants to continue sustaining its high living standards over the long term, the government should enhance productivity growth and reform the pension system to increase the time people spend at work. Indeed, with a quarter of men retiring at 54 years of age and younger and the population continuing to age pension spending is set to rise substantially. Therefore, the Survey recommends putting aligning the retirement age to life expectancy to support younger generations facing higher taxes and lower pensions.
Other recommendations to boost productivity and GDP growth include increasing private investment in R&D spending which is below the OECD average (as a share of GDP). Supporting smaller companies in their digitalisation efforts and helping adults improve their skills should also help boost productivity.
The elephant in the room was also addressed. Luxembourg’s house price inflation has outstripped most other OECD countries as property prices have risen by 9.7%/year on average over the past five years. The Survey recommends a national property tax on unused land and buildings to help tackle land hoarding.
Last but not least, the green transition poses a great opportunity for stronger and more sustainable growth. Luxembourg needs to recommit to lowering its emissions as these have seen a slowdown in recent years. More energy efficiency in housing, reduced car use and tax credits are needed to help Luxembourg meet its net zero emissions targets.
