OECD Economics Department Working Papers

ISSN :: 1815-1973 (online)
DOI :: 10.1787/18151973

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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

Can the Financial Sector continue to be the Main Growth Engine in Luxembourg?

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Authors:

Arnaud Bourgain¹, Patrice Pieretti¹, Jens Høj

Author Affiliations

1: University of Luxembourg, Luxembourg

Publication Date

15 Jan 2009

Bibliographic information

No.:: 660

Pages

DOI

10.1787/227614871768

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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 an adaptive legislative and regulatory framework and low taxation. As a result, 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. On the other hand, these tax revenues are volatile as the sector is highly sensitive to developments in international financial markets. Indeed, past downturns in international financial markets have tended to lead to a sharp slowdown of growth in the economy as well as in revenues, pointing to potential large risks associated with the current turmoil in international financial markets. Besides these short-term considerations, a lower trend growth rate of the sector is likely over the medium term. The main activities of the sector are in middle and back offices dealing with financial administration which, with new IT technologies, will tend to be increasingly outsourced. At the same time, the sector is having problems in attracting highly specialised talent to enter higher value front office activities. Over the longer term, international competition will continue to exert pressures that may eventually erode Luxembourg’s position. The extent of the decline in the sector’s trend growth depends on the ability to maintain and expand the attractiveness of investing and working in Luxembourg. Achieving this will depend on being able to adjust tax, infrastructure, and housing policies to attract foreign talent while updating and increasing the transparency of financial sector regulation.

Also available in: French

Keywords:: economic growth, financial sector, public finances, Luxembourg

JEL Classification:

G15: Financial Economics / General Financial Markets / International Financial Markets
G18: Financial Economics / General Financial Markets / Government Policy and Regulation
G21: Financial Economics / Financial Institutions and Services / Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G24: Financial Economics / Financial Institutions and Services / Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies