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  Basic statistics of Luxembourg, 2011

  This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of Luxembourg were reviewed by the Committee on 7 November 2012. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 19 November 2012.The Secretariat’s draft report was prepared for the Committee by Jean-Marc Fournier, Nicola Brandt, and Sebastian Barnes with a contribution from Clara Garcia under the supervision of Piritta Sorsa. Research assistance was provided by Valery Dugain.The previous Survey of Luxembourg was issued in May 2010.

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  Executive summary

  Luxembourg enjoys the highest per capita income in the OECD and has emerged from the economic and financial crisis in relatively good shape. The important financial centre rode out the global financial crisis, banks are well capitalised, public finances are robust compared to most other OECD countries, and unemployment is relatively low. In particular, employment in the financial sector has continued to grow, benefitting from inflows to asset management, which has sustained domestic demand. However, the weak recovery and downside risks to global and European growth imply an uncertain short-term outlook.

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  Assessment and recommendations

  Over the decades, Luxembourg has evolved from an agricultural to a steel-based industrial economy, and subsequently to a successful financial services centre. Today, Luxembourg has the highest per capita income in the OECD, after decades of robust growth, of more than two percentage points above the euro area average over the past 30 years. This growth has been led by the large and successful financial sector. Collective investment funds registered in Luxembourg hold assets of more than EUR 2 trillion, about one-third of investment funds’ assets in the euro area. Private banking is also an important source of activity. The financial sector has also been a significant purchaser of services activities such as legal services and real estate. This booming economy has attracted many European Union migrants and cross-border workers: the labour force has increased by 1.8% annually, one percentage point more than in the euro area on average. The budget has benefited from strong tax revenues, so that the government has been able to offer a high level of public services, including social spending, while keeping the level of public debt low by any standard.

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  Strengthening social cohesion: Making efficiency and equity go hand in hand

  Luxembourg is a rich and fast-growing country. However, inequality of disposable incomes has trended up modestly over the past decades and relative poverty has risen reflecting mainly the rapid growth of high incomes. The relatively high inequality of market incomes is substantially reduced by large social transfers, but the risk of relative poverty still affects the most vulnerable, such as the young, the less educated, single parents and migrants. At the same time the generous transfer systems tend to reduce work incentives. There is significant room for improvement in the design of the tax and transfer system to enhance work incentives and improve targeting, particularly for the less skilled workers. Reforms that tackle poverty traps would both reduce inequality and improve the labour supply of residents. Strong activation policies are important in getting people to jobs. Job opportunities would also be enhanced by improving education outcomes for pupils from low socio-economic backgrounds and for second-generation immigrants. Reducing high repetition rates and better targeting education spending to schools with high shares of vulnerable students would help improve outcomes.

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  Greening growth

  With strong economic growth overall and an increasingly important role as a regional economic centre, Luxembourg is experiencing mounting environmental pressures. This is mainly a result of a growing population and a rapid increase in transport, which is dominated by the car, as the number of workers commuting within Luxembourg and from across the border has risen rapidly. Ensuing environmental pressures are sizable, including through CO2 emissions, air pollution and land use changes. Large-scale commuting, combined with low fuel taxes compared to neighbouring countries, has entailed rapid increases in greenhouse gas emissions, which are higher in Luxembourg in per capita terms than almost anywhere else in the OECD. Sound housing policies, urban and transport planning to limit urban sprawl and to promote public transport, and measures to better internalise environmental externalities will be needed to ensure that Luxembourg’s economic growth is compatible with environmental and economic sustainability and the well-being of its population.

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