2008 OECD Economic Surveys: Luxembourg 2008

image of OECD Economic Surveys: Luxembourg 2008

This 2008 edition of OECD's periodic survey of Luxembourg's economy focuses on key challenges being faced including whether the financial sector can continue being the main growth engine, adapting fiscal policies to slower tax revenues, enhancing efficiency in health care, and increasing student abilities by giving schools more autonomy.

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Adapting fiscal policies to slower tax revenues

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 broadbased 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 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.

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