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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Challenges facing the Luxembourg economy

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. Growth has been mainly driven by a good, albeit slowing, productivity performance, while labour utilisation has decelerated. The financial sector has remained a reliable source of economic expansion, creating jobs mostly filled by cross-border workers and expatriates. By contrast, the number of residents employed in the sector has declined. 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. On the other hand, there has been little demand for low-skilled residents, explaining the relatively modest declines in the unemployment rate. Outside the financial sector, the deteriorating productivity record is related to a disappointing performance in a number of domestically-oriented service sectors, reflecting strict labour-market interventions and competition-hampering regulations. In the longer term, it is doubtful that the financial sector can continue to grow at such an impressive rate and support the rest of the economy. As a consequence, maintaining the generosity of public services will increasingly depend on boosting public sector efficiency rather than by expanding public sector employment. Along similar lines, if the large fiscal sustainability gap is left unattended, the financing of future ageing-related costs will either require abrupt increases in social security contribution and tax rates or drastically cutting benefits or other public services.

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