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2022 OECD Economic Surveys: Luxembourg 2022

image of OECD Economic Surveys: Luxembourg 2022

Luxembourg recovered quickly from the COVID-19 pandemic thanks to extensive policy support. However, the impact of the war in Ukraine is exacerbating inflationary pressures, alongside labour market shortages. This highlights the importance of boosting the resilience of the Luxembourgish economy. Longer-term fiscal sustainability challenges should be addressed by improving the efficiency of public spending through regular spending reviews, limiting early exit from the labour market and undertaking much-needed pension reform. Removing disincentives to work and strengthening the effectiveness of active labour market policies, in particular for older workers and disadvantaged youth, would boost employment and lower skill mismatches. Digital skills need to improve and life-long learning should be strengthened. Increasing private R&D spending, improving diffusion of digitalisation, especially for small firms, and reducing the regulatory burden would support productivity growth and economic diversification. Reaching the climate objective of net zero emissions by 2050 will require bold policy action, requiring a clear carbon pricing path and adjustments to urbanisation and transport policies.

SPECIAL FEATURE: SECURING A DYNAMIC AND GREEN ECONOMY

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Securing a dynamic and green economy

Luxembourg announced ambitious climate targets to accelerate progress towards carbon neutrality in 2050. These objectives require significant mitigation efforts, as progress in the green transition has stalled in the past few years. The emissions reductions required in the next 30 years are greater than the declines of the 1990s, which were driven by reforms to the steel industry and the closure of coal power plants. At the same time, the targets can allow Luxembourg to benefit from the green transition. Owing to the specificities of Luxembourg’s economy, most of the efforts will need to be focused on the transport and housing sectors. The transition will require deep changes in the behaviour of households, whose high carbon footprint is due to car usage and home heating. Sustainably reducing emissions also requires tackling cross-border fuel sales for both freight and commuters. Furthermore, reforms in agriculture are needed to reduce pressures on biodiversity. A wide range of policy tools need to be used to increase public acceptability. A higher carbon price over the medium and long term would lead to lower fuel sales and greater energy efficiency. Better spatial planning policy could reduce urban sprawl and car dependency. Stricter regulations and enhanced incentives would facilitate more environmentally-friendly agricultural practices.

English Also available in: French

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