Luxembourg has the highest GDP per capita among the 38 OECD countries and low public debt. To maintain strong economic growth and public finances, policies should now focus on boosting innovation and skills and securing the sustainability of the pension system for future generations, according to a new OECD report.
The latest OECD Economic Survey of Luxembourg says that GDP growth is projected to pick up from 1.0% in 2024 to 2.1% in 2025 and 2.3% in 2026. Headline consumer price inflation is expected to continue to decline from 2.3% in 2024 to 2.1% in 2025 and 1.9% in 2026.
Fiscal policy should remain prudent. As a highly open economy with a large financial sector accounting for about one-quarter of GDP, Luxembourg is highly exposed to global economic shocks. Spending pressures related to population ageing, defence requirements and the climate transition are rising. In the short term, a tight fiscal policy stance should be maintained, including by fully phasing out energy policy support measures.
“Luxembourg stands out for its very high living standards and income levels among OECD countries. There are opportunities to continue to optimise policies to maintain strong public finances and boost growth,” OECD Secretary-General Mathias Cormann said, presenting the Survey in Luxembourg alongside Luxembourg’s Prime Minister Luc Frieden. “A comprehensive pension reform now – with an earlier increase in contribution rates, increases in effective retirement ages, and lower growth in pension benefits – would put the system on a sustainable path. Productivity growth could be reinvigorated by strengthening competition, improving public support for business research and development, and enhancing adult education and training.”
Luxembourg faces rapidly rising pension expenditure, with the number of pensioners set to more than triple by 2070. A comprehensive reform to curb pension spending and raise revenue is needed.
Raising pension contributions to a rate that can be maintained over the long term and increasing the effective retirement age, currently the lowest in the OECD, would make the system more sustainable. Early and statutory retirement ages should be raised to match gains in life expectancy, including by removing years in higher education from the calculation of contributory years to align benefits with actual work history.
Productivity is among the highest in the OECD but has fallen over the past 15 years. Business innovation and technology adoption need to grow. Business expenditure on research and development is among the lowest in the OECD at 1.0% of GDP. Strengthening competition, especially in services, refocusing public support for innovation, and boosting skills by upgrading training would help. Streamlining the investment tax credit and making incremental digital and technological improvements eligible for support would favour technology adoption in smaller firms.
Housing affordability remains low, despite real house prices having fallen by about 20% over the past two years. A stronger emphasis on addressing structural supply shortages is needed. As part of a tax reform, the government plans to introduce a national-level property surtax on unused land – a positive step that would help increase housing supply by discouraging land hoarding. Streamlining permitting for construction projects would help make building more responsive to demand.
Luxembourg has made significant progress in reducing greenhouse gas emissions, but further efforts are needed. Continuing to develop public transport and alternative mobility options, while bringing fuel prices more in line with neighbouring countries and making the tax regime more favourable for electric vehicle adoption, would help Luxembourg reach its climate targets.
See an Overview of the Economic Survey of Luxembourg with key findings and charts (this link can be used in media articles).
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