Economic growth does not come like manna from heaven
The economic and financial crisis has led to a deterioration of public finances all around Europe. Luxembourg is no exception to this trend. During a press conference, the minister of Finance, Luc Frieden, cited measures that have to be implemented in order to maintain healthy public finances. He and Etienne Schneider, minister of the Economy and Foreign Trade, have presented the benchmark data of the stability and growth pact that has been sent to the European Commission in Brussels.
Mr Frieden underlined that this stability and growth pact pursues two objectives. First, to guarantee better coherence between the economic and fiscal policy, and second, to make sure that every country in Europe cultivates stability when it comes to public finance. And there is a reason for this.
“Stable and healthy public finance is the basis of a solid economic policy. We need this stability, because we have also experienced what can happen when countries don’t respect the rules”. He warned it is very complicated to make an economic forecast because we live in uncertain times. “An unforeseen event in Europe can have a substantial impact on our public finances”.
Though Luxembourg is in a much more enviable situation than most other member states of the European Union when it comes to public debt, a cautious approach for the future is the key to remaining competitive. In a very open economy like that of Luxembourg, tax revenues are subject to a high volatility.
“In 2002 we had a public debt of 6 %, and now it is around 20%. This debt is quite expensive even if Luxembourg pays less interest on its debt compared to other countries; we had an interest rate burden of 200 million Euros for 2012. In this legislation period we will borrow another 2 billion, meaning that in 2014 we will end up with a debt burden of 11 billion, which equals 24% of GDP”.
Preserving the welfare state
The government wants to reduce its budget deficit without completely abandoning the solidarity between generations and social justice. At the same time, the impact of these measures on economic growth has to be reduced to a strict minimum. All in all, more than 500 million euros will be saved in 2013, and the same amount again in 2014. Two thirds will be saved by reducing the level of expenditures an one third by increasing tax.
The government has picked out the five sectors where it wants to be most cost-efficient: employment, government operating costs, household subsidies, energy sector subsidies and housing. On the revenue side, the excise tax on fuel and tobacco will be marginally raised, as well as the solidarity tax, paid by employees and companies.
Minister Frieden noted that “this tax above all affects the financial sector because it pays the biggest part of corporate taxes. But these measures are not the end of the story. What the government has achieved today is a step in the right direction, but more has to be done. I repeat: there is no economic growth without solid, stable public finance. That is why it is called the European stability and growth pact”.
No Spanish conditions
Etienne Schneider, minister of the Economy and of Foreign Trade, then presented the national reform plan to the press, which is Luxembourg’s growth strategy for the future. He cited five sectors of activity that will be promoted: research and innovation, education, energy, employment and inclusion. Research and innovation will be the core piece of the national economy policy.
“Amongst the four sectors we want to promote you find eco-technologies, life sciences, ICT and logistics. In the last six years the public budgets in these domains have more than doubled. Our main objective is to create high-value jobs". In the energy sector, he promised that there would be a lot of efforts made in the area of renewable energies. Another goal is to invest more into wind energy and less into photovoltaic energy, too expensive too subsidise.
Regarding the employment market, the rate of active population has to go up from 69,8% now to 73% in 2020, partly by launching measures to increase the number of women at work. “We also want to invest into our youth policy. We don’t want conditions like in Spain, where 50% of young people are unemployed. Education is another key element of an economy built on growth. We want to reduce the number of dropouts and increase the number of young people with a university degree from the current 46% to 66% by 2020”, minister Schneider concluded. CW