Time to stop the downward trend
The financial sector has endured the euro crisis and remained stable. These were the good news from the International Monetary Fund (IMF) regarding the Luxembourg Country Report. On the other hand, the international experts recommended that the government fuel productivity growth and support economic diversification. The IMF also recommended that local authorities come up with corrective measures in order to keep public debt at a low level.
If the Luxembourg government sits on its hands instead of taking action, public debt will increase sharply in the next five years, the experts from the IMF warn. The riddle to be solved is how to counteract the structural decline in fiscal revenues. In concrete terms, this will mean tax losses from e-commerce as of 2015.
During the press conference of IMF experts in Luxembourg, Alex Hoffmaister addressed another topic linked to fiscal sustainability, specifically, the widening fiscal deficit. “The worrying part of this trend is the increase in current spending, the wage bill and social benefits. And this is coming at the expense of public investment.” The IMF recommends that Luxembourg rationalise current expenditure, including binding expenditure ceilings for all levels of government.
Another area with room for improvement is the pension system. Alex Hoffmaister applauds the efforts undertaken with the so-called “pension à la carte” that seeks to increase the effective retirement age by three years. “A step in the right direction, but a very small one,” the IMF expert said.
Much more needs to be done in order to place the old-age pension system on a sustainable footing. Eliminating complementary periods and limiting benefit indexation to cost-of-living adjustments are two of the measures recommended by the international body.
Fit for the job
Another topic raised in the IMF’s preliminary conclusion is the promotion of growth and employment. The experts of the International Monetary Fund strongly recommend that the Grand Duchy find countermeasures to stop the worrying trend of long-term unemployment that accounts for about 40% of overall joblessness.
One thing is for sure: the measures so far have not been efficient enough “Often, people have been trapped in inactivity and that has made them unable to return to the labour market. In order to guarantee long-term growth, Luxembourg needs to use all of its resources in the best possible manner”. Alex Hoffmaister adds that it is better to put people in training rather than keeping them inactive.
The expert from the IMF said that the financial sector has endured the crisis and that measures have been taken to strengthen its stability. Market conditions have hurt securities portfolios but banks have remained profitable. Furthermore, the volume of assets under management in Luxembourg’s investment industry has recovered following the financial crisis.
While the IMF applauds Luxembourg for its progress in improving its regulatory framework, it urges the country to boost cross-border supervisory coordination. This certainly makes sense for a financial centre that is outward oriented due to its small domestic market. CW