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Excerpts from Executive Summary
Luxembourg enjoys the highest per capita income in the OECD and has emerged from the economic and financial crisis in relatively good shape. Luxembourg will nevertheless face a number of challenges to its economic growth and social model in the years ahead. Despite high social spending, inequality and relative poverty have risen over recent decades.
Strengthening the public finances: The budget deficit is expected to widen in 2012, as growth of spending continues to outpace revenue growth. Consolidation measures should be put in place, focussing on controlling current spending within a stronger medium-term framework. Future pension costs are the main fiscal challenge. Current reform proposals are a significant step forward, although further action is needed to reduce benefits to a sustainable and fair level and to reduce incentives for early retirement.
Sustaining growth in the longer term: While many growth factors are external, policy reforms can improve underlying economic performance, competitiveness and help the economy to adapt to change. Product market regulations remain restrictive weakening competition, although welcome reforms were made to the oversight of competition policy. On-going reforms of the employment service are welcome.
Strengthening social cohesion: The social system plays a powerful role in narrowing inequalities in disposable income, but inequality and relative poverty have increased. The insufficient work incentives created by the minimum guaranteed income should be addressed by expanding in-work benefits, continued reinforcement of activation policies and enhanced training. The sustainability of current social system would be improved by better targeting benefits, while ensuring that their design does not create new incentive problems. Social housing supports should be reformed to make them more effective at helping those in need, while lowering their cost. Inefficient and regressive tax expenditures should be scaled back.