On 15 March 2021 IMF staff issued a concluding statement following discussions under Article IV of the IMF’s articles of agreement.

Luxembourg’s economy has come through the pandemic well so far, owing to effective policy measures and adaptation of the economy to remote working. A large package of measures was introduced to provide support for households and firms, together with a targeted stimulus package for sectors hit most by the crisis. This led to an economic rebound in the second half of 2020.

Luxembourg’s GDP shrank by 1.3% in 2020 but is expected to return to growth this year with projected GDP growth around 4.5% in 2021. In the medium term, economic output is projected to continue slightly below pre-crisis levels, owing to the adverse effects of the crisis on corporate balance sheets and some scarring in the labour market. Downside risks arise from the continuing dynamics of the pandemic, but if the pandemic is contained quickly, economic activity could return sooner. There are wider risks from a possible tightening of financial conditions; further de-globalization; and the potential revenue losses following the reforms in international taxation.

The key policy measures in the pandemic are extended until mid-2021 and are targeted more towards the individuals and sectors most impacted by the crisis. The IMF report suggests that fiscal policy should continue to be supportive and should only return to normal when output has generally recovered to its pre-pandemic levels. The withdrawal of support measures should be done while carefully considering the direction of progress of the pandemic. Measures should continue to offer targeted support to the most vulnerable households and firms in the sectors most affected by the crisis.

Luxembourg should ensure that the economy is environmentally friendly and infrastructure gaps should be closed with public investment. The National Energy and Climate Plan should be taken forward with further measures building on those taken in the 2021 budget. The appropriate measures include the introduction of a carbon tax with mitigation of its effect on vulnerable groups by means of a tax credit; reduction of the subscription tax for sustainable investment funds; and additional incentives to encourage green investment.

Luxembourg has taken steps to comply with the EU and international transparency and anti-tax avoidance initiatives and these could contribute to strengthening the corporate tax base. These international initiatives, combined with US tax developments, may however affect multinationals in a way that reduces the tax revenue collected in Luxembourg. The report recommends that Luxembourg should therefore continue to look at further ways to raise revenue including increases to environmental levies and housing taxation.

As the recovery continues the government should give attention to labour reallocation, as the pandemic has disproportionately affected groups such as the youth, low-skilled and foreign-born workers. Luxembourg has extended the short-time work scheme until mid-2021 but when the recovery is well under way the government could promote labour mobility within and across sectors by making hiring subsidies available.