On 10 March 2023 the IMF issued a report following consultations with Luxembourg under Article IV of the IMF’s articles of agreement.

Luxembourg’s economy has recovered well from the pandemic despite the external challenges in 2022, although the effects of the Ukraine war will continue during 2023 and possibly longer. The extensive support measures have helped demand to remain steady despite the increased cost of living. A decrease in the rate of value added tax (VAT) has helped to steady the prices paid by consumers. The momentum of economic growth has however slowed down as the effects of the Ukraine war have been felt, resulting in weaker external demand and reduced investment in real estate.

The economy is projected to slow down to 1.5% to 2% in 2023 as a result of the weaker demand and the drop in real estate activity. The growth of real disposable income will be boosted by the large fiscal stimulus and wage indexation, reducing the effects of higher interest rates.

There is still high uncertainty in the economic outlook and the risks to growth are still to the downside. External risks come from the danger of deeper recessionary pressures in major economies; a tighter monetary policy than currently anticipated; and disorderly market reactions to central bank decisions. However, if the global economy becomes more resilient, there could be further economic growth resulting from the accumulated domestic demand.

The IMF report encourages an extension of the targeted energy bonus and tax credit to low-income households as this would help the most vulnerable groups in society. Also, the tax brackets should be adjusted more frequently to compensate for the effects of inflation, as part of a more comprehensive reform to tax and benefits. The long delay in the indexation of tax brackets has significantly increased the real tax burden. Only part of the additional tax collected has been used for targeted spending, and this may have had unintended distributional effects.

The increasing pressure to adjust the tax brackets on an ad-hoc basis may cause a large fiscal stimulus. The IMF report therefore recommends that the tax brackets should be frequently adjusted in a budget-neutral way. The adjustments to tax brackets could be carried out as part of a comprehensive simplification of the tax and social benefits system that would have the effect of increasing its efficiency and distributional impact.

The lack of stability in housing markets and the higher mortgage interest rates are likely to make housing less affordable in the short term. The government has been trying to restrict speculative demand and hoarding of land; and should also continue to focus on increasing the supply of housing. The government should avoid measures that increase housing demand. such as the deductibility of mortgage interest payments or the tax credit on the registration and transcription fees for purchasers of a residence for personal habitation. The IMF report considers that housing prices are overvalued, as a result of a number of years of double-digit growth.

The report suggests that Luxembourg could increase the efficiency of its workforce by increasing work flexibility; reducing the time required for commuting; facilitating work permits for immigrant spouses; promoting female entrepreneurship in science, technology, and engineering; adjusting the system of individual taxation; and better targeting family benefits. Participation by older people in the job market could be improved by reducing the generosity of the pension system and the promotion of life-long learning.