This is the most eagerly awaited document of the year, the one that sets government policy to music: the and the multiannual programme 2025-2028 have just been tabled. After the “transition budget” of 2024, prepared by the former government team and “adjusted” by the new one in March, the document presented on 9 October 2024 by the minister of finance is this time the full and complete translation of the CSV-DP coalition’s orientations. The Chamber of Commerce will have the opportunity to analyse these documents in detail in the coming weeks. But, given the importance of the moment, here are a few immediate thoughts.
In the spring, when the 2024 budget was presented, we stressed the need to rebuild budgetary margins to put the country back in a position to deal with future crises. Since then, current events have only confirmed this imperative, as the risks, threats and uncertainties have multiplied. First, at geopolitical level, with the continuing war between Russia and Ukraine and between Israel and Hamas, and the threat of regional contagion. Then there is trade, with the return of protectionism calling into question the growth models we thought would last forever. In terms of climate, with the multiplication of natural disasters around the world. At a societal level, with growing polarisation that is also generating other risks, of a political nature. And finally, on an economic level. At European level, the a few weeks ago reminded us--if that were necessary--of the existential threat hanging over Europe if it does not manage to find its way back to competitiveness.
In Luxembourg, we are not immune to all these risks. In a very open economy like ours, every tremor elsewhere in the world produces vibrations here of varying magnitude. So it is absolutely vital that we strengthen our resilience. And the budget guidelines are our compass, to use the words of the finance minister.
Debt under control at last
What makes our country strong, what attracts investors, is its political and financial stability. Luxembourg still belongs to the increasingly closed circle of countries rated AAA by the various agencies. In recent years, to support households and businesses during crises, the country has resorted to massive borrowing. As a result, public debt has risen from 7.8% of GDP in 2004 to 27.5% in 2024. On reading the draft budget, we are pleased to note that the government has forecast that this debt will stabilise in 2025 and even decrease slightly from 2026. An optimistic outlook, but a realistic one if revenues continue to outpace expenditure. In that case, the scissors effect that we have seen in recent years, with expenditure rising faster than revenue, would be reversed.
For the central government budget, revenues are expected to rise by 5.2% in 2025, while expenditure growth will be contained at 4.5%. Of course, the new government can count on the gradual phasing out of the various aid schemes introduced during periods of high inflation. But we know that politically, it is always more difficult to turn off the tap than to turn it on. In this respect, the government’s sense of responsibility is to be commended.
Controlling expenditure means paying particular attention to the state’s inflexible costs, especially the central government’s wage bill. The number of FTEs (full-time equivalents) in the central government civil service rose by 46% between 2015 and 2023, while demographic growth was limited to 16.5% and GDP growth to 18%. For 2025, the government has set the numerus clausus at 1,350 FTEs, compared with 1,500 in 2024. This is a first step towards better control of staff costs, but it needs to be consolidated and followed up by major investment in digitising and simplifying the administration. These are concrete developments and measures that households and businesses have long been waiting for.
Controlling current expenditure is all the more essential given that the geopolitical situation is forcing Luxembourg to make an unprecedented effort in terms of military spending. In 2025, €792m will be invested in our defence, €94m more than this year. The government’s commitment to change the trajectory of the defence effort to reach 2% of GNI by 2030 will represent an additional cost of €27.1m in 2025, €18.6m in 2026, €74.7m in 2027 and €69.5m in 2028. This effort, which is essential to guaranteeing our security, must force us to develop a genuine economic strategy to maximise the return on our investments, by enabling local businesses in the fields of industry, cybersecurity, artificial intelligence, information and communication technologies, defence technologies, data management and storage, finance, etc. to benefit from our defence effort.
Turning the corner on AI
Better control of current expenditure also means giving ourselves more resources to invest. In the 2025 budget, investment is up by 4.7%. This is a virtuous direction, given that the economic transformations of our time, particularly the environmental transition and the digital transition, require massive investment. We will need to keep a close eye on the resources that will be made available to enable our businesses to make a success of these transitions.
Integrating artificial intelligence (AI) into value creation is a major challenge for Luxembourg. At a time when our productivity has been stagnating for years, AI should enable us to finally break new ground in terms of production and thus maintain the competitive advantage that we have built up over the past decades, and which forms the basis of our social model.
A new approach to taxation
This budget also reflects a paradigm shift on the revenue side. The tax reduction measures decided by the government have a cost in terms of tax waste: €225m for the adjustment of the tax scale by 2.5 additional index brackets, €55m for the revision of class 1A and €56m for the reduction of one point in corporation tax, in order to bring business taxes closer to the average of OECD countries. This timid cut in the rate of corporation tax (IRC) is necessary to boost the country’s attractiveness and restore its competitiveness. Despite these cuts in tax rates, according to the budget forecasts, direct tax revenues should rise by 3.3% in 2025 and indirect tax revenues by 7.6%, thanks in particular to the dynamism of VAT, which will benefit from this policy to stimulate demand.
As a result, the central government balance should be contained at -€1.29bn in 2025, whereas it was forecast at -€1.81bn when the 2024 budget was voted. According to the new budget trajectory, the deficit should fall back below the symbolic one billion mark from 2027, to reach -€667m in 2028.
Pensions: act now
While the central government balance is improving, the social security balance continues to deteriorate dangerously as a result of demographic trends. From €937m in 2024, it will fall to €657m in 2025 and €487m in 2026. Without reform, it will even be negative (-€15m) from 2028. If employment were to be less dynamic than forecast (-0.5% growth compared with the scenario adopted), the balance would even be in the red from 2027. At a time when the , these observations should lead us to approach the subject with courage and realism. Reform of our pension system is essential if we are to maintain a balanced budget in the long term.
Some people will still want to put off the deadline, claiming that the system can still survive as it is, that the forecasts are systematically pessimistic. Faced with the increasing risks mentioned above, I believe we need to do exactly the opposite. To reform our pensions system, as with budget management in general, let us take inspiration from the Portuguese poet Fernando Pessoa, who taught us the following: “Hope for the best and prepare for the worst is the rule.”
This must be our course; we must not deviate from it. It would be very unwise to steer to port for electoral reasons or to starboard for convenience!
is director general of the . We are publishing this article--available on --with his permission.
This article was originally published in .