The OECD presented members of parliament in Luxembourg its recommendations for a modern, comprehensible and efficient public finance system. Photo: Shutterstock

The OECD presented members of parliament in Luxembourg its recommendations for a modern, comprehensible and efficient public finance system. Photo: Shutterstock

At the government’s request, the Organisation for Economic Co-operation and Development has reviewed Luxembourg's public finance system. The OECD recommends modernising and clarifying the existing framework, developing performance-based management and respecting voted expenditure.

The conclusions of the review of Luxembourg’s public finance system were presented on Monday to members of parliament’s budget and budget implementation committees. The review was commissioned by the government in order to draw up proposals for reforming the budgetary procedure, with the involvement of the Chamber of Deputies. This consultation is provided for in the coalition agreement, with the aim of “identifying ways of modernising budgeting practices and introducing budget management by objectives in the grand Duchy.”

The experts from the Organisation for Economic Co-operation and Development (OECD) welcome this commitment to reform, arguing that Luxembourg cannot do without it “despite having one of the lowest levels of debt in Europe” if it wants to “increase the effectiveness and efficiency of public spending” and anticipate the major challenges ahead: ageing, defence, the ecological transition and digital transformation. They have identified four areas for reform.

Reliable forecasts and clear objectives

The first is the adoption of a new budgetary framework to replace the current one, which results in “essentially reactive” budgeting practices.

For the OECD, budgetary rules must be simple, credible and flexible. And multiannual programming must be based on reliable forecasts, set clear objectives--which should go beyond the “maintain the triple A” argument--and binding spending ceilings. This is a criticism of the current system.

All of this should be under the responsibility of the ministries concerned and no longer under the sole authority of the finance ministry. The OECD calls for a clear redefinition of the roles of the main players in the procedure, namely the finance ministry, the Inspectorate General of Finance, Statec and the National Public Finance Council.

Performance and the disappearance of non-restrictive appropriations

The second area of reform is the adoption of a structured performance system to provide a full picture of the effectiveness and efficiency of public spending. This would involve programme-based budgeting, regular reviews of expenditure and coordination of strategic initiatives that may involve several ministries.

The third area for reform is the modernisation of budgetary mechanisms. With this in mind, the OECD is promoting a gradual transfer of financial control to ministries and a modulation of controls. And above all, the disappearance of non-restrictive appropriations “which significantly modify the voted budget” in favour of a budgetary reserve which would itself be restrictive. This would encourage better forecasting of compulsory expenditure. The OECD also advocates rationalising the use of special funds.

The final area for reform is the modernisation of budget documentation. This will involve “using digital tools to make data more accessible,” and systematically analysing the needs of the various users of budget documents.

The ball is now in the government’s court. It is a government that has also put on its agenda the reform of the amended law of 8 June 1999 on the state budget, accounting and treasury, the introduction of a single tax class and the reform of property tax.

This article was originally published in .

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