“Neither the finance minister nor the budgetary control committee of the Chamber of Deputies have challenged our analysis.” With three months to go before the parliamentary elections, , chairman of the National Council of Public Finance (CNFP), presented a final assessment of public finances under the current government to the Chamber of Deputies the afternoon of Monday 26 June. The conclusions of this assessment are hardly conducive to blissful optimism, and put into perspective the proposals put forward by some of the campaigning parties.

Accompanied by Simone Delcourt, Bausch spoke of “significant deterioration” and a debt level that is increasingly close to the fateful limit of 30% of GDP.

On growth. “The economic growth forecasts on which the stability and growth programme [programme de stabilité et de croissance, or PSC in French] is based are likely to prove over-optimistic if we consider the most recent forecasts from the various international institutions and Statec, all in light of the risks and uncertainties surrounding the economic context,” says the CNFP. The problem is that the PSC2023 takes into account the analysis of Oxford Economics based on January figures, a scenario that differs from other international institutions, and has not been updated, says the CNFP. “The most recent forecasts (...) assume weaker growth for Luxembourg (1.5% in 2023 and 2.5% in 2024),” says the council.

On inflation. After very high inflation in 2022 (6.3%, the highest rate since 1983), inflation should return to 3.4% in 2023 and 2.8% in 2024 before rebounding again in 2025 (3.4%) and falling below 2% in 2026 and 2027. But the slight improvement conceals disparities: it is being driven mainly by a lull in the energy markets, while other aggregates remain at high levels, such as “food, alcohol and tobacco” at 12.5% year-on-year in May according to the first estimate, “industrial goods excluding energy” at 5.8% and “services” at 5%.

On the labour market. The PSC expects job creation to slow down from 3.5% in 2022 to 2.2% in 2027, and the unemployment rate to rise from 4.8% in 2022 to 5.7% in 2027.

The two faces of the budget

As if external uncertainties were not enough, the CNFP expressed its dismay at two opposing analyses: the first showed an overestimation of the deficit (with an underestimation of certain revenues, an overestimation of investment expenditure and an overestimation of the envelope to finance Solidairtéitspak and Energiedësch); the second showed an underestimation due to the unfavourable economic outlook.

The public administration balance is expected to remain negative, from -€1.12bn this year to -€887m in 2027 (i.e., a deficit of between 1.5% and 0.9% of GDP). Over the period 2020-2024, the central government balance has been eroded by an average annual increase in expenditure (+8.2%, or +7.9% excluding packages of measures and exceptional expenditure, including €190m for a military satellite) compared with the “usual” figures (+6.4%, or +6.8% excluding packages of measures).

Over the following period (2025-2027), the rate of growth in expenditure should remain below that of revenue... but revenue should not be sufficient to offset expenditure over the 2022-2024 period. And while local government should retain a little margin, the CNFP invites us to consider “the deterioration in the social security balance,” which should shrink from €1.097bn this year to €573m in 2027.

“The development of public finances is likely to jeopardise budgetary room for manoeuvre in the event of a worsening of the macroeconomic situation or in the event of a crisis,” particularly because of the difficulty of reducing expenditure, the increase in public debt and the cost of financing it.

Walls and calculations

“The competent budgetary authorities should monitor the medium-term trend in public spending,” especially as a number of challenges are looming, from the ageing population to defence, housing, the energy transition, mobility... and the future of cross-border commuters, who, if they decide to work more at home, could pay income tax there that would no longer return to Luxembourg. In other words, it will be difficult to keep debt below the symbolic mark of 30% of GDP. And this will hamper the next government’s ability to afford its ambitions.

All the more so since, on 26 April, the European Commission added another piece to the austerity jukebox by announcing a reform of economic governance. For the time being, member states whose public deficit exceeds 3% of GDP or whose public debt exceeds 60% of GDP will be “invited” to follow a “technical path” to get back on track. Far from this, Luxembourg would simply be offered technical information.

Are politicians who promise spectacular tax cuts credible? When they are banking on an increase in consumption and a revitalisation of the economy, we will have to see how much they actually cost. This is what Bausch says with the diplomacy of experience. “When the margin is small or non-existent, we can reduce taxes when we reduce spending or increase revenue. At least, when you have this coherent approach that consists of saying how you are going to finance your measures!”

This story was first published in French on . It has been translated and edited for Delano.