The International Monetary Fund painted a rather worrying picture of Luxembourg’s economy on Wednesday. In its concluding statement, the institution believes that the Grand Duchy is going through a prolonged slowdown marked by weak growth, a rapid deterioration in public finances, and increased risks linked to geopolitical tensions and the financial system.
“The fiscal situation is expected to deteriorate further if current policies are implemented,” the IMF warned, now calling for “moderate fiscal adjustment” in order to stabilize public debt over the medium term.
The Washington-based institution emphasized that Luxembourg’s economy is “struggling to regain its former dynamism.” Since 2022, growth has remained below the eurozone average and below its long-term trend. In 2025, GDP grew by only 0.6%, supported mainly by public spending and gains in real income, while external demand continued to weigh on activity.
The labor market is also showing signs of weakening. Unemployment has now risen above 6%, in a context of “persistent mismatches between supply and demand.” At the same time, the IMF pointed to a loss of competitiveness among non-financial companies, linked to “stagnant productivity and rising labor costs.”
For 2026, the IMF now forecasts growth of only 1.2%, compared with the 1.6% anticipated before the escalation of the conflict in the Middle East. Inflation is expected to reach 2.6% this year due to energy prices and the automatic wage indexation system.
Public spending rising sharply
On the fiscal front, the IMF’s shift in tone appears particularly striking. After a surplus close to 1% of GDP in 2024, the public balance moved into a deficit equal to 2% of GDP in 2025. Public spending jumped by 8.8% year-on-year, driven notably by public investment, salary increases in the civil service, and higher social benefits.
At the same time, growth in tax revenues slowed sharply. The IMF mentioned declining corporate tax revenues and weakening personal income tax receipts.
The institution believes that the current trajectory is not sustainable in the medium term. Future tax and social reforms, combined with spending related to aging, healthcare, defense, and pensions, would further increase budgetary pressures. According to the IMF, measures already announced would represent approximately 1.5% of GDP in additional spending.
Criticism of broad support measures
The organization therefore recommends a fiscal refocusing based mainly on “controlling current expenditures,” particularly the public-sector wage bill. It also advocates stricter targeting of social aid, improved efficiency of public spending, and diversification of tax revenues through property and environmental taxation.
The IMF also criticized generalized energy subsidies. If energy prices remain close to the levels anticipated by markets, “the impact on households will be modest” and already offset by wage indexation mechanisms and existing support measures. In the event of a larger shock, the institution recommends only “temporary and targeted” assistance.
Regarding the financial sector, the IMF stressed that banks and non-bank financial institutions have shown “remarkable resilience” despite recent market tensions. Capital and liquidity levels remain high, while real-estate risks have eased slightly thanks to the gradual recovery of the residential market.
Tighter supervision of mortgage lending
However, the organization emphasized the persistent vulnerabilities of a financial system that is “large, externally open, and highly interconnected.” It warned of risks linked to a sharp market correction, capital outflows, or tighter financial conditions. The IMF also considers household and corporate debt levels to remain high compared with European standards. It recommends gradually strengthening macroprudential tools, notably through stricter supervision of mortgage lending. On the structural front, the institution called on Luxembourg to rebalance its growth model toward the private sector. The report stresses the need to accelerate the adoption of artificial intelligence, strengthen STEM and digital skills, and expand professional retraining programs. The IMF also called for faster labor-market reforms to improve workforce participation and wage flexibility. It explicitly mentioned “greater flexibility in automatic wage indexation” in order to better align wage increases with productivity gains. Finally, the organization believes that the housing crisis continues to weigh heavily on competitiveness and purchasing power. It recommends a “radical shift” toward supply-side policies, including faster implementation of property taxation, simplification of regulatory procedures, and more rapid development of affordable housing.
