Luxembourg’s government on Wednesday proposed running a historic €2.8 billion budget deficit next year, with spending increased to battle spiraling inflation plus a big chunk of added investment projects as national elections loom in one year.
The €27.3 billion spending plan introduced to lawmakers by Finance Minister Yuriko Backes would see almost half of the national government’s spending go to social benefits, subsidies, grants and transfers to social security.
On top of that, the proposed budget for 2023 would increase public investment to a record €3.8 billion.
“Outside of a crisis, such an amount is unpresentable for a country like Luxembourg. But in a crisis, it cannot be avoided,” Backes said.
Last year’s €23.5 billion budget saw Luxembourg spend heavily to mitigate the effects of the pandemic and invested in climate, education and welfare programs.
The increased spending for 2023, which Backes linked to the continuing economic disruptions of the Covid-19 pandemic and the inflation shock resulting from Russia’s invasion of Ukraine in February, means that the country’s debt will increase from an amount representing 24.6% of current total economic output to 26.3% of GDP in 2023 and 29.5% in 2026, she said.
Backes and Prime Minister Xavier Bettel have committed to keeping the country’s debt below 30% of GDP under their watch, even scrapping a long-anticipated tax reform this year, in order to protect the top credit rating that allows Luxembourg to borrow money at the best rates.
An agreement reached last month between the government, businesses and labour unions already called for borrowing heavily for a €1.1 billion aide package designed to reduce inflation’s impact on households from rising energy prices. The deal caps gas and electricity prices and cuts the value-added tax by 1%.
The package should hold inflation to 2.8% next year, Backes said.
Luxembourg’s economy is expected to grow by 2.5 % this year, down from 5.1 % GDP growth in 2021, when the world’s economies started to snap back from pandemic lockdowns.
The details contained in the proposed budget, which parliament could revise before approving before the end of the year, includes expanding a tax break to attract foreign workers in high-demand professions. The government proposed cutting the minimum annual salary to qualify for the tax break from €100,000 to €75,000. The break means more workers would qualify for the tax cuts for costs related to moving to Luxembourg.
Backes also focused heavily on the budget’s social spending, including noting that last month’s three-party agreement settled on raising the minimum wage in January.
The tax credit for single parents will increase from €1,500 to €2,505 with the new year, and that benefit will be expanded to allow families with annual incomes of up to €60,000 to qualify.
The education sector will see music lessons become free of charge, as well as free meals at schools and the Maison Relais.
In the health sector, spending for hospitals will increase by 14.6% in the next two years.
The CNS is currently suffering from a general structural deficit unrelated to Covid-19, Health Minister Paulette Lenert told broadcaster RTL. Expenses in the last few years had gone up by 8.2% while the revenues had only increased by 5.8%, Lenert said.
The budget for housing will increase by 6% in 2023 as the state offers more help with rents and home ownership. The draft bill plans to impose a progressive tax on unoccupied dwellings to incentivise people to either rent out or sell the property.
Climate policies are another budget priority. The VAT on solar panels will drop from 17% to 3% from 1 January. The VAT on repairing household appliances or bicycles will drop from 17% to 8%.
“With this budget, Luxembourg will emerge stronger from the crisis,” Backes said.
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