There are “cracks” in Luxembourg's “financial foundations,” says PM

(CS) The time to get the Grand Duchy's economy back on track is now, Luxembourg Prime Minister Xavier Bettel said on Tuesday, with a “global” tax reform on the horizon and the indexation of wages to remain limited over the coming years.

Bettel said that the current wage indexation system, which is valid until next year, will be extended to last beyond 2015. Agreed in 2012, it foresees that wages are adjusted only once a year, as long as Luxembourg can still be considered to be going through the financial crisis.

The basket of goods, which is used to calculate the index to match inflation, will not be changed, nor will the index be capped.

Bettel commented that the previous government had to make difficult decisions, such as bailing-out banks and fighting for the euro. “And we are happy that we made the right choices for Luxembourg and for Europe together,” Bettel said, pointing out that parliament had widely supported the government during this time.

More than just numbers

However, the PM added, now is the time for necessary reforms. “Our motto cannot be: We want to stand still, where we stand. Then we will surely be overtaken by the others.”

Without reforms Luxembourg faces a state debt of 29.3 percent of GDP by 2016, up from 6.7 percent in 2007, Bettel said. But these are not just numbers, he added. Behind the numbers, livelihoods, the youth's future and trust in the Luxembourg business centre are at stake, the Premier said.

To combat this development, the government will have to structurally consolidate the budget by around 1.5 billion euros, Bettel said. Making more with less money, then, is one of the coalition's main goals.

All expenses will be reviewed with a task force charged with carrying out an efficiency screening of public spending. Internal audit structures will be introduced and the distribution of funds to ministries and the communes will be analysed.

The public sector will do its bit, Bettel announced, with a freeze on wages for the next five years, except for contractual obligations.

Friendly regulatory environment

However, saving money is not enough, Bettel said, who promised a global tax reform instead of bit-part changes over the coming years. An increase in VAT, meanwhile, is nearly unavoidable, the Premier said, while pointing out that the Grand Duchy should keep the lowest VAT rates in the EU.

Still, the new government will not bite off the hand that feeds it. A tax-friendly environment will be maintained for UCITS, SICARs and SIFs and there will be no wealth or inheritance tax, Bettel said.

And while working to comply with European and OECD standards, the new government will also aim to make such standards apply to financial centres around the globe. In line with the CSV-LSAP coalition, for example, Bettel said that Luxembourg will not speak out for a financial transaction tax unless this is implemented worldwide.

New industries for more jobs

Another way of increasing revenue, rather than raising taxes on what is already there, and creating more jobs is to branch out into new industries and sectors, Bettel said.

A sustainable approach to growth is needed, he explained, and efforts to expand into ICT, eco-technologies, bio-technologies and logistics will continue, with investment plans to be created, for example in the sector of infrastructure, which Bettel cited as a key factor in attracting business.

The government's ministries also plan to work together more closely to promote Luxembourg abroad, as well as ensuring that synergies are created in national politics.

New synergies are also envisioned for the labour market, with the university set to become more involved in research and the economy, and job centre the ADEM to be a closer partner for employers.

Tackling youth unemployment

Additionally, the new government wants to raise awareness among students earlier in their lives, to encourage them to think about their careers and develop goals while still at school so that they are better prepared for a difficult labour market.

A solidarity pact will meanwhile try to battle youth unemployment, with the ADEM, the labour ministry and the country's youth services working together to either bring youngsters back into training or offer them first work experience.

Other measures, such as micro-credit schemes, the Luxembourg Future Fund and simplified administrative procedures to set up a business are also aimed at boosting the economy.

The full government programme is available (in French) on gouvernement.lu