COUNCIL OPINION

of 18 January 2005

on the updated Stability Programme of Luxembourg, 2004-2007

(2005/C 79/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 18 January 2005 the Council examined the updated stability programme of Luxembourg, which covers the period 2004 to 2007. The update broadly complies with the data requirements of the revised ‘code of conduct on the content and format of stability and convergence programmes’. In particular, some required data on the macroeconomic assumptions are missing.

The update estimates real GDP growth at 4,4 % in 2004, from 2,9 % in 2003. In 2005 and 2006, growth is projected to decelerate to 3,8 % and 3,3 % respectively, before reaccelerating to 4,3 % in 2007. On the basis of currently available information, this scenario seems to reflect plausible growth assumptions.

The budgetary strategy underlying the update aims to slightly reduce the deficit to 1,0 % of GDP in 2005 from the 1,4 % of GDP estimated for 2004. In 2006 and 2007, the deficit would remain at the 2005 level with both revenues and expenditure projected to remain constant as a percentage of GDP. It positively contrasts with the 2003 update, which was based on a significantly less optimistic growth outlook than that of 2004 and anticipated that the general government deficit would widen from 0,6 % of GDP in 2003 to around 2 % in the remainder of the programme period. In cyclically-adjusted terms, the Commission services' calculations according to the commonly agreed methodology project that a surplus, amounting to 0,3 % of GDP, will emerge in 2005 and gradually rise to 2,0 % of GDP in 2007, reflecting an estimated widening negative output gap. However, the estimates of output gaps and hence of cyclically-adjusted balances present unusually large margins of uncertainty in the case of Luxembourg, due to the very specific features of its economy, which calls for a very prudent use of such indicators. Over the time horizon covered, the ratio of public investment to GDP would remain broadly constant, at about 5 % of GDP, which is well above the EU average.

The risks to the budgetary projections in the programme appear broadly balanced. On the one hand, revenue projections in Luxembourg are traditionally cautious, and the 2004 budgetary outcome might be significantly better than currently estimated, which might perhaps entail a favourable base effect for the remaining years of the programme. On the other hand, the programme projects a slowdown in the rise in public spending, which has been particularly rapid in recent years, without detailing the measures that should help achieve this. The budgetary stance in the programme seems to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal cyclical fluctuations. It also seems sufficient to achieve the Stability and Growth Pact's medium-term objective of a position close to balance within the programme period (from 2005) in cyclically-adjusted terms.

The debt ratio is extremely low and is even forecast to decline somewhat over the time horizon covered by the update, from 5,0 % of GDP in 2004 to 4,5 % of GDP in 2007. The total net asset position is even more favourable due to the substantial financial assets, estimated at about 50 % of GDP, accumulated over past years through fiscal surpluses.

Luxembourg appears to be in a favourable position with regard to the long-term sustainability of its public finances. The large net positive asset position can be expected to offset at least in part the future costs of ageing. However, the ratio between contributors to and beneficiaries of the pension system will deteriorate, even under a favourable scenario whereby employment growth keeps up with the exceptional rates recorded in the last two decades. Therefore, some restraint is called for in order to ensure that government spending remains in line with revenue and that the policy of accumulating reserves can be maintained, together with the adoption of measures aiming at raising the currently low employment rate of residents, especially older ones.

Comparison of key macroeconomic and budgetary projections

		2004	2005	2006	2007
Real GDP (% change)	SP Nov 2004	4,4	3,8	3,3	4,3
	COM autumn 2004forecast	4,0	3,5	3,6	n.a.
	SP Nov 2003	2,0	3,0	3,8	n.a.
HICP inflation (%)	SP Nov 2004	2,6	3,2	1,5	1,7
	COM autumn 2004	3,0	2,3	1,6	n.a.
	SP Nov 2003	1,5	1,3	1,2	n.a.
General government balance (% of GDP)	SP Nov 2004	– 1,4	– 1,0	– 0,9	– 1,0
	COM autumn 2004(3)	– 0,8	– 1,6	– 2,0	n.a.
	SP Nov 2003	– 1,8	– 2,3	– 1,5	n.a.
Primary balance (% of GDP)	SP Nov 2004	– 1,2	– 0,9	– 0,8	– 0,9
	COM autumn 2004(3)	– 0,6	– 1,4	– 1,8	n.a.
	SP Nov 2003	– 1,6	– 2,1	– 1,5	n.a.
Cyclically-adjusted balance (% of GDP)	SP Nov 2004(2)	– 0,7	0,3	1,4	2,0
	COM autumn 2004(3)	0,4	0,3	0,7	n.a.
	SP Nov 2003(2)	0,9	1,0	2,2	n.a.
Government gross debt (% of GDP)	SP Nov 2004	5,0	5,0	4,6	4,5
	COM autumn 2004(3)	4,9	4,8	4,7	n.a.
	SP Nov 2003	5,2	5,0	4,4	n.a.
Sources: Stability programme (SP); Commission services economic forecasts (COM); Commission services calculations

(1)

OJ L 209, 2.8.1997, p. 1

(2) Commission services calculations on the basis of the information in the programme

(3) Finalised before the presentation of the 2005 budget

Sources:

Stability programme (SP); Commission services economic forecasts (COM); Commission services calculations