(L-R) Franz Fayot, Xavier Bettel, Yuriko Backes; Credit: MinEco

On Tuesday 19 April 2022, Luxembourg's Prime Minister, Xavier Bettel, together with the Minister for Finance, Yuriko Backes and the Minister for the Economy, Franz Fayot, presented a package of measures known as "Solidaritéitspak" to the Tripartite Commission of the Chamber of Deputies (Luxembourg's Parliament).

The package results from the agreement between the government, the Luxembourg private-sector businesses union (Union des entreprises luxembourgeoises - UEL) and the trade unions LCGB and CGFP, which was concluded following the meetings of the Tripartite Coordination Committee on 22, 23 and 30 March 2022.

I. Indexation and household purchasing power

The agreement signed on 31 March 2022 between the social partners UEL, LCGB and CGFP and the government does not provide for any cancellation of an index tranche. It was decided to postpone to April 2023 the index tranche which, according to national statistics agency Statec's latest forecasts, should fall in August 2022. It is also planned to postpone by twelve months - and not to cancel - any tranche additional index which falls in 2023, this with the aim of guaranteeing more predictability to companies.

Beyond support for businesses, this is a tangible measure in favour of the country's competitiveness, the maintenance of jobs and the continued development of the job market.

Since the index tranche scheduled for August 2022 has not been cancelled but simply postponed, the Tripartite agreement does not provide for index compensation (the effect of which, especially for the wealthiest households, may correspond to an increase in the purchasing power). On the contrary, it emphasises compensation, or even overcompensation, for the loss of purchasing power that results temporarily, in particular for the least well-off households.

Based on the most recent data, Statec has calculated, completely independently, the change in household purchasing power for the years 2022 and 2023, taking into account both the postponement of the index tranche of August 2022 to April 2023, the increase in the CO2 tax in January 2022 and January 2023, the measures already decided within the framework of the "Energiedësch" of 28 February 2022, as well as those retained within the framework of the recent negotiations at Tripartite level.

On the basis of these calculations, it appears that all these measures, taken as a whole, make it possible on average not only to compensate, but also to overcompensate for the loss of purchasing power induced by the current economic situation.

It should be remembered that households, depending on their situation, will not only benefit from the introduction of a new Energy Tax Credit (Crédit d'Impôt Energie - CIE), but also from the following measures:

  • the energy bonus for low-income households;
  • stabilisation of electricity prices by increasing the State's contribution to the "contribution to the renewable/cogeneration compensation mechanism" share;
  • subsidising gas network charges;
  • the reduction of 7.5 cents per litre in the price of fuel until the end of July 2022 and fuel oil until the end of 2022;
  • the freezing of rents until the end of 2022;
  • the early introduction and adaptation of the rental subsidy;
  • the revision of the PRIME house aid scheme and the introduction of a "social top-up" in this aid scheme;
  • adaptations to the system of state financial aid for higher education.

While the reduction of 7.5 cents per litre on diesel and petrol has already been in force by regulation since 13 April 2022, the other measures will be the subject of legislative texts, the drafts of which are in finalisation phase, and will be submitted to the Chamber of Deputies as soon as possible.

With regard to the CIE, which is the flagship measure in favour of households, it is presented as follows:

  • for salaries and pensions between €936 and €44,000 gross per year, the CIE will amount to €84 per month;
  • for salaries and pensions between €44,001 and €68,000 gross per year, it will amount to at least €76 per month for this income bracket, then gradually reduce to €0 for salaries and pensions exceeding €100,000 per year.

In addition, the government undertakes to pay an equivalent tax credit (équivalent crédit impôt - ECI) to each beneficiary of the basic lump sum per adult due under the amended law of 28 July 2018 relating to social inclusion income (REVIS). This equivalent tax credit will also be paid to each beneficiary of the income for severely disabled persons (RPGH). The amount of the ECI will amount to €84 per month for the compensation period.

Even if the objective was not to compensate for the index, but for the loss of purchasing power, it must be noted that people who receive the unskilled minimum wage and the qualified minimum wage thus receive a higher monthly compensation higher than they would have obtained with a new index tranche.

In fact, any person in tax class 1 who earns less than €5,700 gross monthly and any household in tax class 2 with an income of up to €5,000, receives a higher amount in compensation than with the indexing.

Here are some concrete illustrations:

  • a person who earns the minimum wage (€2,313 per month from 1 April 2022) and is in tax class 1, will receive €42 net more than if the index had fallen;
  • a person with the qualified minimum wage (€2,776 from 1 April 2022) will receive €38 net per month more than with the index;
  • a single parent who earns €4,200 gross, receives €29 net more per month than with the index;
  • a single person with a salary of €5,000 gross will have €17 more per month than with the index.

The above figures relate to the CIE alone and do not take into account the additional gain in purchasing power obtained in regard to the other measures mentioned above.

The CIE will be paid from the first month in which the index currently scheduled, for August should have fallen, until the month in which it will be postponed – therefore, a priori for eight months, from August 2022 to the end of March 2023.

It will be paid, not per household, but per employee, pensioner or self-employed. It will benefit both residents and cross-border workers.

Statec's calculations on indexation and inflation show the cumulative effect of all the "Energiedësch" and "Solidaritéitspak" measures on household purchasing power. As a result, all households benefit from an increase in their purchasing power, ranging from €245 to €1,196 for the year 2022 and from €205 to €2,055 for the year 2023, depending on the gross annual income of the household.

These figures also take into account the fact that family allowances will not be affected by the shift in the index brackets provided for in the Tripartite agreement. Indeed, the government will introduce a specific provision making an exception to it in the corresponding normative texts.

II. Measures in favour of companies

As far as businesses are concerned, they will benefit, in addition to the index predictability and the reduction in fuel prices of 7.5 cents per litre, in particular from the following support measures:

  • an aid scheme aimed at offsetting part of the additional costs linked to the rise in the prices of electricity and natural gas, for the benefit of companies qualified as large consumers of energy;
  • an aid scheme aimed at offsetting part of the additional costs linked to the rise in the prices of energy, fertilisers and inputs, for the benefit of undertakings carrying out activities in the field of primary agricultural production;
  • an aid scheme to offset the additional costs linked to the greenhouse gas emission allowance trading system (ETS) for the period 2021-2030;
  • a new "Fit4Sustainability" aid programme benefiting SMEs in particular will be set up within the framework of a climate pact for companies ("Klimapakt fir Betriber");
  • the introduction of a new aid scheme aimed at supporting companies in decarbonisation projects, as well as a new mechanism for sharing the risks associated with these projects;
  • the establishment of an aid scheme for the acquisition of clean vehicles.

Finally, to facilitate access to bank credit for eligible companies that have liquidity needs due to the current geopolitical situation, a guaranteed loan scheme, comparable to the one launched at the start of the COVID-19 pandemic, will be put in place. During the meeting of the "Tripartite" commission, the MPs were informed that this scheme has been notified for approval to the European Commission in order to be able to submit the corresponding legislative text soon to the Chamber of Deputies.

III. Budget implications

The cumulative cost of the aforementioned measures amounts to €827 million, spread over the budget years 2022 and 2023. Although this amount represents a significant burden for the State budget, it is however necessary to also take into account the effects benefits of this massive support for Luxembourg's economy. Thanks to these measures, the impact of the crisis linked to soaring energy prices and the war in Ukraine will be significantly cushioned for households and businesses. More detailed estimates of the budgetary impact are presented by Minister Backes on the occasion of the upcoming presentation of the Stability and Growth Plan (PSC) for the year 2022.