Luxembourg Presents €10.4bn Stability and Growth Programme for 2020

Luxembourg's Minister of Finance Pierre Gramegna presented the Stability and Growth Programme for 2020 on Wednesday at a joint meeting of the Finance and Budget Committee, the Committee on the Economy, Consumer Protection and Space and the Labour, Employment and Social Security Committee.

The Stability and Growth Programme 2020, which complies with the European Commission's guidelines for this exceptional year, focuses mainly on the years 2020 and 2021, while emphasising the elements of response that were developed during the ongoing health, economic and social crisis.

The macroeconomic projections independently established by STATEC for the needs of the 2020 programme are broadly in line with those of the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD). For 2020, they expect a fall in real GDP in the euro area of ​​around -5.1% as well as a fall in growth to -6% for the Grand Duchy. Assuming a gradual lifting of containment measures and a continuous recovery of economic activities from the second half of 2020, Luxembourg's growth could rebound to +7% in 2021. The effects of the economic stabilisation measures decided by the government are integrated into this projection and lay the foundations for a rapid recovery.

However, these projections represent only a preliminary estimate of the economic impact of the crisis, which is based on assumptions that may change depending on developments in Luxembourg and elsewhere in the world.

Since the entry into force of the state of emergency on 18 March 2020, the government has implemented several measures aimed at fighting the pandemic and its economic repercussions. The overall volume of measures has increased from the €8.8 billion announced on 25 March to a total of €10.4 billion, or 17.5% of GDP, due to the inclusion of additional measures decided since the initial announcement. To this end, a total of €194 million has been allocated to the High Commission for National Protection to increase crisis management capacities in the fight against the virus, through the acquisition of equipment necessary for medical treatment and the establishment of treatment centres. 

Furthermore, €226 million has been dedicated to family leave, from which over 26,000 employees from more than 5,700 employers have already benefited, at a cost of more than €124 million. Regarding partial unemployment, more than 26,000 requests from more than 14,600 employers have been processed to date. This corresponds to a volume of around €550 million, out of the total of €989 million planned for this purpose.

In addition to strengthening crisis management capacities, the package of measures aims to maintain employment and the purchasing power of employees and to support businesses and the self-employed by strengthening their liquidity situation. This package, which is of an unprecedented scale in the history of Luxembourg, has been adapted to the specific needs of the national economy, which is characterised by a large number of very small, small and medium-sized enterprises. 

The budgetary forecasts which emerge from the Stability and Growth Programme 2020 are largely dependent on very cautious assumptions which are accepted in the preparation of the figures due to the uncertainties surrounding the current crisis. The government has chosen to keep public investments at high levels, with investment rising from €2.7 billion in 2019 to €2.8 billion in 2020 and €3 billion in 2021, i.e. 4.8% and 4.7% of GDP respectively.

In total, the central government is expected to post a deficit of €4.9 billion in 2020, or -8.3% of GDP. In 2021, this deficit could drop to €-2.1 billion , following the dissipation of the budgetary cost linked to economic stabilisation measures.

As the financial resources available to the municipal authorities are directly linked to the development of tax revenues and since the latter will bear the brunt of the consequences of the deterioration of the macroeconomic context, the local administration balance is mechanically in decline and will reach a deficit of -0.6% of GDP in 2020, equivalent to €-372 million euros. For 2021, the deficit could reach -0.2% of GDP, or €-150 million.

Finally, the financial situation of social security is also likely to be strongly affected by the COVID-19 crisis. The surplus is forecast to fall from €1.1 billion, or 1.8% of GDP, in 2019 to €281 million, or +0.5% of GDP in 2020. In 2021, it could slightly improve to €342 million. The crisis will therefore translate for the public administration as a whole into a deficit unrivaled in the history of the country, estimated for 2020 at -8.5% of GDP, or €-5 billion, and for 2021 at -3 %, or €-1.97 billion.

As a result, public debt could reach €17 billion, or 28.7% of GDP, in 2020 and rise to 29.6% in 2021 while remaining below the 30% set by the coalition programme.

Finance Minister Pierre Gramegna commented: “Luxembourg, like the rest of the world, is facing the greatest economic crisis since the end of the Second World War. Thanks to the ambitious policy of fiscal consolidation carried out in recent years, the country has the budgetary means to meet it. However, the effort required to restore confidence is of such magnitude that it will not be without impact on the budgetary balance and the level of public debt in the years to come”.