Q1 2020 Budgetary Situation Marked by COVID-19 Crisis

On Monday 25 May 2020, Luxembourg's Minister of Finance Pierre Gramegna presented the financial situation as of 31 March 2020, at the joint meeting of the Finance and Budget Committee and the Committee on the Control of Budgetary Implementation.

On this occasion, the Finance Minister also presented the situation in April 2020, strongly marked by the consequences of the crisis linked to the COVID-19 pandemic.

In the first three months of 2020, the evolution of central government revenue and expenditure showed the first signs of a crisis. Compared to the same period in 2019, revenues decreased 0.8% and expenses increased 19.4%. The very sharp increase in spending must be nuanced since the evolution of spending over the first three months of 2019 was particularly weak due to the use at that time of the "provisional twelfths" procedure. The negative scissor effect between spending and revenue increased in April, given the many stabilisation measures implemented by the government to meet health challenges and to cushion the economic consequences of the pandemic. As a result, revenue fell 8.4% from the first four months of 2019 and spending increased by around 28.5% on an annual basis. Compared to a third of the annual amounts forecast in the budget voted for 2020, this corresponds to a drop in revenue of 12% and an increase in expenditure of 8%, which resulted in a significant deterioration of the budget balance.

In terms of direct taxes, the corporate income tax (impôt sur le revenu des collectivités, IRC) decreased by about 23% compared to the period January-April 2019, since many companies seized the opportunity to request cancellations of advances in the first quarter and payment deadlines. In terms of indirect taxes, the 17% decrease observed in VAT was mainly due to an unrivaled effort in reimbursements by the Administration of Domain and VAT Registration (Administration de l'enregistement des domaines et de la TVA) to meet the liquidity needs of businesses. In total, repayments made over the first four months of 2020 amounted to €734 million, i.e. €160 million more than over the same period in 2019. Consequently, the credit balance to be reimbursed to businesses is at lowest level in five years.

With regard to revenue from the Customs and Excise Administration (Administration des douanes et accises), these were significantly affected by the containment measures as well as by the partial closure of the borders to neighbouring countries, which led to a significant drop in the sale of fuel and other products. For the period from January to April 2020, petrol and diesel sales suffered a decline of 19% and 22% respectively.

Taken as a whole, the revenue of the three tax administrations, on a cash basis, amounted to €5.2 billion in April. This is equivalent to a deterioration of €284 million compared to the same period in 2019 and corresponds to a capital loss of 10% compared to a third of the annual amount provided for in the 2020 budget. This negative trend is likely to accelerate further in the coming months.

The increase observed as of 30 April 2020 in terms of expenditure was the result of the implementation of the numerous stabilisation measures linked to the crisis, of which the total budget amounts to €2.2 billion and to which the new “NeistartLëtzebuerg” measures (€700 to €800 million) will be added. Among the stabilisation measures paid out until 30 April, spending on partial unemployment due to force majeure represented the largest item of expenditure with a current spending of €566 million.

The aforementioned elements explain why the central government balance has deteriorated substantially, both compared to the same period 2019 and compared to the 2020 voted budget, reaching a deficit of €1.6 billion at the end of April 2020.

Finance Minister Pierre Gramegna commented: “The crisis linked to the COVID-19 pandemic constitutes a real challenge for all the countries of the European Union, including Luxembourg. From the start, the government's priority has been to preserve the health of citizens and that of the economy. Thanks to the favourable starting situation of our public finances, it was possible to put in place measures in record time to respond as best as possible to the crisis. However, these numerous measures have significant repercussions on our public finances and the figures for the first four months of 2020 are proof of this. Since the health crisis will certainly continue to have its effects on public finances in the months which follow, it is advisable to watch its evolution with prudence and to continue to find the right balance between, on the one hand an ambitious policy of revival and sustainable investments , and on the other hand a responsible approach in the general interest of the country".