2022 Budget Prioritises Investment in Climate Action, Housing, Digitalisation

On Wednesday 13 October 2021, Luxembourg's Minister of Finance, Pierre Gramegna, presented the draft state budget for 2022 in the Chamber of Deputies (Parliament).

The Ministry of Finance noted in a press release that the presentation of the 2022 draft state budget comes at a time when the normalisation of economic life, and thus public finances, is materialising in Luxembourg. The statement added that the government's strategy to contain the virus paired with the vaccination campaign have made it possible to gradually ease health restrictions and thus promote the resumption of economic activities in recent months, so that economic recovery is now fully launched.

The Luxembourg economy fared well in 2020 despite the COVID-19 pandemic, with a decline in gross domestic product (GDP) limited to 1.8%. This represents one of the best results in the eurozone for which GDP fell by 6.5% as a whole. According to the Finance Ministry, the strong resilience shown by the country's economy made it possible to emerge from the crisis more quickly, with the Grand Duchy returning to its pre-crisis GDP level already at the start of 2021.

Against the backdrop of a resolutely better economic outlook than expected in 2021, the government's 2022 draft budget is oriented towards the future and preparing the country for the challenges of tomorrow. Through record public investments, the draft budget promotes a strong recovery and a rapid return to qualitative and job-creating growth, in line with the government's climate objectives. The draft budget also has a strong social dimension and places particular emphasis on increasing the supply of affordable housing. Digitalisation is also prioritised as a major and transversal axis of development.

Public investment

Over the next few years, the government will step up its efforts in terms of public investment, focusing on quality infrastructure projects as well as on strengthening essential structures for residents. The 2022 budget year provides record public investment of around €3.2 billion, or 4.4% of GDP, which is above the average of 3.9% observed over the period 2016-2021.

Social dimension

Almost half (47%) of budget expenditure will be dedicated to social benefits and subsidies in the social field, particularly in favour of disadvantaged households. Budgetary resources dedicated to the National Solidarity Fund will increase by 5% to reach €367 million, due in particular to the €200 increase in the cost-of-living allowance (allocation de la vie chère - AVC) and the adjustment of the social inclusion income (revenu d'inclusion sociale - REVIS) by 2.8%. Family allowances will also be reindexed from 1 October 2021.

Climate action

The 2022 draft budget provides for an envelope of €765 million for investments in the field of climate and the environment; this budget is expected to increase to €975 million by 2024. The financial means to achieve the objectives set in the integrated national energy and climate plan (PNEC) will be increased to reach €1.8 billion in 2022.

The government also plans to further invest in the development of the rail and tram network, as well as soft mobility. The investment expenditure of the rail fund (Fonds du rail) alone will reach €300 million in 2022 and the multi-year investment programme amounts to a total of €1.5 billion over the period 2021-2025.

Digitalisation

The 2022 draft budget provides for several measures aimed at advancing the digitalisation of the Luxembourg economy. For the year 2022 alone, investments will increase by almost 50% compared to 2020 to reach €235 million. A budget of €1.1 billion will be made available over the period 2021-2025 in favour in particular of flagship projects in the field of cybersecurity and cyber defence as well as in ultra-fast and secure 5G and communication infrastructures. 

Affordable housing

Expenditure for the construction of affordable housing units programmed in the special development fund for newly created housing amounts to €228 million in 2022, an increase of 77% compared to 2021.

Education

The total expenditure of the Ministry of Education, Children and Youth stands at more than €3 billion for the 2022 financial year, which represents an increase of 10% compared to the 2021 budget. This increase is aimed particularly at financing free school meals for children from lower-income households, as well as free daycare during school periods.

Key figures

The most recent figures on budget execution showed a negative balance lower than initially forecast; the 2020 financial year ended with a government deficit of -€3.2 billion, whereas a figure of -€5 billion had been estimated at the peak of the health crisis. The balance for the year 2021 is currently estimated at -€1.37 billion.

Government revenue will amount to €22.3 billion in 2022, which represents an increase of 4.3% compared to 2021. Public spending will rise to €23.5 billion, up 3.4% compared to 2021, in particular due to the government's ambitious investment policy. Due to the positive jaws effect that emerges from this draft budget, the government balance is also shrinking and is estimated at -€1.23 billion in 2022.

The public administration balance in 2020 stood at -€2.3 billion (-3.5% of GDP). For 2021, this balance is now estimated at -€416 million, which represents -0.6% of GDP and is below the bar of 3% of GDP provided for by the European treaties.

The positive trajectory continues in 2022 with a deficit of -€143 million or -0.2% of GDP, or almost at breakeven. The structural balance goes from -2.4% of GDP in 2020 to +0.3% of GDP in 2022.

Owing to the good performance of public finances, Luxembourg's public debt grew by just 3.5 points of GDP from 2019 to 2021, the lowest in the eurozone. In total, public debt is now estimated at 24.8% of GDP in 2020, 25.8% of GDP in 2021 and 26.6% of GDP in 2022. According to multi-year forecasts, public debt is stabilising at around 27% of GDP in the medium term and it therefore remains at all times below the 30% of GDP bar that the government set in its coalition agreement.

Finance Minister Pierre Gramegna commented: “The draft state budget for the 2022 fiscal year is set against the backdrop of a markedly improved economic outlook, thanks to the vast state support measures made available to businesses and citizens. The end of the tunnel is very near and it is time to lay the groundwork to continue resolutely on the path of strengthening the social fabric, accelerating digitalisation and taking the fight against climate change head-on. This is what this state budget does, while respecting the rules of the Stability and Growth Pact from 2022".