2023 Budget to Reduce Tax Burden of Single-Parent Families

On Wednesday 12 October 2022, Luxembourg's Minister of Finance, Yuriko Backes, tabled in the Chamber of Deputies (Luxembourg's parliament) the bill concerning the state revenue and expenditure budget for the financial year 2023.

After two years of pandemic, Luxembourg is once again faced with a crisis of historic proportions. The Russian invasion of Ukraine has sent shock waves around the world and led to an unprecedented rise in inflation.

Within the framework of the “Energiedësch” and two tripartite meetings, the government has taken a coherent set of unprecedented measures to curb the rise in energy prices, support households, in particular the most vulnerable, as well as businesses.

In total, the budgetary envelope mobilised through the three packages of measures amounts to €2.5 billion, or 3.3% of GDP (gross domestic product). This amount constitutes a considerable burden on public finances, both in 2022 and 2023.

According to Luxembourg's Ministry of Finance,, the evolution of the budgetary situation will strongly depend on the evolution of the crisis and its impact on the Luxembourg economy. For the year 2023, Luxembourg's national statistics agency, STATEC, currently expects a growth of 2%. As for inflation, it could be contained to 2.8% due to the anti-inflation measures of “Solidaritéitspak 2.0”, especially through the stabilisation of energy prices as well as the reduction of VAT rates by 1%.

In this difficult context marked by very high uncertainty, according to the ministry, the 2023 budget is firmly betting on an ambitious investment policy that will improve the competitiveness of the Luxembourg economy and contribute to accelerating the climate and digital transition. The 2023 budget also aims to strengthen social cohesion and household purchasing power, while addressing the structural challenge of housing.

Budget 2023 priorities

An ambitious social policy

The 2023 budget includes a strong social component, with 47% of total central government spending dedicated to social benefits, subsidies, subsidies and transfers to social security.

Single-parent families are among the most exposed to the risk of poverty in Luxembourg. This is why the 2023 budget introduces a major reduction in the tax burden of single-parent families, by substantially increasing from 1 January 2023 the maximum amount of the "single-parent tax credit" (crédit d'impôt monoparental - CIM) from €1,500 to €2,505. In addition to this 67% increase, the annual income ceiling up to which a taxpayer can benefit from the maximum amount of the CIM will be raised from €35,000 to €60,000.

In order to ensure that recipients of the minimum social wage (salaire social minimum - SSM) can continue to receive the full tax credit in their favour (€70 per month) following the increase in the SSM from 1 January 2023, the Budget 2023 also plans to revise upwards the income brackets under which taxpayers will be able to benefit from the “tax credit on the minimum social wage” (crédit d'impôt sur le salaire social minimum - CISSM).

The government had undertaken to closely monitor macroeconomic and financial developments and, if necessary, to implement additional tax relief, as soon as structural improvements in the budgetary situation are on the horizon.

Further develop affordable housing

The development of affordable housing is one of the government's priorities. The budgetary means of the Ministry of Housing will be further reinforced in 2023, to reach €282 million, while the budget of the Special Housing Development Support Fund will be increased to €192 million.

To limit speculation as well as to contain the pressure on prices through excessive demand, the tax system for accelerated depreciation has been reformed. From the 2023 tax year, any taxpayer will only be able to benefit from this advantageous tax scheme for two buildings or parts of buildings assigned to rental housing.

A sustainable investment policy

Public investments are increased to a new record level of €3.8 billion in 2023, or 4.6% of GDP. Through a wide range of projects in the areas of mobility, education, health and infrastructure, the 2023 budget helps prepare the country for the challenges of the future. Environmental and climate investments alone represent €1.2 billion in 2023.

Acceleration of the energy transition

In order to encourage active and soft mobility and with a view to promoting the circular economy, the sale, rental and repair of bicycles and the repair of household appliances will henceforth be subject to the reduced VAT rate of 8%. Following the tripartite agreement, this rate will even be temporarily reduced to 7% for the year 2023. The super-reduced VAT rate of 3% will apply from 2023 to the delivery of solar panels. Biofuels and bioliquids, which meet sustainability criteria and reductions in greenhouse gas emissions, will also be exempt from the CO2 tax.

A more competitive and resilient economy

Substantial resources have been mobilised for the continuous digitalisation of the country and public services, with a total envelope of €1.5 billion until 2026. To continue the diversification of the financial centre, a "Finnovation Hub" will be set up together with the University of Luxembourg and the means of the  the Luxembourg House of Financial Technology (LHoFT) and Luxembourg for Finance (LFF) will be reinforced. SMEs will benefit from investment aid for a total amount of €116 million in 2023.

In order to maintain the attractiveness of the country in the face of increased difficulties in recruiting skilled labour, the current threshold of minimum remuneration of €100,000 under the impatriate scheme will be lowered to €75,000. The scope of calculation of the participation bonus will also be extended to give more flexibility to groups of companies residing in Luxembourg.

The deadline for filing tax returns will be postponed to 31 December of each year from 2023. This extension will apply for the first time to returns for income tax, community income tax and municipal business tax for the 2022 tax year, and with regard to wealth tax declarations, for the 2023 tax year.

A reliable and supportive partner

Accordning to the ministry, Luxembourg continues to be a reliable and supportive partner on a global scale. By devoting 1% of its gross national income (GNI), i.e. €544 million, to official development assistance (ODA), the 2023 budget supports the resolute action of Luxembourg's cooperation in favour of the most vulnerable countries.

In a strongly shaken geopolitical and security context since the Russian invasion of Ukraine, the gradual increase in the defence effort to 1% of GDP by 2028 also testifies to Luxembourg's firm commitment within NATO.

Key figures of the 2023 budget

The total revenue of the government (central administration) amounts to €24.5 billion, against €27.3 of expenditure.

Faced with the magnitude of the crisis, the central administration will thus show a deficit of €2.8 billion.

As for public administration – which includes central administration, local administrations and social security as a whole, the balance for 2023 will amount to a deficit of €1.8 billion.

Luxembourg will continue to respect the 30% of GDP threshold, with a debt that will stand at 26.3% of GDP in 2023. Excluding the financing of crisis measures (COVID-19 and energy), Luxembourg's public debt will be 19.7% of GDP in 2023.

Minister Backes said: “Luxembourg is in the middle of a storm. In such a situation, it is essential not to take unnecessary risks. This crisis demands a realistic, united and responsible approach. With the 2023 budget, the government has assumed its responsibilities. It responds in a concrete way to the challenges facing our country, supports the households that need it most and strengthens the competitiveness of our businesses. With this budget, Luxembourg will come out of the crisis stronger!”