Luxembourg Reports Central Government Deficit of €228m in H1 2023

On Monday 24 July 2023, Luxembourg's Minister of Finance, Yuriko Backes, presented the financial situation of the state as of 30 June 2023 at a joint meeting of the finance and budget committee and the budget implementation committee of the Chamber of Deputies (Luxembourg's parliament).

The whole of the Central Administration recorded revenues amounting to almost €12.9 billion as of 30 June 2023, according to the European accounting rules SEC2010. In line with the 2023 budget forecasts, this represents an increase of 5.4% compared to the same period of 2022.

The combined revenue of the three tax administrations reached a total amount of €10.9 billion at the end of the first half. More specifically, the Luxembourg Inland Revenue (Administration des Contributions Directes - ACD) received revenue of €6.4 billion, which represents an increase of €674.5 million or 11.8% compared to 30 June 2022. Luxembourg's Ministry of Finance attributed this growth in particular to a significant increase in corporate income tax (IRC), which increased by €198 million (up 18.3%) mainly due to balances collected relating to previous fiscal years. The personal income tax set by the tax base (IRPP) and the tax deducted from salaries and wages (RTS) also contributed to the positive trend in ACD receipts, under the effect of the successive installments of the indexation mechanism and thanks to the good dynamics of the labour market. The ministry noted that the year 2022 was marked by the creation of 17,000 new jobs. These developments also include the effect of the “energy tax credit” (CIE), which reduced revenue in the first quarter of the year.

The total revenue of the Registration Duties, Estates and VAT Authority (Administration de l'enregistrement, des domaines et de la TVA - AED) amounted to €3.5 billion, marking a decrease of €163 million or 4.5% compared to the same period in 2022. The finance ministry attributed this reduction mainly to the effects of the slowdown in the real estate market on the revenues generated by registration fees. These amounted to €142 million, i.e. a decrease of €125 million compared to 30 June 2022. In addition, the less favourable evolution of the financial markets observed at the end of 2022 and the beginning of 2023 also led to a drop in revenue from the subscription tax of around €84 million. However, despite a capital loss of €80.5 million due to the reduction of several VAT rates, VAT receipts increased by €70 million or 2.8% compared to 30 June 2022. The ministry attributes this positive trend mainly to inflation and the improvement in household purchasing power.

Customs and Excise Agency (Administration des douanes et accises - ADA) revenues amounted to around €1 billion, an increase of €79 million or 8.3% compared to the same period of 2022. Although overall customs revenue is in line with forecasts, diesel sales continued a downward trend in line with the government's commitment to reduce CO2 emissions. During the first six months of 2023, revenues related to excise duties on diesel fell by €17 million, or a reduction of 5.5%.

Central government expenditure amounted to €13.1 billion as of 30 June 2023, representing an increase of €2 billion or 17.9% in annual comparison. This increase is explained by several factors, according to the finance ministry, namely the various aid schemes intended for households and businesses (“Energiedësch” and “Solidaritéitspak 1/2.0”) which totalled €942 million as of 30 June 2023. The ministry noted that most “Solidarity Package 3.0” provisions had not yet entered into force at the end of June. Consequently, the related expenditure will impact public finances in the second half of the year as well as in 2024.

In addition, the cumulative impact of the index brackets and the continuous recruitments carried out by the State led to an increase of €285 million or 10.4% in expenses related to remuneration paid by the State during the first half of the year. Similarly, intermediate consumption expenditure, i.e. essentially operating costs of the State, increased by €90 million or 10.2%.

Public investments (direct and indirect) recorded marked growth during the first half of the year, reaching a total of €1.6 billion. This represents an increase of €344 million or 28% compared to the same period in 2022. According to the ministry, this increase reflects the government's sustained commitment to maintaining investments at a high level and is part of a strategy aimed at mitigating the impacts of the crisis, supporting economic activity and strengthening the resilience of the Luxembourg economy in the face of future challenges.

Expenses associated with the war in Ukraine, which mainly include military equipment and refugees for the years 2022 and 2023, have so far amounted to €188 million. Regarding the guarantee scheme for companies in connection with the consequences of the war, as of 30 June 2023, around €228 million have been committed, of which the State guaranteed 90%, i.e. €205 million. During the first half of the year, fifteen new loans were granted under this scheme totalling around €23 million, which represents an increase of 11% compared to 31 December 2022.

The finance ministry added that Luxembourg paid an exceptional contribution of €247 million to the European Union (EU) budget in March 2023, due to a recalculation of economic growth between 2010 and 2020.

During the first half of the year, state transfers to Social Security and the municipalities increased respectively by €368 million (+13.2%) and €98 million (+11.8).

At the end of the first half of 2023, the balance between income and expenditure resulted in a central government deficit of €228 million.

Minister Backes commented: “I am delighted that households will benefit from the business tax credit from this month, as this represents a significant gain in terms of purchasing power.”

“Luxembourg has been posting the lowest inflation in Europe for several months, which clearly demonstrates that the measures decided have borne fruit,” she elaborated. “Nevertheless, they weigh heavily on our budget, which will materialise more during the second half of the year. Indeed, we are faced with substantial expenses related to the measures resulting from 'Solidaritéitspak 3.0'." She concluded: “Therefore, it is to be expected that the central government deficit will continue to widen further until the end of the fiscal year, while remaining in line with the projections established under the stability and growth programme. I will thus continue to follow a far-sighted and responsible budgetary policy, ensuring that the evolution of public expenditure is kept under control at all times.”

At the end of June 2023, public debt amounted to €22.2 billion, i.e. 27.1% of GDP. Following the repayment of a bond loan of €2 billion on 10 July 2023, the public debt now stands at €20.2 billion, or 24.7% of GDP.