Yuriko Backes, Luxembourg's Minister of Finance; Credit: MINFIN

On Tuesday 5 September 2023, Luxembourg's Minister of Finance, Yuriko Backes, provided an update on her work at the head of the Ministry of Finance since January 2022.

Barely a month after Minister Backes took office, Russia launched its full-scale invasion of Ukraine and disrupted the COVID-19 recovery, generating an atmosphere of economic and social uncertainty. Luxembourg's Finance Minister noted: "With this conflict, two priorities have emerged: mitigating the effects of rising energy costs and affirming unwavering support for Ukraine."

Crisis management

Minister Backes recalled that the government quickly rolled out measures to support households and businesses amid rising energy prices: the "Energiedësch" support programme, followed by three "Solidaritéitspak" packages of measures. So far, a budgetary envelope of more than €2.5 billion has been released to counter inflation, stabilise energy prices, maintain wage indexation, strengthen purchasing power and guarantee business competitiveness.

In addition, Luxembourg has provided humanitarian assistance to Ukraine and welcomed Ukrainian refugees since Russia's invasion. Related to this conflict, Luxembourg has disbursed €188 million for the years 2022 and 2023, mainly intended for the purchase of military equipment and refugee support. Another objective was to cut Russia's sources of funding as quickly and efficiently as possible, to prevent the continuation of its war effort. From the beginning, the minister recalled, Luxembourg has supported and actively participated in the elaboration of the eleven sanctions packages against Russia at EU level.

The financial sanctions monitoring committee, composed of representatives of the ministries of finance, foreign affairs and justice, as well as various supervisory authorities and the CRF (financial intelligence unit of the Public Prosecutor's Office), received a new legal framework in 2022 to improve collaboration and strengthen coordination between these entities.

Balanced fiscal policy

Two overriding commitments had been previously defined in the coalition agreement: debt control and confirmation of the "Triple A" rating. Minister Backes noted that these commitments have been honoured. Although national debt has increased in absolute value, its ratio in relation to the gross domestic product (GDP) has maintained a constant course, always remaining below the 30% threshold. Currently, national debt stands at 24.7% of GDP - with Luxembourg remaining among the EU countries with the lowest debt ratio.

Digital, dynamic and sustainable financial centre

Minister Backes recalled that the financial sector contributes 25% to GDP, generates budget revenue amounting to €4 billion and offers professional opportunities to some 67,000 employees. In a context of globalisation and rapid financial changes, her objective has remained the development, diversification and modernisation of the financial centre. She has carried out financial missions in nine countries and met the leaders of more than 145 financial companies abroad and in Luxembourg since taking office. She added that her ministry also continued to pursue a regulatory framework that meets the highest standards while remaining innovative and modern, having negotiated about 50 European texts on financial services in the space of 600 days.

Faced with intensified global competition, legislation was passed in July to improve and modernise the Luxembourg "toolbox" for funds. These measures aim to further strengthen the attractiveness and competitiveness of the Luxembourg financial centre. Note that Luxembourg remains the leader in investment funds within the EU, with €5.160 billion in assets under management and ranks second financially in the world after the United States.

Regarding digitalisation, Luxembourg has taken anticipatory measures, noted the minister: the development and adoption of three blockchain-focused laws is an illustration of this. In addition, with an ecosystem of 280 flourishing fintech companies, Luxembourg is establishing itself as a reference in terms of financial innovation, the minister highlighted.

Sustainable finance pioneer

Minister Backes noted that Luxembourg stands out as a major sustainable finance hub, ranking 5th globally and 2nd within the EU for green finance. The country hosts 43% of all ESG funds in Europe and, through the Luxembourg Green Exchange, has become the world's leading platform for listing sustainable bonds. The development of this sector has been one of the priorities for Luxembourg's Finance Minister, with particular emphasis on the mobilisation of private investment.

Talent management

Faced with the challenge of the quest for qualified talent, Minister Backes highlighted two concrete measures which have been introduced through the 2023 budget: an improved "impatriate regime" which aims to make it easier for companies to attract talent from remote regions; the extension of the "prime participative" scheme to allow more companies to offer this bonus to their employees. Moreover, in 2023, the market development agency, Luxembourg for Finance, received a larger budget to launch initiatives focused on attracting talent.

Inclusive finance and gender

Luxembourg's Minister of Finance noted that one of her priorities was the promotion of gender equity in the financial sector, encouraged through a series of flagship actions: the first "Women in Finance Charter", launched in Luxembourg in spring 2023 (70 companies have signed up to this charter to date); in February 2023, a strategic partnership was formed with the organisation 2X Global to accentuate the dynamics of gender-focused finance internationally. The recently established "Gender Finance Task Force" also aims to help the Ministry of Finance identify and deploy initiatives promoting gender-based investments and supporting professionals in the financial sector.

Realistic and sustainable tax policy

Faced with unforeseen events such as the COVID-19 pandemic or Russia's war against Ukraine, several tax projects planned in the government programme had to be postponed. However, technical preparations have been made, noted Minister Backes, providing the next government with a "solid foundation" on which to build.

Concerning natural persons, targeted adjustments have been implemented to make the current system more socially equitable. For example, to further support single-parent households, the ceiling for the single-parent tax credit (CIM) was increased within the 2023 budget, from €1,500 to €2,505. In addition, the meal voucher system has been modernised and digitalised.

Regarding corporate taxation, the tax credit has been adapted to support companies in their transition to a digital and sustainable future. This now includes not only investments, but also expenses, provided that they are carried out within the framework of a digital transformation or an ecological/energy transition. The Ministry of Finance has also started work and analyses on a potential individualisation of the tax system.

Tax policy and climate goals

In 2021, a CO2 tax of €20 per tonne was introduced and increased each year by €5. Its implementation led to a drop in diesel sales of 13.26% in the first half of 2023. Over the past two years, sales have fallen by 16.12%. This measure, based on the "polluter pays" principle, has been adjusted to take into account its social dimension: first, by increasing the tax credit for employees, pensioners and the self-employed; then, from 2024, the part of the tax credit relating to compensation for the tax on carbon dioxide emissions will be withdrawn from the traditional tax credit to make it a full-fledged CO2 tax credit which will reduce the care of socially vulnerable people. A new bill will also increase this amount from €144 to maximum €168 per year, from 1 January 2024.

Measures have also been taken to encourage the adoption of ecological solutions, for example the reduction of the VAT rate from 17% to 3% for the delivery and installation of solar panels on private homes and other buildings.

Minister Backes concluded: "For the last 600 days, my ambition has been to help guide Luxembourg with confidence through successive crises. Today, I am proud to see that we have succeeded. Through our actions, we have not only protected purchasing power, but also ensured social stability and supported our businesses. [...] Particular attention has been paid to strengthening the competitiveness of our economy, particularly the financial sector, in order to ensure the continued prosperity of our country. These values, along with the promotion of equal opportunity in the financial sector and support for the most vulnerable in our society, have been the common thread of each of my initiatives."