IMF Recommends Reduction in State Support to Fuel Growth

On Friday 21 March 2025, the International Monetary Fund (IMF) published the concluding statement of its 2025 Article IV mission to Luxembourg.

The annual mission is part of Article IV of the IMF's statutes, which provides provision for the IMF to examine the economic, budgetary and financial developments of its member countries as well as their related national policies. Over the past two weeks, the IMF team met with a large number of Luxembourg representatives of the public and private sectors, as well as the social partners, to enable them to compile its report.

At a press conference held at Luxembourg’s Ministry of Finance (Luxembourg-Ville), the IMF contingent provided a breakdown of the report and detailed a series of recommendations to the Luxembourg government in relation to state support, pension reforms, the housing market and the labour market.

In the report, the IMF acknowledged that while Luxembourg’s economic fundamentals remain strong, economic performance has been modest and warned that significant challenges must be addressed to relieve fiscal pressures. Based on data from the last three quarters, Luxembourg’s economy grew by just 0.5%, a figure below the European Economic Area (EEA) average for the third consecutive year, indicating a weaker recovery than expected. Outside the public sector, unemployment continues to rise, surpassing the long-term average of 5.5%. The IMF also noted that while the mortgage market has started to recover, with house prices stabilising, the demand for construction remains weak.

The IMF suggested that Luxembourg adopt a neutral fiscal stance in 2025 by “balancing fiscal discipline with strategic needs”. To ensure long-term fiscal sustainability, the IMF advised greater control of public spending, containing wage bill growth and rationalising tax benefits. Further recommendations included diversifying revenue sources through the increase of property and environmental taxes and implementing national-level fiscal rules, including a debt anchor and defined expenditure limits, to ensure the country maintains its AAA credit rating.

In relation to the housing market, the IMF recognised that recent government policies have stabilised prices but also that Luxembourg’s real estate sector continues to face supply shortages and concerns regarding affordability, noting that: “High private sector indebtedness and past house price overvaluation contributed to a substantial but orderly correction in the real estate market, heightened uncertainty and low confidence in the construction sector.” 

Recommendations to improve these issues included improving housing supply, streamlining the construction permit process, making greater use of unused land for development and reforming property taxation. To curb speculation in the housing market and excessive borrowing, the IMF recommended the government reduce mortgage tax incentives. 

On pension reform, the IMF noted that Luxembourg’s ageing population presented a significant fiscal challenge, with pension reserves projected to be entirely depleted by 2045. The IMF recommended that to counter this the government should seek to gradually raise the age of retirement, discourage early retirement and adjust benefits to ensure they can remain sustainable. Other suggested improvements include reducing automatic pension indexation and simplifying administrative processes through digitalisation to enhance efficiency and reduce costs.

In relation to the labour market, the IMF highlighted the need for greater flexibility, with restrictive job entry rules and wage indexation hindering employment growth. It suggested that the automatic wage indexation system requires more flexibility, collective bargaining reforms should be done in a way that does not hamper labour mobility within and across job sectors and reducing entry requirements to professional services. The IMF also expects Artificial Intelligence (AI) to play a growing role in the labour market but uncertainty remains about its long-term impact, amid concerns regarding its potential impact on job security, noting: “AI promises a lot, but there’s still a great deal of uncertainty.”  

The full report can be read at: https://www.imf.org/en/News/Articles/2025/03/21/mcs-luxembourg-staff-concluding-statement-of-the-2025-article-iv-mission

SM