OECD Says Innovation, Skills, Pension Reform Key to Luxembourg's Strong Growth & Public Finances

On Monday 28 April 2025, OECD Secretary-General Mathias Cormann presented the latest edition of the Economic Survey of Luxembourg published by the Organisation for Economic Co-operation and Development (OECD).

The presentation took place at a press conference held in Luxembourg City in the presence of Luxembourg's Prime Minister Luc Frieden and the Minister of the Economy, SMEs, Energy and Tourism, Lex Delles, as well as Tom Haas, Head of Delegation to the OECD's Economic and Development Review Committee (EDRC) and Director of STATEC.

As reported by Luxembourg's Ministry of State and Ministry of the Economy, the OECD publishes an economic survey of each member country every two years. Each study on a member country provides an in-depth analysis of recent macroeconomic developments, also drawing on an assessment of previous reforms. It also provides a framework for formulating recommendations and identifying good practices in public policies, with the aim of improving the country's long-term economic performance.

The OECD highlighted innovation, skills and pension system reform as the "key" to strong growth and public finances in the Grand Duchy. The latest OECD Economic Survey of Luxembourg has projected that GDP growth will increase from 1.0% in 2024 to 21.% in 2025 and 2.3% in 2026. Headline consumer price inflation is expected to continue to decline from 2.3% in 2024 to 2.1% in 2025 and 1.9% in 2026.

The organisation added in a press release about the report that "fiscal policy should remain prudent", adding: "As a highly open economy with a large financial sector accounting for about one-quarter of GDP, Luxembourg is highly exposed to global economic shocks. Spending pressures related to population ageing, defence requirements and the climate transition are rising. In the short term, a tight fiscal policy stance should be maintained, including by fully phasing out energy policy support measures".

"Luxembourg stands out for its very high living standards and income levels among OECD countries. There are opportunities to continue to optimise policies to maintain strong public finances and boost growth," stated Mathias Cormann while presenting the survey in Luxembourg alongside Prime Minister Frieden. "A comprehensive pension reform now – with an earlier increase in contribution rates, increases in effective retirement ages and lower growth in pension benefits – would put the system on a sustainable path. Productivity growth could be reinvigorated by strengthening competition, improving public support for business research and development and enhancing adult education and training."

The OECD also noted that Luxembourg faces the challenge of "rapidly rising pension expenditure, with the number of pensioners set to more than triple by 2070," suggesting that a "comprehensive reform to curb pension spending and raise revenue is needed".

The OECD argued that raising pension contributions to a rate that can be maintained in the long term and increasing the effective retirement age (currently the lowest in the OECD) would make the system "more sustainable". "Early and statutory retirement ages should be raised to match gains in life expectancy, including by removing years in higher education from the calculation of contributory years to align benefits with actual work history," the organisation said.

Productivity in Luxembourg is still among the highest in the OECD but has fallen over the past fifteen years. The OECD stressed the need for business innovation and technology adoption to grow. It also noted that business expenditure on research and development is among the lowest in the OECD at 1.0% of GDP. "Strengthening competition, especially in services, refocusing public support for innovation and boosting skills by upgrading training would help," the organisation said. "Streamlining the investment tax credit and making incremental digital and technological improvements eligible for support would favour technology adoption in smaller firms."

On housing, the OECD noted that affordability remains low, despite real house prices having dropped by about 20% over the past two years. The organisation stressed the need for "stronger emphasis on addressing structural supply shortages". It also acknowledged that, as part of a tax reform, the Luxembourg government plans to introduce a national-level property surtax on unused land - the OECD described this as "a positive step that would help increase housing supply by discouraging land hoarding". "Streamlining permitting for construction projects would help make building more responsive to demand," it added.

The OECD also recognised that "Luxembourg has made significant progress in reducing greenhouse gas emissions, but further efforts are needed". It suggested that "continuing to develop public transport and alternative mobility options, while bringing fuel prices more in line with neighbouring countries and making the tax regime more favourable for electric vehicle adoption, would help Luxembourg reach its climate targets".

The 2025 OECD Economic Survey of Luxembourg is available on the OECD website in English and French at https://www.oecd.org/en/topics/sub-issues/economic-surveys/luxembourg-economic-snapshot.html