Luxembourg budget deficit could more than double to under €3bn, watchdog warns

Luxembourg’s budget deficit could more than double to under €3 billon by the end of the decade, due to the impact of tax reforms and defence spending, the agency monitoring government expenditure said on Tuesday.

Representatives of the National Public Finance Council (CNFP), led by its president Romain Bausch, warned MPs that the budget deficit could now reach between €2.6 billion and €3 billion in 2029, instead of the €1.3 billion forecast.

That is unless “these costs are offset by savings and/or additional revenue,” the CNFP told deputies at a closed-doors meeting of parliament’s finance committee on Tuesday at which it presented a review of the latest draft annual budget and multi-year budget.

The larger gap could occur due to the failure to take two important factors into account in the government’s 2025–2029 multi-year budget forecasts, with Bausch telling deputies that the future reform of tax brackets will cost the state an additional €850 million per year, according to a report of the meeting published on parliament’s website.

At the same time, a gradual increase in the defence budget from the planned 2% of gross national income (GNI) in 2025 to the agreed Nato target of 5% in 2035 would result in additional expenditure of £880 million in 2029.

That could be lowered to €440 million if Luxembourg were to limit the increase in “core” defence spending to 3.5% of GNI in total and reclassify expenditure currently accounted for in other items of the state budget within the 1.5% of GNI set aside by Nato for “non-essential” defence expenditure.

The fact that tax reform and defence were not fully taken into account by finance minister Gilles Roth could be explained by the fact that the multi-year budget is established on the basis of existing legislation, the CNFP said. Nevertheless, it believes that these two factors will place a significant burden on public finances in the medium term.

Bausch described the current global situation as one of “high uncertainty due to a fragile and unstable international macroeconomic environment” linked to ongoing geopolitical and trade tensions.

He has also suggested that in future the multi-year budget be “decoupled” from the annual budget for the coming year, which tends to “overshadow” the medium-term planning.

Discussing multi-year financial planning at a later date, for example in the spring, would make it possible to work independently of the imminent budgetary situation and to take a more useful approach to the medium term, Bausch explained.

The CNFP representatives also called on parliament to commission a study into the functioning of the public sector, taking into account the impact of artificial intelligence and other issues related to digitalisation. “This is something the Chamber could do to bring about greater transparency,” said Bausch.