The 2025 state budget is the most eagerly anticipated document of the year, setting out government policy. It will be delivered alongside multi-annual programming for 2025-2028. After the “transitional budget” in 2024, prepared by the previous government and “adjusted” by the new administration in March, the document presented on 9 October 2024 by the Finance Minister plainly sets out the full policy direction of the CSV-DP coalition. The Luxembourg Chamber of Commerce will have the opportunity to analyse the documents in detail over the coming weeks. However, given the importance of the occasion, here are a few immediate thoughts.
In spring, when the 2024 budget was presented, we insisted upon the need to restore the budgetary margins to put the country back in a position to be able to handle future crises. Since then, current events have only served to confirm this imperative, as the risks, threats and uncertainties have multiplied. Firstly on a geopolitical level, with the continuing war between Russia and Ukraine and between Israel and Hamas, and the threat of regional contagion. Then on a commercial level, with the return of protectionism calling into question the growth models we thought would last forever. There is also the climate issue, which has seen an increasing number of natural disasters around the world. On a societal level, growing polarisation also generates other, politically natured, risks. And finally, on an economic level. In Europe, the publication of the Draghi report a few weeks ago reminded us, if it were necessary, of the existential threat that bears down on Europe if it does not get back on the road to competitiveness.
In Luxembourg, we are not immune to all these risks. In a very open economy like ours, every tremor elsewhere in the world produces vibrations of varying magnitude here. It is therefore absolutely vital that we strengthen our resilience. And the budget guidelines are our compass, to paraphrase the Finance Minister.
Debt finally under control
What makes our country strong, and what attracts investors, is its political and financial stability. Luxembourg still belongs to the increasingly closed circle of countries rated AAA by the various agencies. However, in recent years, to support households and businesses during times of crisis, the country has resorted to massive borrowing. As a result, public debt has risen from 7.8% of GDP in 2004 to 27.5% in 2024. On reading the draft budget, we are pleased to note that the government has forecast that this debt will stabilise in 2025 and even anticipates a slight reduction from 2026. This is an optimistic outlook, but a realistic one if revenues continue to outpace expenditure. In this case, the price scissors that we have seen in recent years, with expenditure rising faster than revenue, would be reversed.
Regarding the central government budget, revenues are expected to rise by 5.2% in 2025, while expenditure growth will be contained at 4.5%. Of course, the new government can count on the gradual phasing out of the various support schemes introduced during periods of high inflation. But politically, it’s always harder to turn off the tap than to turn it on. In this respect, the government’s sense of responsibility is to be commended.
Controlling expenditure means paying particular attention to the State’s rigid costs, in particular the central government’s wage bill. The number of FTEs (full-time equivalents) in the central government civil service rose by 46% between 2015 and 2023, while population growth was limited to 16.5% and GDP growth to 18%. The government has set a limit of 1,350 FTEs for 2025, compared with 1,500 in 2024. This is a first step towards better control of staff costs, and it needs to be consolidated and followed up by major investment in administrative digitisation and simplification. These are concrete changes and measures that households and businesses have been waiting for for a long time.
Controlling current expenditure is all the more essential given that the geopolitical situation is forcing Luxembourg to make an unprecedented effort in terms of military expenditure. In 2025, 792 million euros will be invested in our defence, 94 million more than this year. The government’s commitment to changing the trajectory of the defence effort to reach 2% of GNI from 2030 will represent an additional cost of €27.1 million in 2025, €18.6 million in 2026, €74.7 million in 2027 and €69.5 million in 2028. This effort, which is essential to guaranteeing our security, must force us to develop a genuine economic strategy to maximise the return on investment, by ensuring that local businesses in the fields of industry, cyber security, artificial intelligence, information and communication technologies, defence technologies, data management and storage, finance, etc. benefit from our defence spending.
Making a successful transition to AI
Better control of current expenditure also means giving ourselves more resources to invest. In the 2025 budget, investments are up by 4.7%. This direction is justified, given that the economic transformations of our time, particularly the environmental and digital transitions, require massive investment. We will need to keep a close eye on the resources that will be made available to enable our businesses to make a success of these transitions.
Integrating artificial intelligence (AI) into value creation is a major challenge for Luxembourg. At a time when our productivity has been stagnating for years, AI could enable us to finally reach a new level of productivity and thus maintain the competitive advantage that we have built up over the past decades, and which forms the basis of our social model.
A new approach to taxation
This budget also reflects a paradigm shift regarding revenue. The tax reduction measures decided by the government have a cost in terms of tax waste: 225 million euros to adjust the tax scale by 2.5 additional index brackets, 55 million to revise class 1a and 56 million to reduce corporation tax by one point to bring it closer to the OECD average. This timid reduction in the corporate income tax rate (IRC) is necessary to boost the country’s attractiveness and restore its competitiveness. Despite these cuts in tax rates, according to the budget forecasts, direct tax revenues will increase by 3.3% in 2025 and indirect tax revenues by 7.6%, thanks in particular to the VAT dynamics, which will benefit from this policy stimulating demand.
As a result, the central government balance should be contained at -1.29 billion in 2025 vs an original forecast of -1.81 billion when the 2024 budget was passed. Under the new budget trajectory, it should fall back below the symbolic one billion deficit mark from 2027, landing at -667 million in 2028.
Pensions: act now
While the central government balance is improving, the social security one continues to deteriorate dangerously under the impact of demographic trends: it will fall from €937 million in 2024 to €657 million in 2025 and €487 million in 2026. Without reform, it will even be negative (-15 million euros) from 2028. If employment were to be less dynamic than forecast (-0.5% growth compared with the scenario adopted), the balance would even be in the red from 2027. At a time when the government is launching a major consultation on the future of the pensions system, these observations should lead us to approach the subject with courage and realism. Reform of our pension system is essential if we are to maintain a balanced budget in the long term.
Some will still want to push back the deadline, claiming that the system can still cope as it is, that the forecasts are systematically pessimistic. Faced with the increasing risks mentioned above, I believe we need to do exactly the opposite. To reform our pension system, as with budget management in general, let us draw inspiration from the Portuguese poet Fernando Pessoa, who taught us the following: “hope for the best, prepare for the worst, that’s the rule”. That must be our course, and we must not deviate from it. It would be very unwise to steer to port for electoral reasons or to starboard for the sake of ease!