Council Recommendation of 21 January 2025 endorsing the national medium-term fiscal-structural plan of Luxembourg C/2025/650
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THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the Functioning of the European Union, and in particular Article 121 thereof,
Having regard to Regulation (EU) 2024/1263, and in particular Article 17 thereof,
Having regard to the recommendation from the Commission,
Whereas:
(1) A reformed EU economic governance framework entered into force on 30 April 2024. Regulation (EU) 2024/1263 of the European Parliament and of the Council on the effective coordination of economic policies and on multilateral budgetary surveillance, together with the amended Regulation (EC) No 1467/97 on the implementation of the excessive deficit procedure, and the amended Council Directive 2011/85/EU on the budgetary frameworks of Member States are the core elements of the reformed EU economic governance framework. The framework aims at promoting sound and sustainable public finances, and sustainable and inclusive growth and resilience through reforms and investments, and preventing excessive government deficits. It also promotes national ownership and has a greater medium-term focus, combined with more effective and coherent enforcement of the rules.
(2) The national medium-term fiscal-structural plans that Member States submit to the Council and to the Commission are at the centre of the new economic governance framework. The plans are to deliver on two objectives: i) ensuring that, inter alia by the end of the adjustment period, general government debt is on a plausibly downward trajectory, or stays at prudent levels, and that the government deficit is brought and maintained below the reference value of 3 % of GDP over the medium term, and ii) ensuring the delivery of reforms and investments responding to the main challenges identified in the context of the European Semester and addressing the common priorities of the EU. To that end, each plan is to present a medium-term commitment to a net expenditure path, which effectively establishes a budgetary constraint for duration of the plan, covering four or five years (depending on the regular term of legislature in a Member State). In addition, the plan is to explain how the Member State will ensure the delivery of reforms and investments responding to the main challenges identified in the context of the European Semester, in particular in the country-specific recommendations (including those pertaining to the macroeconomic imbalances procedure (MIP), if applicable), and how the Member State will address the common priorities of the Union. The period for fiscal adjustment covers a period of four years, which may be extended by up to three years if the Member State commits to delivering a set of relevant reforms and investments that satisfies the criteria set out in Regulation (EU) 2024/1263.
(3) Following the submission of the plan, the Commission is to assess whether it complies with the requirements of Regulation (EU) 2024/1263.
(4) Upon a recommendation from the Commission, the Council is to then adopt a recommendation to set the net expenditure path of the Member State concerned and, where applicable, endorses the set of reform and investment commitments underpinning an extension of the fiscal adjustment period.
(5) On 15 October 2024, Luxembourg submitted its national medium-term fiscal-structural plan to the Council and to the Commission. The submission took place following an extension of the deadline set out in Article 36 of Regulation (EU) 2024/1263, as agreed with the Commission in view of the reasons provided by Luxembourg.
(6) Luxembourg was eligible for receiving technical information in line with Art. 9(3) of Regulation (EU) 2024/1263 but did not request it. The Commission provided to Luxembourg on 21 June 2024 the main initial conditions and underlying assumptions used in the Commission's medium-term government debt projection framework, as referred to in Recital (25) of Regulation (EU) 2024/1263, and published them on 15 October 2024.
(7) In line with Article 12 of Regulation (EU) 2024/1263, Luxembourg and the Commission engaged in a technical dialogue in September 2024. The dialogue centred on the underlying assumptions (in particular potential growth and GDP deflator), as well as on the envisaged delivery of reforms and investments responding to the main challenges identified in the context of the European Semester and the common priorities of the Union in fair green and digital transition, social and economic resilience, energy security and the build-up of defence capabilities.
(8) In line with Article 11(3) and 36(1), point (c) of Regulation (EU) 2024/1263, according to the information provided by Luxembourg in its plan, Luxembourg has regularly engaged in a consultation process with social partners in the context of the European Semester. According to the information provided by Luxembourg in its plan, in July 2024, in the most recent meeting with social partners, exchanges were about the 2024 Country report for Luxembourg, the 2024 country specific recommendations and the modifications related to the new economic governance framework.
(9) The plan was presented to the national parliament on 15 October.
(10) On 15 October, Luxembourg submitted its Draft Budgetary Plan for the year 2025. The Commission adopted an opinion on this Draft Budgetary Plan on 26 November 2024.
(11) On 21 October 2024, the Council addressed to Luxembourg a series of country-specific recommendations (CSRs) in the context of the European Semester.
(12) In line with Article 16 of Regulation (EU) 2024/1263, the Commission assessed the plan as follows:
(13) Economic activity in Luxembourg declined by 1,1 % in 2023, driven by a negative contribution to growth of net exports and a contraction in investment. According to the European Commission Autumn 2024 Forecast, the economy is expected to grow by 1,2 % in 2024, on the back of an increase in domestic demand and a positive contribution from net exports. In 2025, real GDP is set to increase by 2,3 %, supported by an expansionary fiscal stance, falling interest rates -which underpin investment-, and the improvement of the external environment. In 2026, real GDP is expected to increase by 2,2 %, as momentum is expected to weaken on the back of lower domestic demand. Over the forecast horizon (i.e., 2024–2026), potential GDP growth in Luxembourg is expected to peak at 2,0 % yearly growth, due to a deceleration in the population of working age and in average working hours. The unemployment rate stood at 5,2 % in 2023, and is projected by the Commission to amount to 6,0 % in 2024, 6,0 % in 2025 and 5,8 % in 2026. Inflation (GDP deflator) is projected to increase from 3,4 % in 2023 to 3,9 % in 2024, and to reach 3,0 % in 2025 and 2,9 % in 2026.
(14) Regarding fiscal developments, in 2023 Luxembourg's general government deficit amounted to 0,7 % of GDP. According to the European Commission Autumn 2024 Forecast, it is set to decrease to a deficit of 0,6 % of GDP in 2024 and to increase to 0,8 % of GDP in 2025 and, on a no-policy change basis, to reduce to 0,6 % in 2026. The European Commission Autumn 2024 Forecast includes Luxembourg's draft budget for 2025 that the government proposed to the national parliament in October. General government debt was 25,5 % of GDP at end-2023. According to the European Commission Autumn 2024 Forecast, the debt ratio is expected to increase to 27,5 % of GDP at end-2024. It is projected to broadly stabilise 27,6 % of GDP at end-2025 and at 27,5 % of GDP until end-2026. The fiscal forecast by the Commission does not consider the policy commitments in the medium-term plans as such until they are underpinned credibly announced and sufficiently specified concrete policy measures.
(15) Luxembourg's national medium-term fiscal-structural plan covers the period 2025–2029 and presents a fiscal adjustment over four years.
(16) The plan contains the information required by Article 13 of Regulation (EU) 2024/1263.
(17) Table 1: Net expenditure path and main assumptions in Luxembourg's plan
The plan commits to the net expenditure path indicated in Table 1, corresponding to average net expenditure growth of 4,9 % over the years 2025-2029. The net expenditure path committed to in the plan is reported to lead to a structural primary balance of 0,4 % of GDP at the end of the adjustment period (2028). The plan assumes potential GDP growth to steadily increase from 1,5 % in 2024 to 2,1 % in 2029. In addition, the plan expects the growth rate of the GDP deflator to increase from 1,7 % in 2024 to 3,1 % in 2025 and 2026, to then bottom out at 1,9 % in 2027 before returning to around 2,5 % in 2028 and 2029. Source: Medium-term fiscal-structural plan of Luxembourg and Commission calculations. 2024 2025 2026 2027 2028 2029 Average over the period of validity of the plan 2025–2029 Average over the adjustment period 2025–2028 Net expenditure growth (annual, %) 8,0 5,8 4,7 3,8 5,4 4,7 4,9 4,9 Net expenditure growth (cumulative, from base year 2023, %) 8,0 14,2 19,6 24,1 30,8 36,9 n.a. n.a. Potential GDP growth (%) 1,5 1,7 1,8 1,9 2,0 2,1. 1,9 1,9 Inflation (GDP deflator growth) (%) 1,7 3,1 3,1 1,9 2,6 2,5 2,6 2,7
(18) Table 2: General government debt and balance developments in Luxembourg's plan
If the net expenditure path committed to in the plan and the underlying assumptions materialise, general government debt would, according to the plan, gradually decrease from 27,5 % in 2024 to 26,0 % of GDP at the end of the adjustment period (2028), as per the following table. After the adjustment, over the medium term (i.e. until 2038), the debt ratio is projected to gradually decline according to the plan and to bottom out in 2032, at 25,4 % of GDP, before starting to gradually increase and peaking at 26 % of GDP by 2038. Source: Medium-term fiscal-structural plan of Luxembourg. 2023 2024 2025 2026 2027 2028 2029 2038 Government debt (% of GDP) 25,5 27,5 27,5 27,2 26,7 26,0 25,6 26,0 Government balance (% of GDP) -0,7 -0,6 -0,6 -0,5 -0,3 -0,4 -0,2 -2,1 Thus, according to the plan, general government debt would stay below the Treaty reference value of 60 % of GDP over the medium term. Therefore, based on the plan's policy commitments and macroeconomic assumptions, the net expenditure path put forward in the plan is consistent with the requirement for debt as set out in Article 16(2) of Regulation (EU) 2024/1263.
(19) Based on the plan's net expenditure path and assumptions, the general government deficit would decrease from 0,6 % in 2025 to 0,4 % of GDP in 2028. Thus, according to the plan, the general government balance would not exceed the 3 % of GDP reference value at the end of the adjustment period (2028). In addition, in the ten years following the adjustment period (i.e. until 2038), the government deficit would not exceed 3 % of GDP. Therefore, based on the plan's policy commitments and macroeconomic assumptions, the net expenditure path put forward in the plan is consistent with the requirement for the deficit as set out in Article 16(2).
(20) The plan is based on a set of assumptions which differs from the Commission's assumptions transmitted to Luxembourg on 21 June 2024. In particular, the plan uses different assumptions for seven variables, namely the starting point (structural primary balance in 2024), potential GDP growth, GDP deflator growth, stock-flow adjustment, real GDP, nominal implicit interest rate, and output gap closure. A careful assessment of these differences in assumptions is necessary to ensure they are underpinned by sound and data-driven economic arguments, especially as the average net expenditure growth contained in the plan is less demanding than the one resulting from using the Commission's assumptions. The differences in assumptions with the most significant impact on average net expenditure growth are listed below, together with an assessment of each difference considered in isolation. The remaining differences do not have a significant impact on average net expenditure growth compared to the Commission's assumptions. Overall, all the differences taken together lead to a theoretical average net expenditure growth ceiling that is higher than what would be required based on the Commission's assumptions of Spring 2024. In its plan Luxembourg commits to a net-expenditure path that is lower than this theoretical ceiling. The Commission will take into account the above assessment of the plan's assumptions in future assessments of compliance with the net expenditure path. (1) The plan assumes that the structural primary balance would stand at a surplus of +1,1 % of GDP in 2024 compared to surplus of +0,1 % of GDP in 2024 based on the Commission's assumptions transmitted to Luxembourg on 21 June 2024. The better-than-assumed initial position in 2024 is underpinned by more recent fiscal data, whereby the plan assumes that the general government balance would stand at a deficit of -0,6 % of GDP in 2024 compared to the assumption of a deficit of -1,7 % of GDP in 2024 transmitted to Luxembourg on 21 June. This is in line with the European Commission 2024 Autumn forecast. Consequently, this assumption is deemed to be duly justified. (2) The plan assumes growth in the GDP deflator to average 2,7 % over the adjustment period compared to the assumption of an average growth of 2,5 % transmitted to Luxembourg on 21 June. The projections for GDP deflator growth used in the plan have been produced by the Luxembourg national statistical office (STATEC) and are based on more recent macroeconomic data. The projections for both 2025 and 2026 appear to be plausible. Consequently, this assumption is deemed to be duly justified.
The plan assumes that the structural primary balance would stand at a surplus of +1,1 % of GDP in 2024 compared to surplus of +0,1 % of GDP in 2024 based on the Commission's assumptions transmitted to Luxembourg on 21 June 2024. The better-than-assumed initial position in 2024 is underpinned by more recent fiscal data, whereby the plan assumes that the general government balance would stand at a deficit of -0,6 % of GDP in 2024 compared to the assumption of a deficit of -1,7 % of GDP in 2024 transmitted to Luxembourg on 21 June. This is in line with the European Commission 2024 Autumn forecast. Consequently, this assumption is deemed to be duly justified.
The plan assumes growth in the GDP deflator to average 2,7 % over the adjustment period compared to the assumption of an average growth of 2,5 % transmitted to Luxembourg on 21 June. The projections for GDP deflator growth used in the plan have been produced by the Luxembourg national statistical office (STATEC) and are based on more recent macroeconomic data. The projections for both 2025 and 2026 appear to be plausible. Consequently, this assumption is deemed to be duly justified.
(21) According to the indicative fiscal strategy in the plan, the commitments on net expenditure will be delivered mainly through containing expenditure growth and ensuring that revenue growth will remain above growth of expenditure. The precise specification of the relevant policy measures is to be confirmed or adjusted and quantified in the annual budgets. At the same time, there are risks to the implementation of the indicative fiscal strategy in the plan, which stem from the information on the specific measures underpinning the fiscal strategy not being fully detailed in the plan. In addition, the Draft Budgetary Plan for 2025 specifies that net expenditure growth is expected to decelerate in relation to the decrease in price pressure, which is an important factor in determining expenditure growth in Luxembourg, given the mechanism of automatic indexation to inflation which applies to a large share of public expenditure.
(22) The plan describes policy intentions concerning reforms and investments to respond to the main challenges identified in the context of the European Semester, especially the CSRs, and to address the common priorities of the EU. The plan includes close to 90 reforms and investments, of which over 10 are financially supported by the Recovery and Resilience Facility and some are complemented by cohesion policy funds.
(23) Concerning the common priority of a fair green and digital transition, including the climate objectives set out in Regulation (EU) 2021/1119, the plan includes various measures such as investing in renewable energy (recommended in 2022, 2023 and 2024), promoting the deployment of photovoltaic panels, and the government's support for circular economy principles. The plan confirms the authorities' support for the updated National Energy and Climate Plan. Additionally, recognising that transport is Luxembourg's largest contributor to greenhouse gas emissions, the plan emphasises decarbonising transport (recommended in 2019, 2020, 2022, 2023 and 2024), through electrification, renewable energy use, and enhanced public transport infrastructure, including investments in the railway, tramway, and bus networks. These initiatives directly address the climate transition and energy security objectives. The measures aim to increase investments in green technologies and sustainable energy infrastructure crucial for Luxembourg to meet its national and EU-defined targets.
(24) Concerning the common priority of social and economic resilience, including the European Pillar of Social Rights, the plan includes measures to address housing affordability and availability issues exacerbated by rapid population growth driven by strong labour market dynamics. Specific actions include increasing housing supply (recommended in 2019, 2020, 2023 and 2024) through simplified planning procedures and ongoing work on the reform of property taxes, moving away from transactions-based toward recurrent property taxation and introducing a new tax on unused constructible land. Additionally, the measures promote equality in the education system with an emphasis on multilingual and inclusive education that ensures equal opportunities for all students, addressing recommendations in 2022, 2023 and 2024 to reduce the impact of inequalities on pupils' performance. Measures include continuous investments in educational research, innovative learning environments, and a reinforced support system for inclusive education. For example, through the new Law for newly arrived students, which aims to provide new pupils and their families a smooth transition, and by introducing a new approach to mathematics education in a multilingual context. The plan includes one measure to increase the employment rate of older workers through enhanced employment opportunities (recommended in 2019). Initiatives such as the continuous upskilling and reskilling of the workforce, and extending the vocational training offer (recommended in 2019, 2023 and 2024), have the potential to contribute positively.
(25) Concerning the common priority of energy security, the plan includes significant investments in energy infrastructure, including the development of new electricity grid capabilities such as a new 380 kV interconnection line between Germany and Luxembourg and the promotion of hydrogen infrastructure. For instance, through the European economic interest group Grande Région Hydrogen, with a project involving the construction of a 100 km hydrogen pipeline network based on a 70 km natural gas transport infrastructure. This distribution network is expected to be operational by 2027. These measures are aligned with the recommendations in 2022, 2023 and 2024 on ensuring energy supply resilience, while also contributing to reducing reliance on fossil fuels. The investments are essential to support Luxembourg's economic and demographic changes and the broad electrification of various sectors.
(26) Concerning the common priority of defence capabilities, the plan emphasizes the transformation of the Luxembourg Army to better respond to current geopolitical challenges, including developing military capabilities in aviation, cyber, and space domains. Moreover, the formation of a Belgo-Luxembourg binational battalion for combat recognition and projects focused on societal resilience are prioritised.
(27) In addition, the plan includes other policy measures going beyond the common priorities of the EU, including measures to support advanced research, development, and innovation policies (recommended in 2019, 2020 and 2024) through the establishment of a science and technology park, renewing aid schemes for R&D and innovation, and fostering public-private collaborations. These initiatives aim to enhance Luxembourg's competitiveness and productivity by focusing on emerging technologies and digitalization initiatives for SMEs, contributing to both fair green and digital transitions.
(28) The plan provides information on the consistency and, where appropriate, complementarity with the Cohesion policy funds and Luxembourg's recovery and resilience plan (RRP). The government has ensured that the initiatives listed support ongoing efforts under the RRP, especially in the areas of green and digital transitions, as well as social cohesion.
(29) The plan aims to contribute to meet the public investment needs of Luxembourg related to the common priorities of the EU. For the green transition, it identifies investments in renewable energy infrastructure and energy efficiency measures. Regarding social and economic resilience, it highlights the need for continuous investment in education, social cohesion measures, and increased housing supply. Energy security needs focus on upgrading the energy grid and hydrogen infrastructure. In defence capabilities, it underscores the necessity of enhanced military spending and foresees an increase of defence budget towards achieving a 2 % of GNI defence effort by 2030, in alignment with NATO commitments.
(30) Overall, the Commission is of the view that Luxembourg's plan fulfils the requirements of Regulation (EU) 2024/1263.
(31) The Council welcomes the medium-term fiscal-structural plan of Luxembourg and considers that its full implementation would be conducive to ensuring sound public finances and supporting public debt sustainability as well as sustainable and inclusive growth.
(32) The Council takes note the Commission's assessment of the plan. However, the Council invites the Commission to present its assessment of future plans in a separate document from the Commission recommendations for Council recommendations.
(33) The Council takes note of the Commission assessment of the net-expenditure path and the main macroeconomic assumptions in the plan as well as the implications of the plan's net expenditure path for government deficit and debt. The Council takes note of the Commission assessment that the macroeconomic and fiscal assumptions, while differing in some instances from the Commission's assumptions, including to cater for updated macroeconomic and fiscal data, are overall duly justified and underpinned by sound economic arguments. The Council takes note of the broad fiscal strategy of the plan and the risks to the outlook, which could affect the materialisation of the macroeconomic scenario and the underlying assumptions and the delivery of the plan's net expenditure path. In particular, the Council also welcomes that relevant stakeholders were engaged with at the national level prior to the submission of the plan. The Council also notes that geopolitical risks may put pressure on defence expenditures.
(34) The Council expects Luxembourg to stand ready to adjust its fiscal strategy as needed to ensure delivery of its net expenditure path. The Council resolves to monitor closely economic and fiscal developments, including those underlying the scenario of the plan.
(35) The Council considers that further discussions to find a common understanding on the annual surveillance implications of the cumulative net-expenditure growth rates is warranted in time for the next round of fiscal surveillance.
(36) The Council takes note of the Commission description of the reforms and investment needs and intentions responding to the main challenges identified in the context of the European Semester, and stresses the importance of ensuring the delivery of such reforms and investments. The Council will, on the basis of reports submitted by the Commission, assess such reforms and investments and monitor their implementation within the framework of the European Semester.
(37) The Council looks forward to the annual progress reports from Luxembourg that shall contain, in particular, information about the progress in the implementation of the net expenditure path as set by the Council, and the implementation of broader reforms and investments in the context of the European Semester.
(38) In accordance with Article 17 of Regulation (EU) 2024/1263, the net expenditure path as set in the plan should be recommended by the Council to Luxembourg.
HEREBY RECOMMENDS that Luxembourg: Ensure that net expenditure growth does not exceed the maxima established in Annex I to this Recommendation. Done at Brussels, 21 January 2025. For the Council The President A. Domański
ANNEX
Grp. luxembourg. Years 2025 2026 2027 2028 2029 Growth rates (%) Yearly 5,8 4,7 3,8 5,4 4,7 Cumulative 14,2 19,6 24,1 30,8 36,9
ANNEX I Maximum growth rates of net expenditure (annual and cumulative growth rates, in nominal terms)
Luxembourg
Years 2025 2026 2027 2028 2029 Growth rates (%) Yearly 5,8 4,7 3,8 5,4 4,7 Cumulative 14,2 19,6 24,1 30,8 36,9