O E C D E c o n o OECD Economic Surveys m ic S u r v e LUXEMBOURG y s V JULY 2019 o lu m e 2 0 1 9 / 1 4 L U X E M B O U R G J u ly 2 0 1 9 OECD Economic Surveys: Luxembourg 2019 This document, as well as any data and any map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this publication as: OECD (2019), OECD Economic Surveys: Luxembourg 2019, OECD Publishing, Paris, https://doi.org/10.1787/424839c1-en. ISBN 978-92-64-48031-5 (print) ISBN 978-92-64-32847-1 (pdf) OECD Economic Surveys ISSN 0376-6438 (print) ISSN 1609-7513 (online) OECD Economic Surveys: Luxembourg ISSN 1995-3720 (print) ISSN 1999-0782 (online) The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. 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TABLE OF CONTENTS | 3 Table of contents Executive Summary .............................................................................................................................. 9 Key Policy Insights .............................................................................................................................. 15 Growth has been solid, but there are risks ahead ............................................................................... 18 Strengthening financial regulation to address risks ........................................................................... 21 External risks to the large financial sector call for enhanced monitoring ...................................... 21 Macroprudential tools can help contain soaring house prices ........................................................ 24 Luxembourg has become a gateway for fintech and big tech firms ............................................... 27 Enforcement against international corruption needs to be stepped up ........................................... 28 Fiscal reforms for inclusive growth and sustainability ...................................................................... 29 The fiscal position is strong, but ageing poses a long-term challenge ........................................... 29 Further adjusting corporate taxation to a globalised world ............................................................ 31 Improving work incentives and diversifying tax bases .................................................................. 32 Reviving productivity growth in Luxembourg .................................................................................. 36 Understanding productivity developments ..................................................................................... 36 Evaluating and adjusting diversification efforts ............................................................................. 42 Reviving productivity growth for firms below the frontier ............................................................ 44 Stimulating the innovation engine to push the frontier .................................................................. 49 Avenues for greener growth............................................................................................................... 53 There is scope to further reduce CO emissions, especially from transport ................................... 53 2 Harnessing finance for the transition to a low-carbon economy .................................................... 55 References .......................................................................................................................................... 57 Annex. Progress in main structural reforms..................................................................................... 63 Thematic Chapter ................................................................................................................................ 67 Chapter 1. Policies for a more efficient and inclusive housing market .......................................... 69 Population growth and constrained supply diminish housing affordability ....................................... 70 Demographic growth has exceeded housing supply ...................................................................... 70 Price developments reflect limited use of available land ............................................................... 72 Increasing the supply of housing ....................................................................................................... 76 Spatial planning instruments fail to prevent land hoarding ............................................................ 76 Improving co-ordination in spatial planning and infrastructure provision ..................................... 80 New construction............................................................................................................................ 81 Densification measures .................................................................................................................. 85 Making the access to housing more equitable ................................................................................... 88 Tax preference for homeownership ................................................................................................ 88 Measures to expand the stock of social housing ............................................................................ 94 Social housing should be targeted to those most in need ............................................................... 97 Affordable private rental sector ...................................................................................................... 98 References ........................................................................................................................................ 102 OECD ECONOMIC SURVEYS: LUXEMBOURG 2019 © OECD 2019 4 | TABLE OF CONTENTS Tables Table 1. Macroeconomic indicators and projections ............................................................................. 18 Table 2. Low probability events that could lead to major changes in the outlook ................................ 21 Table 3. Illustrative annual fiscal impact of recommended reforms ..................................................... 36 Table 4. Illustrative impact of structural reforms on GDP per capita ................................................... 42 Figures Figure 1. Wellbeing is high in multiple dimensions .............................................................................. 15 Figure 2. Gender wage and employment gaps are comparatively small ............................................... 16 Figure 3. The risk of poverty among immigrants is a concern .............................................................. 17 Figure 4. Macroeconomic developments are solid ................................................................................ 19 Figure 5. Luxembourg mainly trades with European partners .............................................................. 20 Figure 6. Macro-financial vulnerabilities have increased in housing and credit markets ..................... 21 Figure 7. The financial sector accounts for a large share of total value added ...................................... 22 Figure 8. The contribution to growth from financial services has been high ........................................ 22 Figure 9. Assets under management have been on an upward path since the crisis .............................. 23 Figure 10. Real house prices are growing strongly ............................................................................... 24 Figure 11. The share of over-indebted households is high, in particular for those with low wealth ..... 25 Figure 12. Borrower-based macroprudential measures have been increasingly implemented .............. 26 Figure 13. Corruption is perceived as very low..................................................................................... 28 Figure 14. The fiscal balance is sound .................................................................................................. 29 Figure 15. Ageing related costs are projected to rise substantially ....................................................... 30 Figure 16. Debt is sustainable in the long-term provided ageing related costs are dealt with .............. 31 Figure 17. Unemployment mainly affects young low-skilled workers ................................................. 33 Figure 18. Unemployment traps are significant particularly for low-earners........................................ 34 Figure 19. Environmental taxes and recurrent taxes on immovable property are low .......................... 35 Figure 20. Productivity is high, but has grown sluggishly in recent years ............................................ 38 Figure 21. The contribution of the financial sector to productivity growth declined, and other service sectors struggle to catch up ..................................................................................... 39 Figure 22. Depressed productivity growth stems from a stagnating frontier and tumbling laggards in services ............................................................................................................................. 40 Figure 23. Numerous sectors are characterised by low productive outliers .......................................... 40 Figure 24. Weak productivity developments concern firms of all sizes ................................................ 41 Figure 25. There is scope to reduce zombie congestion ........................................................................ 45 Figure 26. Luxembourg’s insolvency regime is weak, calling for reforms ........................................... 45 Figure 27. ICT skills shortages remain high but ICT training offers in firms remain scarce ................ 46 Figure 28. In Luxembourg, as elsewhere, digitalisation lags behind in smaller firms .......................... 47 Figure 29. Too few firms and workers recognise the importance of continuous training ..................... 48 Figure 30. Product market regulations remain high despite recent reform ........................................... 49 Figure 31. Multifactor productivity growth did not recover since the financial crisis .......................... 50 Figure 32. R&D spending remains far from EU 2020 headline target for R&D ................................... 52 Figure 33. Green growth indicators: Luxembourg ................................................................................ 54 Figure 34. Luxembourg has become a leader in green bond listing ...................................................... 56 Figure 1.1. Strong population growth is projected to continue ............................................................. 70 Figure 1.2. Population growth is driven by net migration ..................................................................... 71 Figure 1.3. Housing construction has not kept up with population growth ........................................... 72 Figure 1.4. Real house prices are growing strongly .............................................................................. 73 Figure 1.5. Increasing price-to-income and price-to-rent ratios point to affordability problems .......... 74 OECD ECONOMIC SURVEYS: LUXEMBOURG 2019 © OECD 2019 TABLE OF CONTENTS | 5 Figure 1.6. Households’ housing cost burden is high............................................................................ 75 Figure 1.7. The regional variation in housing prices reflects the distance from capital ........................ 76 Figure 1.8. Developed land per capita is high ....................................................................................... 77 Figure 1.9. Growth rates of developed areas per capita is strongly negative ........................................ 77 Figure 1.10. Prices of land for construction vary strongly across the country ...................................... 78 Figure 1.11. Construction prices have increased strongly ..................................................................... 82 Figure 1.12. Transaction costs are high ................................................................................................. 82 Figure 1.13. New construction is shifting towards apartment buildings ............................................... 85 Figure 1.14. Average number of rooms per household is high for all tenures ...................................... 86 Figure 1.15. Perceived noise and pollution levels are high ................................................................... 87 Figure 1.16. Urban sprawl is high ......................................................................................................... 87 Figure 1.17. Housing tenure is dominated by homeownership ............................................................. 89 Figure 1.18. Marginal effective tax rates on owner-occupied residential property are low .................. 90 Figure 1.19. Taxes on property consist mainly of net wealth taxes ...................................................... 91 Figure 1.20. Recurrent immovable property taxes are low ................................................................... 92 Figure 1.21. Other real estate is predominantly owned by top 10%...................................................... 94 Figure 1.22. Social rental housing stock is low ..................................................................................... 95 Figure 1.23. The stock of vacant dwellings could be reduced further ................................................... 95 Figure 1.24. Providers of social rental housing are mainly public bodies ............................................. 96 Figure 1.25. Subsidised rental housing tenants include many high earners .......................................... 98 Figure 1.26. Many low-income households rely on the private rental sector ........................................ 99 Boxes Box 1. The Revenu d’inclusion sociale ................................................................................................. 33 Box 2. Quantifying the fiscal impact of selected policy recommendations .......................................... 36 Box 3. Selected policy measures announced in the Coalition Agreement for 2018-2023 .................... 37 Box 4. Quantification of the structural reforms recommended in this survey ....................................... 41 Box 5. Data and measurement issues in Luxembourg ........................................................................... 43 Box 1.1. Spatial planning and its main instruments .............................................................................. 78 Box 1.2. The Housing Pact .................................................................................................................... 84 Box 1.3. Tax measures and other demand subsides promoting homeownership .................................. 89 Box 1.4. Housing and inequality in Luxembourg and the Greater Region ........................................... 93 Box 1.5. Recommendations ................................................................................................................. 100 OECD ECONOMIC SURVEYS: LUXEMBOURG 2019 © OECD 2019 | 7 This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries. The economic situation and policies of Luxembourg were reviewed by the Committee on 6 May 2019. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 22 May 2019. The Secretariat’s draft report was prepared for the Committee by Álvaro Pina, Jan Strasky, and Christina Timiliotis, under the supervision of Pierre Beynet. The Survey also benefitted from consultancy work by Guillaume Claveres. Statistical research assistance was provided by Paula Adamczyk and editorial support was provided by Poeli Bojorquez. The previous Survey of Luxembourg was issued in June 2017. OECD ECONOMIC SURVEYS: LUXEMBOURG 2019 © OECD 2019 8 | Basic Statistics of Luxembourg, 2018* (Numbers in parentheses refer to the OECD average)** LAND, PEOPLE AND ELECTORAL CYCLE Population (million, 2017) 0.6 Population density per km² (2017) 245.4 (37.7) Under 15 (%, 2017) 16.4 (17.9) Life expectancy (years, 2017) 82.7 (80.3) Over 65 (%, 2017) 14.3 (16.8) Men (2017) 80.1 (77.7) Foreign born (%, 2017) 45.4 Women (2017) 85.4 (83.0) Latest 5-year average growth (%) 2.4 (0.6) Latest general election October-2018 ECONOMY Gross domestic product (GDP) Value added shares (%, 2017) In current prices (billion USD) 69.5 Primary sector 0.3 (2.4) In current prices (billion EUR) 58.9 Industry including construction 12.1 (27.3) Latest 5-year average real growth (%) 3.0 (2.3) Services 87.7 (70.3) Per capita (000 USD PPP, 2017) 107.6 (44.7) Gross national income (GNI) In current prices (billiion EUR, 2017) 39.2 Per capita (000 USD PPP, 2017, OECD: 2016) 76.2 (42.7) GENERAL GOVERNMENT Per cent of GDP Expenditure (OECD: 2017) 43.1 (40.3) Gross financial debt (OECD: 2017) 28.8 (112.4) Revenue (OECD: 2017) 45.5 (38.1) Net financial debt (OECD: 2017) -48.0 (69.4) EXTERNAL ACCOUNTS Exchange rate (EUR per USD) 0.85 Main exports (% of total merchandise exports, 2017) PPP exchange rate (USA = 1) 0.87 Manufactured goods 37.8 In per cent of GDP Machinery and transport equipment 27.4 Exports of goods and services 224.8 (56.1) Chemicals and related products, n.e.s. 10.7 Imports of goods and services 190.7 (52.0) Main imports (% of total merchandise imports, 2017) Current account balance 4.8 (0.3) Machinery and transport equipment 34.6 Net international investment position (2017) 50.0 Manufactured goods 15.4 Chemicals and related products, n.e.s. 11.3 LABOUR MARKET, SKILLS AND INNOVATION Unemployment rate, Labour Force Survey (aged 15 and Employment rate (aged 15 and over, %) 67.1 (68.4) over, %) 5.6 (5.3) Men 70.7 (76.0) Youth (aged 15-24, %) 14.1 (11.1) Women 63.4 (60.9) Long-term unemployed (1 year and over, %, 2017) 1.9 (1.7) Participation rate for 15-64 year-olds (%, 2017) 70.2 (72.1) Tertiary educational attainment (aged 25-64, %, 2017) 40.3 (36.9) Average hours worked per year (2017) 1 518 (1 746) Gross domestic expenditure on R&D (% of GDP, 2016) 1.2 (2.5) ENVIRONMENT CO2 emissions from fuel combustion per capita (tonnes, Total primary energy supply per capita (toe, 2017) 6.3 (4.1) 2016) 14.6 (9.0) Renewables (%, 2017) 6.9 (10.2) Water abstractions per capita (1 000 m³, 2015) 0.1 Exposure to air pollution (more than 10 μg/m³ of PM 2.5, % of population, 2017) 73.0 (58.7) Municipal waste per capita (tonnes, 2017) 0.6 (0.5) SOCIETY Income inequality (Gini coefficient, 2016, OECD: 2015) 0.304 (0.315) Education outcomes (PISA score, 2015) Relative poverty rate (%, 2016, OECD: 2015) 11.1 (11.8) Reading 481 (492) Median gross household income (000 USD PPP, 2016, OECD: 2015) 42.3 (23.3) Mathematics 486 (490) Public and private spending (% of GDP) Science 483 (493) Health care (2017) 6.1 (8.8) Share of women in parliament (%) 28.3 (29.7) Pensions (2015) 8.4 (8.5) Net official development assistance (% of GNI, 2017) 1.0 (0.4) Education (public, 2017) 5.2 (4.5) Better Life Index: www.oecdbetterlifeindex.org * The year is indicated in parenthesis if it deviates from the year in the main title of this table. ** Where the OECD aggregate is not provided in the source database, a simple OECD average of latest available data is calculated where data exist for at least 80% of member countries. Source: Calculations based on data extracted from databases of the following organisations: OECD, International Energy Agency, International Labour Organisation, International Monetary Fund, World Bank. OECD ECONOMIC SURVEYS: LUXEMBOURG 2019 © OECD 2019