Opinion of the Chamber of Commerce on the draft state budget for the first four months of 2019
Once again the electoral and budgetary schedules have coincided, just as they did five years ago. Hence the Chamber of Deputies could not be consulted on the budget project for 2019 in accordance with the normal schedule. A provisional budget is required for the first four months of 2019 in order to ensure that public services and state organisations can continue working without disruption. This procedure is known as the “douzièmes provisoires” (provisional twelfths), and it will be almost exactly equivalent to 4/12th of the credits approved for 2018 in the 15th December 2017 budget law.
The technical nature of this procedure makes it difficult to conduct standard economic analysis and draw useful conclusions. Thus in its official opinion, the Chamber of Commerce prefers to repeat previously stated key recommendations regarding public finances. This position was detailed in its recent “Actualité & tendances n°20” publication which was addressed to the future government due to be formed following October’s election. These themes have also been addressed in successive budgetary opinions. Nevertheless, the Chamber of Commerce still has comments to make about certain exemptions from the strict 4/12th principle.
Consolidate the AAA rating with coherent, cohesive governance of public finances
For Luxembourg to maintain its AAA status with credit rating agencies it must also target “AAA budgetary governance” and “AAA state governance”.
We have heard for many years about the desire to introduce “improved” governance of public finances. But the movement towards setting budgets based on clearly defined projects and programmes with associated performance indicators has not always been achieved.
A good way to get this moving could be to carry out systematic analysis of public sector expenditure. During this exercise it should be borne in mind that Luxembourg spends more per resident than neighbouring and comparable countries, and this in almost every area of public policy. Yet public sector activity is not necessarily more effective [i]. Luxembourg is likely to face several future challenges linked to an ageing population, notably the cost of pension provision. Over the long term, this will weaken the fiscal position.
The Chamber of Commerce also calls for budget documents to be presented in a simplified format. In particular there needs to be a clearer distinction between the annual budget (with its multiple chapters) and the multi-year budgetary programme. The latter should also highlight general budgetary policy, and set political priorities for the coming years, while describing how these fit into a medium term strategy. Furthermore, new norms should be set regarding spending increases. For example, is should be noted that between 2000 and 2017 general government spending excluding capital expenditure and interest payments rose by 6.2% per year on average, compared to 3.5% in the three neighbouring countries and The Netherlands.
As regards income, although welcoming the 2017 tax reform, the Chamber of Commerce believes the reduction of corporate taxation to 26.01% (the rate imposed in Luxembourg City) in 2018 was too moderate. This rate compares unfavourably to other financial sectors such as Ireland (12.5%) or Switzerland, or even the EU average of less than 21% in 2018. The Chamber of Commerce sees this latter figure as an appropriate target for Luxembourg. Being close to the European norm would be an extra argument in favour of establishing a business in Luxembourg. Setting this target would reinforce the country’s competitiveness, and as the rate would be very close to the European average, this would not contribute to excessive tax competition. The Chamber of Commerce would also like to draw attention to the impact setting tax in a predictable fashion would have, particularly if there were a clearly announced timetable towards reaching a lower target.
These recommendations seek to avoid a short-termist attitude to fiscal policy. It would also be useful to consider how to anchor long-term planning into the management of investment projects. Governance of public investment should be reviewed to ensure better ex ante and ex post evaluation of each project. This would help to better understand (and this from the outset) likely future maintenance and repair costs. The Chamber of Commerce has often spoken of the need for such a “road map for better investment”, which would become a performance check-list for each project.
There are currently 102 communes in Luxembourg. They play a key role powering the development of local economies, so local authority financial governance is far from being a secondary concern. Currently income from the Communal Commercial Tax (ICC) is highly concentrated on a small number of taxpayers and economic sectors. This is clearly a source of vulnerability for municipalities. Moreover, the ICC accounts for about 23% of total local authority income, but property tax (l’impôt foncier) contributes just 1%. This latter figure equates to just 0.1% of GDP, compared to the average for the Eurozone of 1%. A rebalancing of these taxes should be considered soon, in order to contain the rise in house prices and to stabilise local authority income (property tax revenue is much less volatile than that from corporate taxation). In the process, why not take this opportunity to simplify company taxation by merging the two business income taxes? This single business tax could then be adjusted to ensure compatibility with the recent reform of communal finances, including appropriate compensation for local authorities. It would also be essential that reductions currently enjoyed by SMEs within the ICC system would be reflected appropriately within this single business tax.
Exceptions the 4/12th rule
If provisional funding in most areas for the first four months of 2019 will equate to 4/12th of those approved for 2018, there are some exceptions. Salaries are the most important change as these had to increase in line with indexation. This area of expenditure will rise substantially in this four month and thus the whole 12 month period. In addition, the rate at which the public sector is hiring comes at the expense of the private sector. It consumes a significant share of labour supply, particularly young, qualified people. Thus in this context, the Chamber of Commerce regrets in particular the abolition of the so-called 80-80-90 rule [ii].
Recent agreements have continued to push the public sector wage bill upwards on top of automatic annual or biannual increases. There are also “second round effects” on the semi-state and state-linked sectors which have aggravated the situation. These salary increases are also an unfortunate signal to the private sector which cannot keep pace. This is why the Chamber of Commerce recommends that these mechanisms be reviewed. As well, the resultant salary competition helps to deprive the private sector of domestic human resources, particularly those people just starting their careers. This forces businesses to turn to cross-border commuters and migration, which in turn creates related problems that contradict the desire to achieve more qualitative growth.
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The Chamber of Commerce will conduct an exhaustive analysis of the various areas of expenditure and income when the full draft budget for 2019 is drawn up.
The opinion can be consulted online in French under the following link: https://www.cc.lu/services/avis-legislation/avis-de-la-chambre-de-commerce/detail/?user_ccavis_pi1%5BshowUid%5D=4013
[i] For more details, see the thematic section of the 2018 opinion formulated by the Fondation IDEA asbl (http://www.fondation-idea.lu/wp-content/uploads/sites/2/2018/04/Avis-Annuel-2018-IDEA-en-ligne.pdf).
typo3/ [ii] According to this rule the salary of trainee civil servants equals 80% of basic salary for the first two years, and 90% in the third year.