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Luxembourg’s economy has grown at a robust pace
and has enviable levels of well-being, but public policy can do more to make
growth sustainable and inclusive, according to a new report from the OECD.

The latest OECD
Economic Survey of Luxembourg
discusses the challenges of making housing more affordable and reviving
productivity growth. The Survey projects economic expansion will continue, with
growth of about 2% this year and 2.5% next, but cautions about the risks of a
possible downturn.

The Survey, presented in Luxembourg City by OECD Secretary-General Angel Gurria, Luxembourg’s Finance Minister Pierre
Gramegna and Housing Minister
Sam Tanson, discusses the need to address financial sector risks,
ageing-related pressures and use tax reform to support sustainable growth.
  

“Luxembourg is in an enviable position, with
growth that outpaces its neighbours and high levels of well-being for its
citizens,” Mr Gurria said. “The challenge facing policymakers today is to
ensure that Luxembourg remains prosperous and that this prosperity is widely
shared, through reforms that enhance economic resilience, inclusiveness and
sustainability.”

Reducing financial risks should be a priority,
the Survey said. With rising household indebtedness creating vulnerabilities
for families and banks alike, the Survey recommends Luxembourg introduce
borrower-based macroprudential instruments, such as caps on loan-to-value or
debt-service-to-income ratios, as foreseen in draft legislation.

It also underlines the need to further enhance
financial sector resilience and foster the transition to a low-carbon economy.
The disclosure of climate-related risks by financial intermediaries, in line with
the recommendations by the Task Force on Climate-related Financial Disclosures,
should be pursued. Further reinforcement of financial supervision, namely by
continuing to monitor credit risks on intra-group bank exposures and to enhance
on-site inspections and data collection on investment funds, is also necessary.

The Survey points out the need to make the
housing market more efficient and more equitable. Tax policy can be used to
boost housing supply, notably by reforming recurrent taxes on immovable
property to hike the cost of not using land available for construction.
Increasing residential density, ensuring that municipalities penalise
landowners and developers for non-use of building permits, and phasing out or
reducing the tax deductibility of mortgage interest should also be considered.

To improve inclusiveness, Luxembourg can
directly finance new land acquisition by public providers of social housing and
better use means testing to target its provision. Linking housing allowances
and social housing rents to local rents is also recommended.

Fiscal policy should support growth and economic
dynamism while ensuring the sustainability of public finances. For example,
continuing the move toward higher taxes and excise duties on transport fuel –
especially on diesel – combined with flanking measures over the short term for
the most affected poor households, will address congestion and climate change
risks while creating new revenue streams.

The Survey notes that stronger productivity
growth will above all require enhanced training so as to continually upgrade
the skills of the workforce. In addition, modernisation of bankruptcy law would
ease early restructuring and second chance opportunities and facilitate the
exit of non-viable firms. Elimination of restrictions on advertising and
marketing in professional services would boost competition. Also, promotion of
cutting-edge technologies by public sector users would boost adoption by
businesses.