Gross public debt, at 21.4% of GDP in 2018, is among the lowest in the OECD. Indeed, net public debt is negative due to significant assets held by the social security administration. The general government budget is in surplus, which is projected to decrease in 2019, mainly reflecting slowing GDP growth. The fiscal policy stance is projected to remain broadly neutral. The 2019 budget projects falling revenues due to a corporate income tax reduction, the introduction of a minimum social salary tax credit, and a further loss of e‑commerce VAT, offset in part by higher taxes and excise duties on transport fuel. Introducing a system of congestion charges in Luxembourg City would further promote green growth. An important structural challenge facing fiscal policy is work disincentives in the tax-benefit system, which are an obstacle to a further reduction in unemployment and inactivity traps.
The high exposure of the Luxembourg economy to financial sector developments warrants a close monitoring of related risks. This is particularly the case given high household indebtedness. Supply constraints in the housing sector, such as the limited use of available land, have held down new housing construction and led to strong increases in real estate prices, eroding housing affordability. Immigration, mainly driven by the buoyant labour market, has bolstered demand, while the supply of housing remains constrained by unused land zoned for construction and weak co-ordination between the central government and municipalities.
Despite strong digital skills and substantial public investment into connectivity and high speed Internet, the take-up of digital technologies by companies, for example in the area of e-commerce, and by the public administration needs to be improved. Skills mismatches and shortages of high skilled labour are already apparent and further improvements in the education system should focus on lifelong learning and aligning the supply of skills with labour market needs.
