Luxembourg's fiscal system suffers from the lack of a medium-term perspective and various weaknesses in its budget management practices. The International Monetary Fund (IMF) reports in its 2006 Article IV Consultation that the government views the European Union's Stability and Growth Pact, to which it is subject as a Euro member, as a sufficient medium-term framework to align fiscal objectives. The Organization for Economic Cooperation and Development (OECD) notes in its 2006 policy brief that Luxembourg should improve its budget management practices by providing medium-term budget trends in their proposals (specifically including social security system costs); adopt a more outcome-based approach instead of technical line-by-line authorizations; and reduce the number of "special funds" used to execute the public investment projects. However, overall, there is insufficient information as to Luxembourg's compliance with IMF's Code of Good Practices on Transparency in Fiscal Policy.

General Overview

According to the 2006 Article IV Consultation report between the IMF and Luxembourg authorities, the Luxembourg government viewed the European Union's Stability and Growth Pact (SGP), to which it is subject as a Euro member, as a sufficient mechanism to provide a medium-term framework in order to facilitate adjustment, thus making a formal arrangement, as suggested by IMF staff, unnecessary. In the context of the consultations, the IMF further advised the authorities that in order to improve transparency and prevent policy drift, opportune fiscal data, regular analysis, and clearer budget prioritization were required. The IMF reported that the government is committed to implementing the SGP objectives and hopes to achieve a balanced budget by 2009.

In its 2006 Policy Brief, the OECD raises various problems concerning Luxembourg's budget management practices. For one, the budget submitted to Parliament for approval only covers revenues and expenditures for the next year, excluding an estimate of medium-term developments, particularly with regard to social security. Second, the focus on authorization of line-by-line credits hinders the ultimate policy objectives, thus hampering transparency. Another restraint of the budget management system lies in public investment projects. There are 29 special funds to finance public investment projects; but these funds cannot be relocated in case of a change in priorities. To eliminate some of these drawbacks, the OECD recommends that: (a) the budget submitted to parliament include a component that assesses medium-term trends; (b) the request for line-by-line credits be replaced with an outcome-based approach, leaving the responsibility to budget managers to meet the objectives attached to the different budget items; and (c) the number of special funds be reduced.

The Ministry of Finance (MoF) notes in its 9th Update of the Luxembourg Stability and Growth Program that the country has achieved its medium-term budgetary objective of -0.8% of GDP in structural terms, since 2006. The IMF's 2006 Article IV consultation expects a debt-to-GDP ratio for Luxembourg of no more than 10 percent by 2009. Furthermore, Luxembourg's public debt is among the lowest in the European Union, 6.9% of GDP in 2007, while the average Euro Zone public debt amounts to 72 percent of GDP.

According to the MoF the fiscal objectives for 2008's budget are as follows: (a) balanced public finances; (b) public expenditure growing slower than the rate of economic growth; (c) sound macroeconomic assumptions and realistic revenue projections; and (d) maintenance of an economic framework that favors a long-term economic growth.

The Principles

Clarity of roles and responsibilities.

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There is insufficient information as to Luxembourg's compliance with this principle. However, according to the MoF's website; the ministry is responsible for planning, executing and monitoring the budget. The Constitution requires that the budget be approved by the Chamber under legislation that remains valid for one year which could, however, be renewed for additional years. In addition, a court of auditors is established, according to the Constitution, with the objective to monitor the implementation of the budget on behalf of the Chamber.

Open budget processes

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There is insufficient information as to Luxembourg's compliance with this principle; however, according to the Ministry of Finance's 9th Update of the Luxembourg Stability and Growth Program, transparency of public finances was increased as a result of measures taken while drafting the government bill on state revenue and expenditure for fiscal year, 2008. There has been a substantial reduction in delay between the presentation of the draft budget and the presentation of the stability program which has allowed "Parliament to include the assessment of the draft budget for the year ahead within the broader context of medium-term and long-term budgetary planning" (p. 31).

In its 2006 Policy Brief, the OECD raises various problems concerning Luxembourg's budget management practices. For one, the budget submitted to Parliament for approval only covers revenues and expenditures for the next year, excluding an estimation of the medium-term developments particularly with regard to social security system. Second, the focus on authorization of line-by-line credits obscures the ultimate policy objectives, thus hampering transparency. Another restraint of the budget management system lies in public investment projects. There are 29 special funds to finance the public investment projects; however, these funds cannot be relocated in case there is a change in priorities. To eliminate some of these drawbacks, the OECD recommends that: (a) the budget submitted to parliament include a component that assesses medium-term trends; (b) the request for line-by-line credits be replaced with an outcome-based approach leaving the responsibility to budget managers to meet the objectives attached to the different budget items; and (c) the number of special funds be reduced.

Public availability of information.

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As a subscriber to the IMF's Special Data Dissemination Standards (SDDS), Luxembourg now has its statistical government data available on the IMF's website. However, there is insufficient information as to Luxembourg's compliance with this principle.

Independent assurances of integrity.

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The IMF's 2006 Article IV Consultation recommends more timely fiscal data, regular analysis, and clearer budget prioritization in order to "enhance transparency, foster public support of policy requirements, and prevent policy drift" (p. 24). According to the IMF's SDDS website, Luxembourg subscribed to the SDDS on May 12, 2006. Though many requirements were met for the majority of data categories, few like national accounts are lagging in data submission. However, the information does not directly address Luxembourg's compliance with this principle.