Presentation of the OECD 2019 Economic Survey of Luxembourg

2019 OECD ECONOMIC SURVEY OF LUXEMBOURG Preserving and sharing prosperity 10 July 2019, Luxembourg http://www.oecd.org/economy/luxembourg-economic-snapshot//

@OECDeconomy @OECD

Main messages 1.

Increasing housing supply, including social rental dwellings, is key to improving housing affordability.

2. Reviving productivity growth will require supporting viable weaker firms to catch up and helping the best firms to innovate more.

3. Fiscal reforms are needed to tilt revenues towards environmental and property taxation and address rising pension expenditure.

2

Well-being is high Better Life Index country rankings from 1 (best) to 35 (worst), 2017

Source: OECD Better Life Index.

3

The gender wage gap is small Wage gap Percentage, 2017 40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

0

LUX BEL GRC SVN ITA DNK TUR NOR NZL HUN POL FRA ISL IRL MEX ESP LTU SWE OECD NLD AUS PRT CHE SVK DEU CZE AUT FIN GBR CAN USA CHL LVA ISR JPN EST KOR

40

Note: The gender wage gap is defined as the difference between median earnings of men and women relative to median earnings of men, for full-time employees.

Source: OECD Labour Force Statistics.

4

Economic growth has been strong GDP growth, year-on-year % change 12 10 8 6 4 2 0 -2 -4 -6 -8 -10

Luxembourg 2007

2009

2011

2013

2015

Euro area 2017

2019

Source: OECD, Economic Outlook (database).

5

Making growth sustainable and inclusive

6

The fiscal balance is sound Percentage of GDP 7

7

6

6

5

5

4

4

3

3

2

2

1

1

0

0

-1

-1

-2

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

-2

Source: OECD, Economic Outlook (database).

7

There is ample fiscal space r-g (interest rate minus GDP growth) percentage points 3

3

2

2

1

1

0

0

-1

-1

-2

-2

-3

-3

-4

-4

More fiscal space

-5

-5

SVN

ITA

GRC

FRA

USA

PRT

LTU

BEL

ESP

JPN

SVK

GBR

AUT

DEU

NLD

CHE

CAN

LVA

IRL

-8

KOR

-8

FIN

-7 LUX

-7 SWE

-6

EST

-6

Note: r-g is the average difference between the effective interest rate paid on net debt (r) and nominal GDP growth (g) for 2016-18. r is the weighted difference between the implied interest rate paid on government financial liabilities and the implied interest rate earned on government financial assets, where the weights are the share of financial liabilities and assets in net debt, respectively.

Source: OECD, Economic Outlook (database).

8

Ageing-related costs will rise substantially Percentage of GDP 30 25

Public pensions expenditure, gross

Public pensions contributions

Long-term care expenditure

Health care expenditure

30 25

Net ageing related spending 20

20

15

15

10

10

5

5

0

0

-5

-5

-10

-10

-15

2016

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

-15

Note: Net ageing-related costs amount to public expenditure on pensions, long-term care and health care minus pension contributions.

Source: European Commission (2018), "The 2018 Ageing Report - Economic and budgetary projections for the 28 EU Member States (2016-2070)" Directorate-General for Economic and Financial Affairs.

9

Environmental taxes are low Percentage of GDP, 2016 or latest

Source: OECD Green Growth Indicators.

10

Fiscal policy recommendations to make growth sustainable and inclusive 1.

Allow automatic stabilisers to work in case of a downturn and, if it intensifies, implement a countercyclical fiscal expansion.

2. Increase the retirement age with life expectancy and/or reduce the generosity of pensions.

3. Continue to engage in international efforts to address tax challenges of cross-border activities and to strengthen tax transparency.

4. Continue to raise taxes and excise duties on transport fuel, especially on diesel, and develop flanking measures over the short term for most affected poor households.

11

Reducing financial risks for households and banks

12

Investment funds have continued to grow

EUR billion 5000

EUR billion Credit institutions, total assets

4500

Investment funds, assets under managementยน

5000 4500

4000

4000

3500

3500

3000

3000

2500

2500

2000

2000

1500

1500

1000

1000

500

500

0

2001

2003

2005

2007

2009

2011

2013

2015

2017

0

1. Undertakings for collective investment (UCI), net assets.

Source: Banque centrale du Luxembourg, Statistical tables.

13

The share of over-indebted households is high, in particular for those with low wealth Share of households with debt-to-income ratio exceeding 300%, 2014 100 90

Households in the bottom wealth quintile

All households

100 90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

SVK POL SVN EST

FIN

LVA HUN DEU BEL FRA ITA GRC IRL NLD ESP PRT AUT LUX

0

Note: The debt-to-income ratio calculates outstanding debt on main residence divided by annual household gross income.

Source: HFCS database, LWS database, OECD Affordable Housing Database.

14

Recommendations for reducing financial risks 1. Introduce borrower-based macroprudential instruments, such as caps to loan-to-value or debt-service-to-income ratios, as foreseen in draft legislation.

2. Strengthen disclosure of climate-related risks by financial intermediaries, in line with the recommendations by the Task Force on Climate-related Financial Disclosures.

3. Further reinforce financial supervision, namely by continuing to monitor credit risks on intra-group bank exposures and continuing to enhance on-site inspections and data collection on investment funds.

15

Reviving productivity growth

16

Productivity is high but flat GDP per hour worked, USD 2010 PPPs Luxembourg

90

France

Germany

Belgium

OECD

90

80

80

70

70

60

60

50

50

40

40

30

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

30

Source: OECD Productivity Indicators Database.

17

Productivity in services: weaker firms are falling further behind Value added per worker in services, 2005=100 120

Laggard firms

Median firms

120

Frontier firms

110

110

100

100

90

90

80

80

70

70

60

60

50

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

50

Note: Frontier firms are defined as the top 20% of firms with the highest labour productivity levels by industry; median firms are in the 40th-60th percentiles; and laggard firms correspond to the bottom 20%.

Source: OECD calculations based on data from STATEC, structural business statistics.

18

ICT skills shortages remain high Percentage of firms reporting hard-to-fill vacancies for ICT specialists 10

2018

9

10

2012

9

NLD

LUX

DNK

BEL

HUN

FIN

DEU

CZE

AUT

EU

0

GBR

0

SWE

1 SVN

1 IRL

2

FRA

2

EST

3

SVK

3

LTU

4

ESP

4

NOR

5

LVA

5

ITA

6

GRC

6

TUR

7

PRT

7

POL

8

ISL

8

Note: Enterprises with 10 or more employees, excluding the financial sector.

Source: Eurostat, Information Society database.

19

The insolvency regime is weak, calling for reforms Deviation from the OECD average measured in standard deviations, OECD=0 2018 or latest Strength of insolvency framework index (0-16)

Fear of failure rate (%)

Cost of resolving insolvency (% of estate)

Time to resolve insolvency (years)

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

Note: Data bars to the right of zero show better performance than the OECD average and data bars to the left show worse performance than the OECD average.

Source: World Bank, Trade and Competitiveness data.

2

2.5

20

Product market regulations remain restrictive Indicator ranges from 0 (least stringent) to 6 (most stringent) 6

6

Luxembourg OECD

5

Average of 5 best countries Average of 5 worst countries

4

5 4

3

3

2

2

1

1

0

Lawyers

Notaries

Accountants

Architects

Civil engineers

Estate agents

0

Source: OECD Product Market Regulation Indicators of Professional Services, 2019.

21

R&D spending remains low Percentage of GDP 4.5

2016 or latest year

EU Horizon 2020 target

4.5 4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

CHL LVA MEX SVK TUR POL GRC IRL ESP HUN LUX NZL PRT EST ITA CAN CZE GBR AUS EU28 SVN NOR NLD ISL FRA OECD BEL USA FIN DNK DEU AUT JPN SWE CHE KOR ISR

4.0

Source: Eurostat and OECD Research and Development Statistics.

22

Recommendations for reviving productivity growth 1. Undertake regular skill foresight exercises and ensure their outcomes feed into enhanced training offers.

2. Modernise bankruptcy law to ease early restructuring and second chance opportunities, as well as the exit of non-viable firms.

3. In professional services with anti-competitive regulation, eliminate restrictions on advertising and marketing.

4. Promote the adoption of cutting-edge technologies, inter alia through the demonstration effect of public sector use.

23

Policies for a better housing market

24

Population growth has outpaced new construction Percentage change, 2015 2.5

2.5 Population

Dwellings

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

FRA

DEU

CHE

LUX

0.0

Note: Population data for Germany refers to 2016.

Source: OECD (2018), International Migration Outlook; and OECD Affordable Housing Database.

25

Real house prices are growing strongly Index 2007 =100 160 150

Luxembourg

Belgium

Luxembourg City

France

160

Germany

150

140

140

130

130

120

120

110

110

100

100

90

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

90

Source: OECD, Analytical house prices indicators database; and Observatoire de l'Habitat.

26

Households’ housing cost burden is high Median of the mortgage burden as a share of disposable income, in percent, 2016 or latest

Source: Preliminary data from the OECD Affordable Housing Database.

27

Urban sprawl is high Percentage of urban population living in areas with a low population density (150-1 500 people per km²), 2014

Source: OECD (2018), Rethinking Urban Sprawl.

28

Property taxes are low Recurrent immovable property taxes, percentage of GDP, 2016 3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

LUX CHE MEX AUT CZE TUR EST LTU SVK DEU NOR SVN HUN IRL CHL SWE FIN KOR PRT LVA NLD OECD ESP POL ITA BEL DNK ISL AUS JPN NZL ISR GRC USA FRA GBR CAN

3.5

Source: OECD Global Revenue Statistics Database.

29

Social rental housing is scarce Number of social rental dwellings as a share of the total number of dwellings, 2015 or latest

Source: OECD Affordable Housing Database.

30

There are many high earners among subsidised rental housing tenants Percentage of households in social rental housing who are in two top income quintiles, 2014

Note: Subsidised rental housing covers all housing rented at below-market-rate, including social rental housing, employer-provided housing and housing where rent levels are fixed by law.

Source: OECD calculations based on OECD Affordable Housing Database.

31

Recommendations for a more efficient and inclusive housing market Boosting housing supply and reducing housing demand pressures: •

Increase the opportunity cost of unused land by reforming recurrent taxes on immovable property. Turn these taxes into a more important fiscal resource.

•

Ensure that municipalities penalise landowners and developers for non-use of building permits.

•

Phase out or reduce mortgage interest deductibility.

•

Increase residential density.

Improving inclusiveness: •

Directly finance new land acquisition by public providers of social housing. Use recurrent means testing to better target the provision of social housing.

•

Link housing allowances and social housing rents to local rents.

32

For more information Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

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.

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