Assessment of Public Finances - November 2015

The National Council of Public Finance (CNFP) - the independent institution monitoring the public finances of Luxembourg - presents its latest "Assessment of Public Finances". The assessment has been prepared on the basis of the draft budget for 2016 as well as the draft multiannual financial programming law for 2015-2019.

While it remains true that Luxembourg still enjoys sound public finances compared to other countries, the figures stemming from the draft multi-annual financial programming law for the period 2015-2019 point to a deterioration that merits further analysis.

As an independent institution, the CNFP's task is to carry out as complete an assessment as possible, based on the most recent information. Despite the limited resources at its disposal and given the incomplete or outdated nature of some of the macroeconomic data underpinning the budgetary documentation, the CNFP has used updated figures to estimate structural balances through an output gap methodology which, while being different from that used this year by the Government, is better adapted for this assessment. As results vary considerably depending on the methodology, the CNFP's choice must be viewed in the light of the fact that the Government itself relied on this very same methodology as recently as last year and that it provided no explanation of its decision to move away from it in the context of the current budgetary procedure.

Compared to the conclusions drawn last June in the CNFP’s assessment of the 2015-2019 Stability Programme, this new assessment points indeed to less favourable results. Just five months ago, the CNFP stated that compliance with fiscal rules would be far from certain in the medium and long term. It now has to conclude that the medium-term objective may not be achieved as of 2015 and that achieving this objective will become even more unlikely from 2016 onwards such that the correction mechanism under the 12 July 2014 law may have be triggered. The CNFP has come to these conclusions on the basis of the same methodology for estimating structural balances as the one used by the Government last year, which allows to assess more correctly the changes in the figures over time. The fact remains however that the underlying conclusions continue to depend strongly on major methodological parameters.

In view of the complexity of the issues at hand and the volatility of forecasts within a small and open economy such as Luxembourg, the CNFP suggests forming a working group composed of experts from relevant institutions to reach a common agreement on the methodology to be used by all parties in determining structural balances at a national level. The debate on public finances, and consequently also on the potential activation of the correction mechanism, is indeed far too important to depend solely on the choice of the relevant calculation methodology.

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