Luxembourg

Luxembourg’s fiscal position weakened in 2025, with the general government balance shifting from a surplus of 0.9% of GDP in 2024 to a projected deficit of -0.6% of GDP in 2025. This deterioration reflects household support measures and the corporate income tax cut introduced under the Entlastungs-Pak. In addition, the 2025 tax relief package implemented a 1pp reduction in corporate income tax and structural measures for households, with an estimated budgetary impact of EUR421mn (0.5% of GDP). The deficit is expected to stabilize to -0.5% of GDP in 2026 as temporary measures expire, but structural pressures from pensions and healthcare will persist. Public debt remains low, ensuring short-term stability, yet it is on a gradual upward trajectory -from 26.8% of GDP in 2025 to 27.2% by 2027—while refinancing costs are rising, with interest expenditure expected to reach 0.4–0.5% of GDP by 2027. These trends highlight growing vulnerability of fiscal accounts to higher borrowing costs and demographic pressures. 

Luxembourg faces significant rigidity in public spending. Automatic wage indexation, compounded by public sector wage agreements and dynamic hiring, has pushed up the wage bill. Social transfers, particularly pension expenditure, are rising sharply, Pension spending is projected to rise from 9.4% of GDP in 2024 to 17.5% by 2070, the sharpest increase in the Eurozone, posing long-term sustainability risks, with estimates indicating that contributions will no longer cover benefits by 2028. Healthcare costs add further structural pressure, while demographic trends amplify long-term risks. Public investment remains among the highest in the EU at over 6% of GDP, driven by housing and infrastructure programs under the Paquet Logement and strategic projects such as satellite deployment. While these investments support long-term growth, they constrain fiscal flexibility.  

Business insolvencies in Luxembourg increased by +5% in 2025, following a sharp rebound in 2024, and remain above pre-pandemic averages. The rise reflects the combined impact of higher financing costs, the withdrawal of pandemic-era support measures and persistent fragility among SMEs. Sectoral data for H1 2025 show significant dispersion: transport and storage (+78%), industry (+57%), and finance, real estate and B2B services (+24%) recorded the largest increases, while construction (-11%) and information and communication (-9%) posted declines. Insolvency levels are expected to moderate gradually, with projections of -5% in 2026 and -9% in 2027, but risks remain elevated for interest-sensitive sectors and firms with weak liquidity buffers.  

The government coalition, established following the 2023 elections, is a stable partnership that holds a majority in the Chamber of Deputies. The next national elections are scheduled for October 2028, following the regular five-year cycle. From a political standpoint, the coalition places significant emphasis on fiscal consolidation, housing affordability and ensuring long-term competitiveness. It also benefits from strong institutional capacity and broad public trust. Luxembourg's Recovery and Resilience Facility (RRF) under NextGenerationEU has been upgraded to EUR241mn, mostly to climate objectives and digital transformation, including e-government, skills, and connectivity. As of mid-2025, EUR90mn has been disbursed following the completion of 57% of the specified milestones, including reforms in skills, housing support and quantum communications. The government has not requested any loans, underlining its preference for grants and fiscal prudence.