IMF praise high eco­nomic ac­tiv­ity in Lux­em­bourg

The Pak Banker - - COM­PA­NIES/BOSS -

An IMF of­fi­cial staff vis­ited Lux­em­bourg to hold con­sul­ta­tions un­der Ar­ti­cle IV of the IMF's Ar­ti­cles of Agree­ment with the au­thor­i­ties for mon­i­tor­ing of eco­nomic de­vel­op­ments.

The IMF based on the pre­lim­i­nary find­ings says coun­try's growth prospects re­main strong but are sub­ject to in­creas­ing down­side risks from weak­en­ing in­ter­na­tional ac­tiv­ity and stress in fi­nan­cial mar­kets. Im­ple­men­ta­tion of the in­ter­na­tional tax trans­parency agenda, which Lux­em­bourg has em­braced, could weigh on eco­nomic ac­tiv­ity and tax rev­enue.

At the same time, var­i­ous other com­pet­i­tive ad­van­tages, such as Lux­em­bourg's triple-AAA rat­ing and its qual­i­fied la­bor force, would con­tinue to ben­e­fit the coun­try. Against this back­drop, the fis­cal stance should re­main pru­dent and con­tin­gency mea­sures should be pre­pared for the event neg­a­tive shocks oc­cur.

The lim­ited fis­cal space should be used to bol­ster growth prospects, while adapt­ing the tax regime to the chang­ing in­ter­na­tional en­vi­ron­ment and en­sur­ing the long-term vi­a­bil­ity of the pen­sion sys­tem. Im­ple­men­ta­tion of the Bank­ing Union will help to in­crease the sta­bil­ity and re­silience of the bank­ing sys­tem. Fi­nan­cial sec­tor risks need to be mon­i­tored closely and, where nec­es­sary, Lux­em­bourg should ad­vo­cate ap­pro­pri­ate in­ter­na­tional reg­u­la­tion. Build­ing on past ex­pe­ri­ence, ac­tive la­bor mar­ket poli­cies should fo­cus on in­te­grat­ing refugees in the la­bor mar­ket and fur­ther re­duc­ing un­em­ploy­ment.

The rev­enue risks of the in­ter­na­tional tax trans­parency ini­tia­tives and volatile fi­nan­cial flows make it ap­pro­pri­ate for Lux­em­bourg to keep the pub­lic debt ra­tio on a slightly de­clin­ing path, in or­der to main­tain suf­fi­cient buf­fers in case of need. This re­quires tar­get­ing a small fis­cal sur­plus of around ½ per­cent of GDP in 2016 and over the medium term.

Vig­or­ous eco­nomic ac­tiv­ity has opened some fis­cal space, which should be used to bol­ster long-term eco­nomic growth. In 2015, buoy­ant tax rev­enues and lower-than-ex­pected cap­i­tal out­lays have con­trib­uted to a sig­nif­i­cant im­prove­ment in the fis­cal bal­ance com­pared to bud­get. Un­der un­changed poli­cies, in­clud­ing full im­ple­men­ta­tion of the Zukun­ftspak, the fis­cal po­si­tion is ex­pected to re­main in sur­plus over the medium term.

Avail­able fis­cal space of al­most ½ per­cent of GDP should be used for growth-friendly mea­sures such as in­fra­struc­ture in­vest­ments. The tax re­form pro­pos­als un­veiled at end-Fe­bru­ary con­tain a sig­nif­i­cant re­duc­tion in per­sonal tax­a­tion and also in the cor­po­rate in­come tax start­ing in 2017.

Pre­lim­i­nary es­ti­mates in­di­cate that these mea­sures would re­duce to­tal fis­cal rev­enue by up to 1 per­cent of GDP, fully us­ing up the pro­jected fis­cal sur­pluses. It is ad­vis­able to limit the size of the tax re­duc­tion to the avail­able fis­cal space. While some of the tax mea­sures aim to in­crease hous­ing sup­ply, the en­vis­aged tax re­lief for home buy­ers would ag­gra­vate ex­ist­ing im­bal­ances given that de­mand for real es­tate struc­turally out­strips sup­ply.

The on­go­ing tax re­form is an op­por­tu­nity to so­lid­ify the tax base in a rev­enue neu­tral way and ad­just to the chang­ing in­ter­na­tional tax­a­tion en­vi­ron­ment. The in­ter­na­tional tax trans­parency ini­tia­tives-in­clud­ing those spear­headed by Lux­em­bourg dur­ing its EU pres­i­dency in the sec­ond half of 2015-call for clos­ing loop­holes used for tax avoid­ance. The tax re­form should aim at wi­den­ing the cor­po­rate tax base and elim­i­nat­ing spe­cial tax regimes while low­er­ing statu­tory tax rates.

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