Cablegate: Luxembourg's Budget Will Pass Despite Opposition
VZCZCXRO0705
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLE #0574 2991251
ZNR UUUUU ZZH
R 261251Z OCT 06
FM AMEMBASSY LUXEMBOURG
TO RUEHC/SECSTATE WASHDC 5643
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
UNCLAS LUXEMBOURG 000574
SIPDIS
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: PGOV EFIN ECON LU
SUBJECT: LUXEMBOURG'S BUDGET WILL PASS DESPITE OPPOSITION
SENSITIVE BUT UNCLASSIFIED. HANDLE ACCORDINGLY.
1. (SBU) SUMMARY: The Government of Luxembourg introduced its 2007
budget based on an expected economic growth of 4 percent, but
recording a deficit for the second year running. Press and
opposition parties have seized upon this shortfall and criticized the
government for using differing accounting methods in order to hide
the true deficit. END SUMMARY.
2. (U) The GOL introduced its 10 billion Euro draft budget for 2007
to parliament on October 11. Based on the expected economic growth
of 4 percent, the budget contains a 991 million Euro deficit, or 0.9
percent. While this figure is down from last year's 1.29 percent
deficit, it has not gone over well in fiscally conservative
Luxembourg. Among the reform measures the government proposes are:
postponement of indexation payments on salaries and family allowances
(Note: Indexation occurs for salaries and some social benefits when
overall inflation is greater than 2.5 percent. End note), a freeze on
civil service hiring and civil service salaries, and a tax increase
on cars with higher carbon dioxide emissions.
3. (SBU) A large source of confusion and debate is the fact that
there are two methods to calculate the budget: the method required by
the Maastricht treaty, which includes social and local government
spending; and the prior method which includes only national
government spending. This distinction is both crucial and confusing
in Luxembourg because under the Maastricht method the 2007 deficit is
0.9 percent, whereas under the prior method it would be 2.9 per cent.
The difference arises because Luxembourg welcomes approximately
150,000 workers per day from neighboring countries, the majority of
whom are under 30. This group's enormous contribution to
Luxembourg's social security system vastly outweighs its minor
percentage of payouts, creating a large net positive in this account
and hiding the GOL's larger deficit.
4. (U) Political opposition and press reporting has mostly focused on
the deficit and the method of calculating the budget. The opposition
Democratic Party has announced they are rejecting the budget because
they claim the government did not try hard enough to balance the
budget. Though slow to pick up on why the numbers are different,
both opposition parties and the press have belatedly called attention
to the difference in the deficit when using the prior calculation
methodology.
5. (SBU) COMMENT: Press and opposition party objections aside, the
GOL will pass this budget with little problem owing to the ruling
coalition's comfortable majority in parliament. The last time a
budget failed to pass in Luxembourg was in 1919. However, this leaves
aside the criticism raised by the opposition. At some point
Luxembourg will need to address the fact that its young foreign
commuters will eventually retire and the GOL cannot count on a
perpetual surplus in its social security system.
KRAFT