LUXEMBOURG'S BUDGET WILL PASS DESPITE OPPOSITION

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