CNFP says deficit could balloon as plans ignore billions in defence, reform costs

Luxembourg's public finances are projected to remain in deficit for the next four years, with the shortfall expected to grow significantly, according to an analysis by the National Council of Public Finances (CNFP).

The body's review of the 2026 budget proposal and the subsequent multi-year programme forecasts that the combined deficit of the state, local councils, and social security funds will rise from €706 million in 2025 to nearly €1.3 billion by 2029.

In an opinion presented on Tuesday, the CNFP highlighted a critical concern: the official projections do not yet account for two major financial commitments – the planned increase in defence spending and the forthcoming tax reform.

The defence spending target, if raised to 2% of Gross National Income (GNI), would amount to almost €1.3 billion in 2026. Achieving a potential 5% target would require progressively larger additional expenditures, from an extra €190 million next year to €880 million in 2029. For context, defence spending in 2025 reached only 1.3% of GNI.

Simultaneously, the tax reform, which aims to create a single tax bracket, is estimated to cost the state and local councils an average of €850 million per year.

CNFP President Romain Bausch acknowledged that omitting these items is "understandable" since the relevant laws have not been passed. However, he pointed out that even stronger economic growth would not mitigate the defence costs, as they are calculated as a percentage of national income. He also noted that the planned partial financing of the tax reform – through the non-adjustment of tax brackets for 2.5 index tranches – remains undecided and is not reflected in the figures.

In essence, the CNFP warns that the current budgetary plan risks drastically underestimating future expenditure while overestimating revenue.

Public sector salaries and pensions

Economic growth is expected to remain subdued in the coming years, with employment growing at a slower pace than historically observed. Bausch highlighted a significant shift in job creation, noting that one in three new jobs in 2023 and 2024 was in the public sector, compared to just one in 10 between 2011 and 2019.

He further pointed out that public sector salary expenditures have risen by 8–9% annually over the last five years. This growth is attributed not only to new hiring and wage agreements but also to inflation and corresponding adjustments to the tax scale.

Looking ahead, the long-term budgetary burden of civil service pensions will be partially contained, as officials hired after 1999 will receive pensions based on a mixed, defined-contribution system akin to the private sector, rather than a final-salary scheme.

The government's retained pension "measures" – a term Bausch deliberately used instead of "reform" – are projected to provide a net relief of €378 million to public finances. Bausch acknowledged this is insufficient to fully address the issue but noted it is intended to be a topic for discussion ahead of the next election.

"No element of intergenerational fairness"

On the topic of intergenerational equity, Bausch personally concurred with an observation that recent pension changes place the burden of rebalancing the system solely on current and future workers, while existing pensioners remain unaffected.

"This increase in contributions affects everyone working today and tomorrow, and the only ones unaffected by any measure are the pensioners", Bausch stated. He was careful to clarify, "Now, don't say this is the CNFP's view! I am saying, from the perspective of intergenerational fairness, there is no element of it here."

A solid starting point, despite the lack of a financial "nest egg"

The CNFP's analysis offered one key consolation: Luxembourg's national debt is projected to remain below 30% of GDP over the next four years, maintaining its status as one of Europe's most fiscally disciplined nations. However, the cost of servicing this debt has become substantial, with interest expenditures now reaching €700 million.

The report also raises a question that Finance Minister Gilles Roth frequently posed while in opposition: where is the government's financial "nest egg"? The CNFP is now asking the same, questioning where the fiscal room for manoeuvre will be found to address future shocks or fund major priorities like housing, demographic ageing, and the ecological and digital transitions.

Despite these concerns, Bausch concluded on a cautiously optimistic note. He emphasised that Luxembourg begins this challenging period from a comparatively strong position, though he clarified this did not mean that everyone in the country is financially secure.