Despite the government’s temporary 1% reduction in VAT rates between 1 January and 31 December 2023, total VAT revenue is higher so far this year than it was in 2022.
During the first six months the State obtained €2.5 billion euros in VAT, an increase of €70 million.
According to Statec, Luxembourg’s statistics office, lowering the VAT rates did have an impact on the state’s tax revenues, but inflation balanced out the difference.
In Luxembourg, inflation stood at 3.2% in June. As energy prices have fallen for a few months, inflation is now mainly driven by food and services prices. Core inflation (excluding energy and food) remains at a high level: 5.5% in Europe, and 4.7% in Luxembourg in June.
According to the latest forecasts from the Organisation for Economic Co-operation and Development (OECD), the European Central Bank (ECB) and the European Commission, inflation is not expected to drop to 2% before 2025. The rise in the price of services could continue with the application of three indexes in 2023. The 3rd index is expected in the coming weeks.
Inflation often signals an intervention by the ECB. During its meeting on 27 July, the European Central Bank once again raised its key interest rates. Statec reports that while the ECB may pause its rate hike, a cut is not expected for the time being. This will continue to weigh on Luxembourgers, especially when applying for a loan.
