During the first three months of 2020, the evolution of central government revenue and expenditure showed the first signs of a crisis. Compared to the same period in 2019, revenues decreased by 0.8% and expenses increased by 19.4%. However, the sharp increase in spending is more nuanced than it might appear at first glance. In 2019, the evolution of spending in the first three months of the year was particularly weak due to the use of the "provisional twelfths" procedure.
In April 2020, the gap between spending and revenue increased due to the numerous stabilisation measures implemented by the government to meet the challenge of the coronavirus crisis, both within the health sector and to reduce the economic consequences on businesses affected by the pandemic.
As a result, revenue fell 8.4% from the first four months of 2019, while spending increased by around 28.5% on an annual basis. Compared to a third of the annual amounts forecast in the budget voted for 2020, this corresponds to a drop in revenue of -12% and an increase in expenditure of +8%, which results in a significant deterioration of the budget balance .
The increase observed on 30 April 2020 in terms of expenditure is understandably a result of the many stabilisation measures linked to the Covid-19 crisis. The implementation of these measures amounts to 2.2 billion euros at present, with new measures to be added for the Neistart Lëtzebuerg project which will add another 700 to 800 million euros.
The majority of the stabilisation budget, which amounted to 566 million euros of the total expenditure up until 30 April, was used for short-time working due to force majeure.
In terms of direct taxes, the corporate income tax (IRC) decreased by about 23% compared to the same period in 2019, as many companies took advantage of the opportunity to solicit cancellations of advances in the first quarter and payment deadlines . In terms of indirect taxes, the 17% decrease noted in VAT is mainly due to an unrivalled effort in reimbursements by the Administration of Domain Registration and VAT to meet the liquidity needs of companies .
In total, repayments made over the first four months of 2020 amounted to 734 million euros, around 160 million euros more than over the same period in 2019. As a consequence, the credit balance to be reimbursed to businesses is at its lowest level in five years .
Revenue from customs has also been affected by the containment measures, as well as by the partial border closures, which led to a significant drop in sales of fuel and other products. For the period from January to April 2020, sales of petrol and diesel suffered a decline of 19% and 22% respectively.
On the whole, the revenue of the three tax administrations amounted to 5.2 billion euros in April, equivalent to a loss of 284 million euros compared to the same period in 2019. This corresponds to a capital loss of 10% compared to a third of the annual amount provided for in the 2020 budget, with further losses expected over the coming months.
These exceptional circumstances account for the deterioration of the government balance, both compared to the same period in 2019, and compared to the budget voted for 2020, reaching a deficit of 1.6 billion euros at the end of April 2020.
Pierre Gramegna said the Covid-19 crisis represents a real challenge for all European Union countries, with Luxembourg proving to be no exception. From the outset, the government has prioritised its citizens' health, and the economy, putting measures in place rapidly to reduce the spread of the virus and the impact on the country. This was enabled by the "favourable" situation of Luxembourg's finances at the start of the outbreak.
However, Gramegna commented that the numerous measures have had significant repercussions on public finances, with the figures given for the first quarter of 2020 supporting this statement. He went on to say the health crisis and its consequences were expected to linger for the foreseeable future, continuing to affect public finances, and explained the government would continue to monitor developments with a view to finding the right balance with the country's best interests.
