Tax revenues in Luxembourg in 2022 were boosted by the effects of high inflation on VAT revenues, household taxes and social contributions

February 6, 2023

After recovering 16% in 2021, tax revenues increased by 7.2% in 2022, with more than EUR 21 billion collected. The inflationary surge boosted VAT receipts (+12% between 2021 and 2022), but also household taxes (+10%) and social security contributions (+8% over one year at the end of the third quarter)2. Wage growth – with two index brackets in October 2021 and April 2022 – and employment growth (+3.6% year-on-year at the end of the third quarter) pushed up taxes on wages and salaries by 11% year-onyear. Rising prices and wages made up 60% of the increase in household taxes (+4.3% in real terms) and VAT revenues (+5.6% in real terms). Total tax receipts adjusted for price changes (deflated by the sliding wage scale) thus rose by only 1.4% year-on-year.

Corporate taxes were almost flat (+0.5% year-on-year) due to a sharp decrease in tax balances over previous years (-37% year-onyear at the end of October) while advances – which are more dependent on current economic activity – increased by 11%. The decrease in balances is partly related to the introduction of automatic taxation (mandatory from the 2017 tax year).

The subscription tax – which is levied on assets under management of undertakings for collective investment and specialised investment funds – was affected by the stock market downturn in 2022. The stabilisation of revenue collected from this tax (+0.04%in 2022 after +22% in 2021) masks strong volatility over the year.

Receipts increased in the first quarter (+3.4% quarter-on-quarter) and then fell over the last three quarters due to declining fund asset valuations (-6% in Q2, -7% in Q3 and -2% in Q4).

Lower revenue growth in 2023

Tax revenue growth is expected to slowdown in 2023 (+5.8% yearon-year) according to the latest STATEC forecast4. The slowdown in
inflation, the lower VAT rates under the second tripartite agreement and a deteriorating outlook for growth are set to weigh on public
revenues.

The rate cuts, combined with the expected slowdown in growth, inflation and per capita consumption, will put a particular strain on
VAT. Household taxes and social contributions (+10.7% and +8% in 2023 respectively) should continue to be boosted by scheduled
index brackets but could be affected by weaker employment growth. The economic slowdown should also limit corporate tax receipts (+2.5% in 2023, compared to average growth of 5% per year between 2006 and 2021)

Business survey results improved in the euro area as a whole in the final months of 2022. After six consecutive months of decline, the
composite purchasing managers’ index (PMI survey) rose again in November and December, a trend that was noticeable in both industry
and services. However, it remains below 50 points, indicating a further (but less pronounced) contraction in activity. These results point to a decline of 0.2% in euro-area GDP over a quarter in the fourth quarter. A recession – if the GDP decline further in Q1 2023 – remains likely but the extent of this may be less pronounced than previously expected. The European Commission’s Economic Sentiment Indicator (ESI) has also been recovering since November at euro-area level, driven by more optimistic opinions across all economic sectors as well as among consumers. The improvement is not as marked in the Luxembourg surveys, particularly for the industrial and construction
sectors.

Source: STATEC Luxembourg
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