LUXEMBOURG

The Grand Duchy of Luxembourg is a representative democracy, in the form of a constitutional monarchy. Under the Constitution of 1868, it has a unicameral Parliament (Chambre des députés) made up of 60 seats, with deputies elected by proportional representation for five-year terms. Voting is compulsory for parliamentary and municipal elections. The executive branch of the government is composed of the Grand Duke, as Head of State, whose powers are conferred by dynastic succession, and by the Government, led by the Prime Minister (formateur), appointed by the Grand Duke with the support of the Chamber of Deputies.

Luxembourg is a unitary state with a single-tier of local government, called municipalities (communes). The 1868 Constitution (Chapter IX on municipalities) and the 1988 Municipal Organisation Act (Loi communale, amended in 2013) constitute the fundamental laws of the division of powers between the state and the municipalities. They define municipalities as autonomous authorities with a territorial basis, and a legal personality with the responsibility of managing their own assets and interests under central government supervision. Given the country’s small territorial size, decentralisation of spending responsibilities and fiscal resources remain limited in Luxembourg.

Each municipality is governed by a municipal council, with councillors elected directly by the inhabitants of the municipality for a six-year term. The municipal council is headed by a mayor (bourgmestre) or a college of mayors, appointed by the Grand Duke. As such, mayors represent both the state and the municipalities.

The central government established a Master Programme for Territorial Planning (PDAT) in 2003, revised in 2018, for national spatial planning. The instrument aims to develop all parts of the territory sustainably and to ensure the co-ordination of municipal, inter-municipal and national policies with an impact on territorial development. Conventions of territorial co-operation between the state and municipalities are implemented under the PDAT to promote inter-municipal strategies and to implement plans of spatial planning, notably for sustainable transport. Territorial visions (Landesplanerische Leitbilder) are being prepared in the three urban areas of the country (the Nordstad, the agglomeration of the Centre and the region of the South) under these state-municipal conventions.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
102 municipalities (communes)
Average municipal size: 6 199 inh.
102			102

OVERALL DESCRIPTION: The Grand Duchy of Luxembourg has a single tier of subnational government composed of 102 municipalities (communes). According to the 1988 Municipal Law, 12 communes have the legal status of towns (stied).

MUNICIPAL LEVEL: Municipalities have existed in Luxembourg since 1789. A first wave of mergers reduced the number of municipalities from 130 to 118 during the 1970s. In 2009, the government adopted a plan for promoting voluntary municipal mergers and local referenda within the framework of the “Integrative Blueprint for Territorial and Administrative Reform in Luxembourg”. This was followed by another plan in 2015 and the entry into force of the last three amalgamation laws, which resulted in a decrease to 102 municipalities as of 1 January 2018. Criteria for mergers included the size of communes (the minimum population was set at 3 000 inhabitants and the minimum surface area at 100 km²), the geomorphologic characteristics, the road/rail links and existing co-operation (intercommunal associations). The central government provides financial support to the process. In 2021, the average size of municipalities remained quite small, smaller than the OECD average (6 223 vs. 10 250 inhabitants) but on par with the EU average (5 960 inhabitants). The median size is 3 145 inhabitants. Around 70% of municipalities have fewer than 5 000 inhabitants and 23.5% have fewer than 2 000 inhabitants. The smallest municipality (Saeul) had 874 inhabitants and the largest municipality (Luxembourg, the capital-city) had 124 509 inhabitants in 2021.

HORIZONTAL COOPERATION: Municipalities can gather in municipal associations (syndicats de communes) in order to streamline the provision of services within their jurisdiction (Law of 23 February 2001). There are around 75 intercommunal associations, active in sectors related to water, wastewater, waste management, sport, education and natural areas. In addition, national policies are implemented at the local level through contracts between municipalities and the state through the Ministry of Spatial Planning, as stated in the conventions for territorial cooperation. This legally non-binding instrument aims to promote inter-municipal and multilevel cooperation and to foster sustainable regional development, primarily regarding infrastructure.

The Syndicate of Luxembourg Towns and Municipalities (SYVICOL) is an association that aims to promote and defend the interests of municipalities at the national, European and international levels. It established regular consultations between its municipalities members and promotes cross-border and inter-municipal co-operation with foreign local authorities.

STATE TERRITORIAL ADMINISTRATION.

Luxembourg also has three districts (Luxembourg, Diekirch and Grevenmacher) and 12 cantons, which were established for territorial and administrative purposes only. Cantons are a level of state administration without own competences, whereas districts are deconcentrated units of state administration. The Grand Duke appoints a District Commissioner (commissaire de district) in each district, as a contact point between the central government and local administrations and a coordinating point between municipalities. Most of the decisions taken by the municipalities (except for the municipality of Luxembourg) are under the district’s direct supervision, and most of their decisions are subject to the central government’s or Grand Duke’s approval.

The 1988 Municipal Government Act (loi communale, as amended in 2013) provides a reference framework for the distribution of responsibilities across levels of government, making a distinction between mandatory responsibilities (including some which are shared with the central government or delegated) and optional responsibilities. The main mandatory tasks for municipalities include pre-school and primary education, spatial planning and urban development, utilities, local roads and traffic regulation, environmental protection, police and security zones and the management of registry offices. Moreover, optional responsibilities may cover several areas such as culture, sports, housing, tourism, etc. District commissioners are responsible for ensuring the compliance of municipal regulation with national laws, and for the maintenance of public order and safety.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Municipal level
1. General public services (administration)	Internal administration; Management of registry office
2. Public order and safety	Emergency services; Police (shared with the State); Fire and rescue services
3. Economic affairs / transports	Local roads; Traffic regulation; Public transport (optional); Local economic development and tourism (optional)
4. Environment protection	Waste management and sanitation
5. Housing and community amenities	Spatial planning; Urban and land development; Water supply; Gas and electricity supplies (optional); Housing (optional); Cemeteries
6. Health	Public hygiene and health; Management of clinics and hospitals; Care homes (optional)
7. Culture & Recreation	Sport and music education (optional); Cultural affairs (optional)
8. Education	Pre-school and primary education (infrastructure and operating costs); Buildings and school organisation
9. Social Welfare	Social welfare; Kindergartens; Child reception facilities; Welfare activities; Care of the elderly (optional)

Scope of fiscal data: municipalities, social offices and inter-communal associations.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: Provisions concerning municipal finance are specified in the constitution (article 99) and the Municipal Organisation Act. subnational governments are entitled to adequate financial resources of their own, that shall be comparable with the responsibilities that are entrusted to them by law. They may spend those resources freely. In 2017, the local fiscal system was reformed through the Law of 14 December 2016, which introduced a new equalisation grant, the Global Subsidy Fund for Municipalities (Fonds de Dotation Globale des Communes, FDGC), to replace the Communal Fund for Financial Grants (Fonds Communal de Dotation Financière, FCDF). The objective of the reform was to improve the stability of local finances and to reduce the disparities between municipalities by re-adjusting the equalisation criteria.

Subnational government expenditure by economic classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	5 863	5.0%	10.5%	100.0%
Inc. current expenditure	3 749	3.2%	7.7%	64.0%
Compensation of employees	2 103	1.8%	16.4%	35.9%
Intermediate consumption	1 237	1.0%	24.0%	21.1%
Social expenditure	76	0.1%	0.3%	1.3%
Subsidies and current transfers	318	0.3%	5.5%	5.4%
Financial charges	7	0.0%	2.7%	0.1%
Others	7	0.0%	74.1%	0.1%
Incl. capital expenditure	2 114	1.8%	29.1%	36.1%
Capital transfers	45	0.0%	3.1%	0.8%
Direct investment (or GFCF)	2 069	1.8%	35.6%	35.3%

EXPENDITURE: Luxembourg belongs to the OECD countries with a centralised governance. Spending decentralisation is limited: the share of subnational governments in GDP and total public spending is low (5.0% and 10.5% respectively in 2020), compared to the OECD average for unitary countries (12.7% of GDP and 27.5% of public expenditure) and the EU27 average (18.3% of GDP and 34.3% of public expenditure). Local spending varies greatly across municipalities due to differences in size and economic activity. Staff expenditure accounts for one-third of subnational government expenditure and only 16.4% of public staff expenditure (vs 41.4% in OECD unitary countries and 53.6% in the EU27). Overall, current expenditure accounted for only 64.0% of expenditure, reflecting the fact that municipalities have a limited scope of responsibilities, and focus therefore on capital expenditure, financing public infrastructure and utilities.

DIRECT INVESTMENT: A significant part of total subnational government expenditure (35.3% of subnational government expenditure in 2020) is dedicated to direct investment, which is significantly above the OECD and EU27 average (14.8% of OECD unitary countries and 9.9% in the EU27).

Municipalities are key public investors: subnational government investment stood at 1.8% of GDP in 2020 (1.9% on average in the OECD unitary countries and 1.8% in the EU27 in 2016). subnational governments accounted for 35.6% of public investment, which is below the OECD average for unitary countries (48.9%) and the EU27 average (54.4%). Environmental protection now consumes the bulk of subnational government capital expenditure (20.2%), followed by economic affairs and transport (16.4%), particularly road infrastructure, and culture, recreation and religion (15.6%). At the subnational level in Luxembourg, PPPs are seldom used, while they are widely used at the national level.

Subnational government expenditure by functional classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	5 863	5.0%	-	100.0%
1. General public services	1 318	1.1%	15.8%	22.5%
2. Defence	0	0.0%	0.0%	0.0%
3. Security and public order	133	0.1%	8.3%	2.3%
4. Economic affairs/transports	914	0.8%	13.1%	15.6%
5. Environmental protection	814	0.7%	63.1%	13.9%
6. Housing and community amenities	275	0.2%	34.6%	4.7%
7. Health	35	0.0%	0.5%	0.6%
8. Recreation, culture and religion	843	0.7%	52.0%	14.4%
9. Education	676	0.6%	11.4%	11.5%
10. Social protection	856	0.7%	2.5%	14.6%

In addition to general public services expenditure, which accounts for close to one-quarter of subnational government expenditure, other areas of subnational government spending are quite balanced between economic affairs/transports, social protection, recreation and culture, and environmental protection accounted for around 15%, while education accounted for 11.5% in 2019. Broadly speaking, except for general services, subnational governments in Luxembourg have fewer responsibilities in other sectors than the average of OECD countries. The share of education in municipal expenditure has decreased from 24% in 2008 to 11.5% in 2019 following a law that removed the responsibility for teachers’ wages from municipalities to the central government, in exchange for the devolution of infrastructure and operating costs.

Subnational government revenue by category
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	5 940	5.0%	11.5%	100.0%
Tax revenue	1 918	1.6%	6.0%	32.3%
Grants and subsidies	3 097	2.6%	-	52.1%
Tariffs and fees	855	0.7%	-	14.4%
Income from assets	63	0.1%	-	1.1%
Other revenues	7	0.0%	-	0.1%

OVERALL DESCRIPTION: As for expenditure, subnational government revenue accounts for a relatively low share of total public revenue and of GDP, as compared to other OECD and EU countries. Municipalities rely mainly on grants and subsidies, which account for more than half of their revenue, a level close to the average of OECD unitary countries (53.3%) and well above the EU27 average (40.1%). Taxes, tariffs, fees, and property income accounted for another half of revenue with a significant weight of tariffs and fees by international standards (14.4% vs. 9.1% in OECD unitary countries and 10.3% in EUR27).

TAX REVENUE: The share of tax revenue in total local revenue, in GDP and in public tax revenue in Luxembourg is relatively low, below the OECD average for unitary countries (35.4% of subnational government revenue, 4.5% of GDP and 18.7% of public tax and) as well as the EU27 average (respectively 40.1%, 7.2% and 27.1%) in 2020.

All municipal taxes are own-source. The most important tax by far is the municipal trade tax (impôt commercial communal – ICC). Established in 1936, the ICC represented 93.2% of municipal tax revenue in 2020, 31.5% of municipal revenue and 1.5% of GDP. This tax is levied on the profits of commercial companies only. Each municipality determines a rate - approved by the central government, which is applied to the tax base. Tax collection is made by the central government and receipts are not redistributed in full directly: a horizontal equalisation mechanism redistributes ICC receipts among municipalities according to different criteria. The contribution of a municipality to this "Participation fund" used to range between 42% and 67% of ICC revenue located on its territory, with various intermediate differences. Since the reform of local finances of 2017, and the creation of the FDGC, the municipalities are only able to keep up to 35% of the ICC receipts, within the limit that this should not exceed more than 35% of the national average per capita. The rest goes to the equalisation fund.

In addition to the ICC, municipalities also receive revenue from property taxes (impôt foncier) levied on land and buildings. It accounted for 3.8% of local tax revenue, 1.2% of municipal revenue and 0.1% of GDP in 2020, well below the OECD average (1.0% of GDP in 2020). As for the ICC, the property tax rate is set by the municipal council but submitted for the approval of the Ministry of Interior. Other minor taxes include a gambling tax, a tourist tax, an entertainment tax, a dog tax, and a recently introduced local tax on undeveloped urban land that has been rarely used. A bill to reform the property tax is planned for end-2022. The property tax reform is related to the revision of the new generation General Development Plans (Plans d’Aménagement Généraux, PAG) and will aim to reduce land speculation and address the housing shortage. The reform will replace and simplify the current system of the municipal tax on unoccupied property or property not allocated for the contrcution of certain buildings.

GRANTS AND SUBSIDIES: Until 2016, the main intergovernmental transfer was the Communal Fund for Financial Grants (Fonds Communal de Dotation Financière, FCDF). Established in 1987, it represented 70% of all transfers from the central government to municipalities. Annual funding of the FCDF was made up of 18% of PIT receipts, 10% of VAT receipts, 20% of the vehicle tax, as well as an additional lump sum set annually by legislation. The Law of 14 December 2016 created the Global Subsidy Fund that is dedicated to Municipalities (Fonds de Dotation Globale des Communes, FDGC), which replaced the FCDF.

Since 2017, the allocation of the FDGC to municipalities is done primarily according to calculations based on criteria such as the population (82%), the number of salaried jobs (3%), socio-economical indicators (9-10%), concentration of social housing (0-1%) and surface area (5%), and to a lump sum amount. The municipal trade tax (ICC) contribution to this Fund was also increased since ICC receipts are a source of inequality across municipalities.

Other current and investment grants are all earmarked, such as state contributions for the operating of childcare facilities, subsidies for public transport provided by the communes and groupings of communes, subsidies for cultural events, music teaching, etc. In 2020, capital grants represented 12.6% of total grants and 6.6% of subnational government revenue. The Master Programme for Territorial Planning includes subsidies for infrastructure investments of municipalities (conditioned to the criteria that at least two municipalities must participate) and subsidies for regional economic activity zones.

OTHER REVENUE: The share of tariffs and fees in local governments’ revenue is very high, well above the OECD average for unitary countries (9.1% in 2020) and the EU27 average (10.3%). Municipalities receive user charges for services such as water distribution, provision of gas and electricity, disposal of household waste, etc. Changes in tariffs must be approved by the Ministry of Interior.

Property revenue (interests, dividend, assets sales, etc.) stands for a small percentage of local revenues (1.1% as the OECD average for unitary countries).

Subnational government fiscal rules and debt
	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt	1 766	1.5%	4.6%	100.0%	-
Financial debt	1 624	1.4%	5.3%	92.0%	100.0%
Currency and deposits	0	-	-	0.0%	0.0%
Bonds / debt securities	0	-	-	0.0%	0.0%
Loans	1 624	-	-	92.0%	100.0%
Insurance pensions	0	-	-	0.0%	-
Other accounts payable	142	-	-	8.0%	-

FISCAL RULES: Accounting rules are laid down in the Art. 107 of the Constitution and in the communal law (as amended in 2013). Municipal budgets are drafted by the municipal councils, before being approved by the Minister of Interior. Municipalities are not prohibited from running an operating deficit according to the Communal Law. A supervision body of the Ministry of Interior (Service de contrôle de la comptabilité communale) is in charge of legal and financial audits for local governments.

DEBT: Municipal borrowing is under the supervision of the Ministry of Interior and is only allowed if there is no other financing option and if regular reimbursement of annual accruals is guaranteed. Loans are only permitted to fund capital expenditure (“Golden Rule”). Any loans above EUR 50 000 must be approved by the Ministry of the Interior. Issuing bonds is allowed, but rarely used. In May 2020, the central government introduced several mechanisms to limit municipal budget deficits and compensate their spending needs, such as the use of rainy day funds, the activation of the local funds for conjonctural equalisation (fonds communal de péréquation conjoncturelle, FCPC) and borrowing.

The shares of local debt in GDP and public debt are much lower than the averages of OECD unitary countries (respectively 14.5% of GDP and 10.5% of public debt in 2020), as well as the EU27 average (13.9% of GDP and 15.4% of public debt). Outstanding debt is made up of financial debt (“Maastricht debt” for 92.0% and other accounts payable for 8.0). Financial debt is composed exclusively of loans. The Municipality of Luxembourg is the only municipality to have issued debt securities in the past (2014).

TERRITORIAL MANAGEMENT OF THE CRISIS: The Ministry of the Interior and SYVICOL were responsible for the coordination of measures to deal with the pandemic at the national level (e.g. the distribution of EUR 3.5 million of masks). SYVICOL played a key role between the central government and municipalities by collecting plans established by municipalities. A crisis unit (cellule de crise pandémie) was created under the Ministry of Health to prepare the gradual transition from lockdown strategy to additional measures. A national electronic platform was also developed in January 2021 by the Ministry of Digitalisation to centralise information about public enquiry procedures, to facilitate citizens‘ participation in public enquiry projects and to dematerialise administrative procedures. Municipal procedures have been gradually integrated to the platform.

At the local level, municipalities established „security and continuity plan“ (Plan de sécurité et de continuité). The plans aimed to distinguish essential from non-essential services and to determine how to provide continued public services (e.g. public transport, energy, water supply). The City of Luxembourg was the first to develop a continuity plan. Municipalities also implemented plans to protect vulnerable households, which comprised grocery and meal delivery services, medication delivery services and helplines for the elderly, isolated and vulenrable people.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: The central government established several measures to reduce the adverse impact of the pandemic on the economy. It notably implemented tax and social security charge deferrals to strengthen the liquidity of companies and self-employed persons. Companies that made a commercial profit, an agricultural and forestry profit or a profit from a liberal profession with liquidity problems had the possibility to request the cancellation of their quarterly advances from the corporte income tax (CIT) and the municipal lbusiness tax for the first and second quarter of 2020. They also had the possilbity to defer payment deadlines for the CIT, municipal commercial tax and wealth tax.

No measure to compensate municipalities for their loss of revenue was adopted as the central government considered that they had the capacity to pay their staff, , rent, other bills and to honour their debt obligations. However, municipalities benefit from mechanisms to prevent their insolvency in Luxembourg (e.g. the use of rainy day funds, the activation of the local conjonctural funds FCPC and borrowing).

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The pandemic strongly affected local economy, with limited disparities given the small size of the country. The rise of unemployement in 2020 was the highest in Vianden, Luxembourg and Wiltz cantons and the lowest in Echternach canton.

Municipal revenue dropped by 7.3% in 2020 compared to 2019, mostly driven by the fall in tax revenue due to tax deferrals and cancellation (-16.0%) and of tariffs and fees (-10.4%). By contrast, grants and subsidies remained almost stable, which did not compensate for the loss of tax revenue. On the expenditure side, the increase in spending was limited and mostly underpinned by capital spending. Economic affairs and environemental protection were the categories of spending that increased the most between 2019 and 2020 (9.3% and 8.7% respectively), while spending in public order and safety decreased by a sharp 20.8%. Given the robust position of municipalities in Luxembourg, their debt remained almost stable in 2020.

ECONOMIC AND SOCIAL STIMULUS PLANS: The central government established a national reform programme to benefit from the EUR 93 million grants of the EU Recovery and Resilience Facility (RRF) established under NextGenerationEU. This fund aims to support the implementation of investment and structural reforms of the national recovery and resilience plan over 2021-2026, which include all levels of governments. The plan focuses on climate projects (61% of the financing), which comprises the supply of renewable energy in Neischmelz and the implementation of the „Naturpakt“ scheme to encourage municipalities to protect the environment and biodiversity. 32% of the financing will be devoted to projects to promoting digital transformation in the country, notably the digitalisation of public services and procedures (e.g. in healthcare).

Additionally, the government renewed the design of the Climate Pact 2.0 in 2021 to orientate it towards more quantitative results. The Climate Pact is a cooperative agreement between the central govenrment and municipalities, created in 2012, with the aim to reduce GHG emissions and energy use and to stimulate investment at the local level. Each municipality member commits to hire a climate adviser and to implement an energy management system as well as 64 measures listed (from spatial planning, municipal buildings, resource management, mobility and internal organisation to cooperation).