Chambre de Commerce
The Chamber of Commerce welcomes the draft law implementing most of the measures of the tripartite agreement of 31 March. It is concerned about the impact of the current supply crisis, triggered by inflation, the scarcity of certain products and components and supply problems. It is necessary to safeguard the production and investment capacity of companies and to avoid stimulating demand too unilaterally through a generalised strengthening of purchasing power, which can lead to an increase in inflationary pressures and deteriorating public finances. The aim is to act in a targeted way to support households most affected by the current crises.
The Chamber of Commerce has just published its opinion on the draft law implementing a first package of measures provided for in the ‘Tripartite Agreement’ signed on 31 March 2022 between the Government, the UEL (Union des Entreprises luxembourgeoises) and the LCGB (Lëtzebuerger Chrëschtleche Gewerkschaftsbond) and CGFP (Confédération Générale de la Fonction Publique) trade unions [1].
In general, the Chamber of Commerce welcomes the measures proposed in this draft law and fully subscribes to its objective of mitigating via a package of targeted measures, called Solidaritéitspak, the effects of inflationary pressures on companies and households. In particular, it welcomes the postponement of the next index increments, which allows companies to maintain predictability in salary developments over a two-year period. In its view, this is essential in a macro-economic and economic context that has been severely impacted by a combination of unfavourable circumstances and developments.
The economic momentum driven by the sustained recovery in demand from mid-2020 onwards and the post-Covid recovery in 2021 have already led to disruptions in some supply chains and shortages of materials, resulting in the return of inflation in most economies. The Russian-Ukrainian conflict has only accentuated this upward trend in prices, due in particular to soaring energy costs and the scarcity of certain raw materials. Added to this is the additional pressure on global supply chains caused by the severe lockdowns in China.
These successive economic shocks are disrupting all economies and the macroeconomic outlook is being disrupted and revised downwards. In Luxembourg, growth, while remaining positive, according to the latest STATEC forecasts will only be +1.4% in 2022 (instead of the initial forecast of +3.5%), while inflation will reach +5.8% [2] in 2022 and +2.8% in 2023.
The unpredictable and perilous economic and geopolitical situation is worrying and putting pressure on Luxembourg companies
Soaring prices, as well as geopolitical tensions since the beginning of 2022, are weighing heavily on Luxembourg companies, some of which are still vulnerable as a result of the health crisis. The pressure on energy market prices is likely to be further accentuated by the recent decision to immediately ban more than two thirds of Russian oil imports and to put an end to 90% of them by the end of the year. Added to this is the pressure from rising costs and salaries with indexation increments applied in October 2021 and April 2022, a double indexation that induces a certain ‘self-igniting’ effect of inflation on the prices of services [3].
The concern of businesses in the face of these adverse developments has been confirmed by the results of the Chamber of Commerce's latest Barometer of the Economy (published in French as Baromètre de l’Economie) for the first quarter of 2022 [4], which confirms the decline of business leaders' confidence in the national economy and in their activities. The latter is back to the low level recorded at the height of the health crisis. The profitability of companies is also under intense pressure, as illustrated in particular by the last place occupied by Luxembourg out of the 27 Member States of the European Union in the latest competitiveness scoreboard published by the Ministry of the Economy [5]. A further fall in profitability is also expected by 29% of entrepreneurs in the next six months (compared to 16% in the last quarter). This threshold is also close to what was observed during the health crisis.
Even if companies have acted responsibly, by not passing on the full increase in costs, particularly energy costs, in their sales prices, which would have been to the detriment of consumers' purchasing power and would have further increased inflationary pressures, the Chamber of Commerce warns that new price rises for certain products and services could occur in the next six months, as companies' run out of leveraging power.
Deferral of index increments essential in a context of insecurity and rampant inflation
In this highly uncertain economic and geopolitical climate, the deferral of the index increments, as well as the 12-month delay between each activated increment until 1 April 2024, are two provisions that the Chamber of Commerce expressly welcomes, as they should provide some breathing space and predictability for businesses in terms of rising salary costs.
The Chamber of Commerce does not exclude, however, that Luxembourg's inflation forecasts could be further adjusted upwards in the coming months, as has already been the case in recent weeks. Thus, an additional index increment could most likely be implemented before 1 April 2024, in an even more pessimistic scenario than the latest STATEC scenario. This would imply the application of two (or even three) cumulative index increments on 1 April 2024, i.e. a theoretical revaluation of 5% (or even 7.5%) of all salaries, pensions and other allowances, on that date.
Beyond the fact that the application of an indexation increase of 5% on 1 April 2024 would cost nearly 1.82 billion euros [6] more to companies and the State in terms of the remuneration of employees and public servants, it would have a strong impact on companies and would risk creating an inflationary spiral not encountered for decades.
An increase in labour costs of 5% or even 7.5% would have an adverse impact on investment, recruitment and tax revenues
While inflation of around 2% [7] (which equates to an indexation of 2.5% every 15 months) can possibly be absorbed by companies through the adjustment of their margins and/or partial repercussions on their sales prices (although many of them are still in difficulties due to the health crisis and many sectors are exposed to cross-border competition and have a limited margin to manoeuvre in terms of sales prices), a shock of salary costs of 5% (and possibly 7.5%) would be much less feasible. Many companies would thus be forced, if they can, to transfer, in a more substantial way, this increase in costs to their sales prices, being unable to absorb this shock through a new drop in their margins, with all the risks that this entails for their international competitiveness.
If companies achieve lower margins, they are likely to suspend or even cancel some of their investments. As the Chamber of Commerce's Barometer of the Economy for the first semester of 2022 shows, already today 20% of companies are planning to make no investments in 2022 and 2023. With a shock to labour costs of 5%, this rate could rise further, given that a quarter of companies are already planning to reduce their investments in the next six months. The drop in recruitment [8], the threat to the sustainability of companies and the reduction in innovation and development projects in new markets resulting from this drop could trigger a truly vicious circle, eroding the growth potential of the Luxembourg economy, even though growth is the fuel for sustainable financing of the social cohesion and protection model.
In addition, there may be an impact on state revenue if companies must continue to erode their margins and financial power. As a consequence, corporate profits will fall, and therefore state revenue from corporate taxes will decrease. With declining public revenue, the State would risk in the medium and long term not being able to make all the investments necessary for its development, which are essential in the current context where the environmental and energy transitions will have to strengthen the country's independence and resilience to external shocks.
The Chamber of Commerce believes that Luxembourg could enter a new 'home-made' inflationary spiral if a shock of several cumulative index increments happen at a set time. A salary shock of this magnitude has never occurred in Luxembourg before, and it is complex to understand with certainty the potential impact.
Consider now a solution to mitigate the potential consequences of the simultaneous application of several index increments
The Chamber of Commerce calls for a forthcoming review to link at least partially the indexation of salaries to the improvement of productivity, because the current disconnect between the evolution of salaries and productivity presents a major risk of loss of competitiveness of the Luxembourg economy vis-à-vis its European partners, and in particular the three neighbouring countries. It is therefore urgent to reflect now on an adequate solution in view of the potential consequences of the application of several index increments simultaneously.
The Chamber of Commerce recalls in this context that the modulation of the index between 2012 and 2014 had been voted with a view to neutralising the additional index increments. A ‘reset’ of the ‘inflation counter’ used to trigger the next indexation increments was thus agreed at that time.
Finally, the Chamber of Commerce recalls that the Tripartite Agreement provides for an evaluation or rendez-vous clause according to which ‘[i]f the economic and social situation worsens during the year 2023 or an additional index increment is triggered in 2023, the Government undertakes to convene a new meeting of the Tripartite Coordination Committee.’ According to the understanding of the Chamber of Commerce, no new meeting of the Tripartite Coordination Committee should therefore be convened in 2022, which it supports. The next tripartite coordination meeting should therefore take place at the end of 2023. The economic situation will then have to be reassessed and the state of the country's public finances analysed at that time.
Finally, the opinion suggests that currently many sectors are experiencing supply shocks, especially in view of supply problems. Thus, any further massive injection of salaries, or even non-selective compensation, could fuel inflationary trends rather than mitigate them and thus transform the current supply crisis into a demand crisis, which would inevitably increase inflationary pressure.
New aid for companies
In view of the seriousness of the current situation, the Chamber of Commerce welcomes the decision of the Government to grant new aid to companies particularly affected by the rise in energy prices and by the costs linked to the energy transition and the decarbonisation of their activities. Indeed, the Government has committed itself in the tripartite agreement, ‘to analyse the possibility of opening the scope of application to the road haulage sector, the construction sector and the artisanal food sector, which are also facing a substantial increase in their operational costs due to the rise in fuel prices, and which are incurring a loss’. The Chamber of Commerce invites the Government to closely monitor the situation in order to widen the scope of the new business aid scheme, if necessary, in order to preserve the production apparatus and the investment capacity of companies to combat the current supply crisis.
Measures to promote purchasing power
Concerning the introduction of an energy tax credit (ETC), by which the Government commits to introducing a new tax credit, socially targeted, to compensate for the loss of purchasing power for the lowest salaries due to the shift of the index increment planned for August 2022, as well as the increase of the CO2 tax on the 1st of January 2022 and 2023, respectively, the Chamber of Commerce welcomes the fact that it takes into account the level of income of the beneficiaries, and thus targets more particularly the lowest incomes, while being on a sliding scale, contrary to the indexation which looks more like a watering can proportional to the salary. It believes that targeting the preservation of purchasing power for those households most affected by inflation should again be at the heart of future tripartite agreements looking at modulating indexation. Finally, the Chamber of Commerce welcomes the inclusion of the self-employed as beneficiaries of the ETC, especially as the at-risk-of-poverty rate of the self-employed is twice as high as that of salaried employees.
Unlike most of the other provisions in the draft, the creation of a sliding scale of family allowances (EMAF) (échelle mobile des allocations familiales, EMAF) is not a direct result of the Tripartite Agreement, but is proposed as a continuation of the re-indexation of family allowances from 1 October 2021. While the creation of such a mechanism has the merit of separating the sliding scale mechanisms, which makes sense because the levels of salaries and family allowances deal with dissimilar economic and social issues, the Chamber of Commerce believes that compensation for the loss of purchasing power of families should have taken another form, and in particular should have been targeted not in a non-selective way to all households with children, but only the most modest ones, as is the case for the ETC. Indeed, in the absence of any selectivity, the automatic increase in family allowances does not specifically support the households most affected by the crisis. The Chamber of Commerce therefore recommends that the EMAF include a ceiling with a sliding scale above a certain income level.
While the Chamber of Commerce can also support the increase in State financial aid for higher education as of the academic year 2022/2023, because of the importance for students to have, in this difficult economic context, the financial means to allow them to succeed in their studies and to make the transition to their professional life under the best conditions, it would however have wished that the draft law had gone even further in terms of solidarity with students receiving grants and believes that an additional effort could have been made for students, specifically for the social grant.
Read the full opinion of the Chamber of Commerce.
[1] Link to the draft law on the website of the Chamber of Deputies, published in French.
[2] Main scenario of STATEC. Link to STATEC’s Statnews No. 20 from 4 May 2021, published in French.
[3] ‘In Luxembourg, inflation in services (+4.4% over one year in April) has already been fuelled in recent months by, among other things, the two index increments paid in October 2021 and April 2022’, STATEC’s Statnews No. 20 from 4 May 2022. Original published in French.
[4] Link to Barometer of the Economy - S1 2022 - Theme: Inflation and energy, published in French on 17 May 2022, published in French.
[5] Link to the ‘Competitiveness and Resilience Report 2021: A highly resistant economy in Luxembourg’.
[6] By way of comparison, the application of a single indexation increment on 1 April 2024, as currently planned, i.e. an indexation of 2.5%, represents a cost of almost 910 million euros, and a cumulative indexation increment of 7.5% would cost 2,728.86 million euros.
For information, the application of the indexation increment on 1 April 2023 will cost over 887.43 million euros.
Estimates made by the Chamber of Commerce on the basis of 2021 employee remuneration data in the national accounts, taking into account the indexation of April 2022 and that which will be applied in April 2023.
[7] The European Central Bank (ECB) sets a 2% inflation target at the European level.
[8] The Barometer of the Economy for the first semester of 2022 shows that 10% of companies expect to reduce their workforce in the next six months.