Luxembourg faces ageing, needs tougher budget-OECD

BRUSSELS, May 10 (Reuters) - Luxembourg needs more ambitious budgetary plans given its ageing population and reliance on volatile financial sector revenue, the Organisation for Economic Cooperation and Development said in a report issued on Monday. The OECD said Luxembourg's plan to target a small budgetary surplus was appropriate, but the government did not envisage getting there for at least five years. "These plans should be implemented and consideration given to adopting a more ambitious consolidation path," the OECD said. The OECD acknowledged that there were few immediate pressures, but said large pension liabilities in the future made the long-term budget position far weaker. "Luxembourg is one of very few OECD countries not to have undertaken major (pension) reforms," the report said. "The pension system needs to be reformed now," it continued, adding early retirement schemes should be abolished to raise the effective retirement age, which is currently below 60 years. Luxembourg's situation is not perilous. The OECD report forecast that it would have a budget deficit of 3.8 percent of gross domestic product this year and of 4.9 percent in 2011 after a 0.7 percent shortfall in 2009. In the four-year period to 2008, Luxembourg achieved surpluses averaging close to 2 percent. Its gross debt according to EU criteria was 14.5 percent of GDP in 2009, the report said. Luxembourg's economy, of which the financial sector makes up some 29 percent, contracted by 3.4 percent in 2009 after stagnation in 2008, but is seen growing 2.7 percent this year and 3.1 percent next. In the coming years, growth is anticipated to be stronger than the euro area average, but lower than in the pre-crisis years, the OECD said. Trend growth from 1988 to 2008 was 4.8 percent. Indeed, demand will be held back by weak competitiveness, the necessary fiscal consolidation and sluggish growth of potential output. This reduction in the average growth rate over a sustained period will have major implications for the economy and the sustainability of public finances, the OECD said. Unemployment has increased from 4.2 percent at the end of 2007 to close to 6 percent, its highest recorded level. (Reporting by Philip Blenkinsop; editing by Stephen Nisbet) Keywords: LUXEMBOURG/OECD (philip.blenkinsop@thomsonreuters.com; +32 2 287 6838; Reuters messaging: philip.blenkinsop.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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