Belgium

   

Economic Policies

#23
Key Findings
Hampered by indebtedness and structural weaknesses, Belgium falls into the middle ranks internationally in terms of economic policies (rank 23). Its score in this area has increased by 0.1 point since 2014.

Efforts to reduce public debt levels that remain above 100% of GDP have led to cuts in public investments, health care and pension spending, and sluggish education and environmental improvements. The deficit has fallen below 1%. However, growth has been sluggish, productivity has not improved, and labor-market mismatches are widening.

The country’s employment rate is well below the EU average. Efforts to encourage labor-market partition by increasing the retirement age, reducing labor costs and reducing unemployment benefits have had little impact.

Labor income is strongly taxed, while the share of revenues from indirect taxes is the EU’s second-lowest. Recent tax reforms have cut rates for firms and low-wage earners. While public spending as a share of GDP is high by euro-area standards, public infrastructure and higher education are underfunded.

Economy

#27

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
6
Located at the heart of the euro zone and the European Union, Belgium is a small, open and competitive economy. Its performance depends as much on the actions of its federal and local governments as on the general economic climate of the euro zone.

The high degree of exposure to global competition forces governments to keep an eye on the country’s international competitiveness, with mixed results. Belgium’s competitiveness eroded over the last decade, with production costs and market distortions progressively worsening in comparison with those of immediate neighbors. To compensate, the country offered increasingly generous tax deals to multinational enterprises. As these have recently been criticized as illegal state aid, the Michel government initiated a set of structural and tax reforms meant to 1) reduce the inflation gap (focusing more on wage-cost cuts than on product-market structural reforms), 2) partially remedy the labor-tax distortions that contribute to the competitiveness handicap and 3) reduce corporate taxation across the board – this latter policy being a recent development not initially planned by the government.

These efforts essentially represent the positive side of current efforts. On the negative side: public infrastructure investment remains low, as much as a full GDP point below levels in France and the Netherlands (see the World Economic Forum’s Global Competitiveness Report and the OECD’s economic survey of Belgium); employment rates remain consistently low (see the “Labor Markets” criterion); and the higher-education sector remains chronically underfunded, meaning that Belgium’s previously strong position in terms of worker skills is eroding.

Another major challenge hindering international competitiveness is the relatively low level of entrepreneurship, which hinders the market entry of young, innovative firms. In addition, the government is unusually right-wing for a country with a tradition of middle-of-the-road coalition governments. The previous government’s heavy-handed reform style has provoked substantial opposition and political unrest (e.g., demonstrations and strikes) that has done little to contribute to the investment climate. Last but not least, since December 2018, the federal government has in effect become a “caretaker” executive, preventing it to from acting proactively to improve the country’s international competitiveness.

Citations:
http://www.plan.be/press/communique-1706-fr-la+croissance+de+l+economie+belge+s+etablirait+a+1+7+pct+tant+en+2017+qu+en+2018

http://www.oecd.org/eco/growth/Going-for-Growth-Belgium-2017.pdf
http://www.oecd.org/belgium/economic-survey-belgium.htm

http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32017H0809(01)&from=EN

Schwab, Klaus and Sala-i-Marti, Xavier (2017). The Global Competitiveness Report 2017–2018. World Economic Forum editor.

Productivity growth is slowing: http://www.oecd.org/global-forum-productivity/country-profiles/belgium.htm

Reforms and economic perspective: http://www.plan.be/admin/uploaded/201606211317350.FOR_MIDTERM_1621_11276_F.pdf

Too little entrepreneurship: http://www.plan.be/admin/uploaded/201606240814370.WP_1606.pdf

Labor Markets

#26

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
6
At the onset of the financial crisis, unemployment rates in Belgium did not increase as significantly as in the rest of the euro zone. According to Eurostat data, the employment rate in the euro zone dipped by 3.5 percentage points between 2008 and 2013, but only by 0.8 percentage points in Belgium, reflecting the effectiveness of the Belgian social safety net.

However, this happened against a background of structurally low employment in Belgium (68% in 2008, 67.2% in 2013 and 69.7% in 2018), well below the European average of 71% in 2007 and 73.2% 2018. According to Eurostat’s employment rate statistics, the country’s labor-market participation rate is actually falling further behind neighboring Germany (Belgium’s employment rate was 5 points below Germany’s in 2007 and a full 10 points in 2018) and the Netherlands (respectively 7.8 and 9.5 points).

The government attempted to encourage labor market participation by increasing the retirement age and reducing unemployment benefits, and took some steps to reduce labor costs. However, this has not addressed the structural mismatch between the demand and supply of skills. According to a study by Bodart, Dejemeppe and Fontenay (2019), these actions had little actual impact on employment dynamics.

In the European Semester’s diagnosis several key issues are listed, such as: “Important financial disincentives to take up employment remain. […] Belgium remains the only Member State in which unemployment benefits are not limited in time […]. There are financial disincentives for beneficiaries of sickness and disability schemes and second earners to take up full-time employment. […]. Moreover, coordination problems may arise due to the split of responsibilities for the social protection between the federal, regional and local levels. […] The decline in educational performance and the existence of significant disparities in the education system […].”

Citations:
Council of Europe’s recommendations: https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1560258016104&uri=CELEX:52019DC0501
Bodart, Dejemeppe, and Fontenay (2019) “Évolution de l’emploi en Belgique : tentons d’y voir plus clair,” Regards Economiques No 146.
OECD’s analysis:
https://read.oecd-ilibrary.org/taxation/taxing-wages-2018_tax_wages-2018-en#page199

Taxes

#24

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
6
The deficit of the Belgian government remains well contained, and dropped from 3.1% of GDP in 2014 to 0.7% in 2018. Long-term sustainability is, however, less obvious. First, because the deficit reductions were partly due to positive conjunctural factors, such as EU economic growth and negative interest rates. Second, because there remain unresolved issues with pension and healthcare entitlements.

Regarding equity and competitiveness, by OECD standards, Belgium’s taxes are the third highest in the European Union (European Commission) and its structure is too narrowly concentrated on labor income. The share of revenue coming from indirect taxes is the second lowest in the European Union. Outside excise taxes on fuel, environmental taxation is also extremely limited.

The Council of Europe’s June 2019 recommendations remain cautious regarding Belgium’s fiscal sustainability. While it sees some of the recent tax reforms as potentially growth enhancing (the drop in the tax rate for firms and for low wage earners, reduced deductibility for company cars, and planned increase in car taxation, among other reforms), it also states that “The composition and efficiency of public spending can be improved in order to create space for more public investment. In spite of a recent decrease, total expenditure as a share of GDP in Belgium remains among the highest in the euro area. […] Given the high level of public expenditure, the outcomes of certain policies and the quality of certain public services raises questions of cost efficiency. Spending reviews and policy evaluations can help Belgium prioritize and improve the efficiency of public expenditure. Furthermore, spending reviews could be used to assess the efficiency of the indirect public support for business Research and Development.”

Citations:
https://www.plan.be/admin/uploaded/201906181138450.FOR_MIDTERM_1924_11923_F.pdf
Council of Europe’s recommendations: https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1560258016104&uri=CELEX:52019DC0501
European Commission, DG TAX UD (2019) “Taxation Trends in the European Union”
https://www.lecho.be/actualite/archive/la-flandre-moins-ambitieuse-ou-plus-realiste/10168960
https://www.lecho.be/economie-politique/belgique/economie/comment-soigner-le-budget-belge/10160584
https://www.bdo.be/fr-be/actualites/2019/reforme-de-l-impot-des-societes-point-sur-les-mesures-en-vigueur-et-apercu-des-mesures-a-venir
https://www.rtbf.be/info/belgique/detail_reformes-fiscales-et-hausses-des-salaires-dans-les-programmes-a-qui-cela-profiterait-il-vraiment?id=10204436

Budgets

#35

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
6
Belgium’s public debt, because it is currently above 100% of GDP, is in the preventive arm of the Stability and Growth Pact, and subject to the debt rule of the European Semester. This requires that the government prioritize public debt reduction. Similar to several other EU member states, this translated into cuts to public investments, healthcare and pension spending, and sluggish improvements in the education system and environmental protections.

It is fair to say that Belgium is thus well on track to maintain its solvency. However, it is doubtful that its current approach is sustainable – given that growth is anticipated to remain rather sluggish (1.5% – 1.6% over the next five years), productivity is not improving, and the gap between the supply and demand of skills in the labor market is widening – potentially putting the competitiveness of the country at risk. The Council of Europe, in its July 2018 recommendations (paragraph 19), states that “The proportion of graduates in science, technology and mathematics is one of the lowest in the [European] Union and shortages in these fields could become a major barrier to [economic] growth and innovation.” The Belgian Sustainable Development Indicators point to a structural and continuing decline in lifelong education since 2004, in contrast with the rest of the EU28. It is also unclear whether the pension system will still be able to protect those currently under the age of 40, as it has supported the two or three older generations.

Citations:
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018H0910(01)&from=EN
http://www.indicators.be/en/i/SDI_G04_LLL/Lifelong_learning
https://www.plan.be/press/communique-1788-fr-perspectives+a+cinq+ans+pour+l+economie+belge+ralentissememnt+de+la+croissance+economique+taux+de+chomage+au+plus+bas+et+pas+de+retour+a+l+equilibre+budgetaire+sans
https://www.plan.be/admin/uploaded/201807091124340.REP_CEVSCVV2018_11684_F.pdf

Research, Innovation and Infrastructure

#17

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
6
R&D policy is shared between the central government, which can offer tax incentives, and the subnational (regional and community) governments, which are responsible for managing European subsidies and supporting university R&D and related projects. This increases subnational accountability but hurts coordination and limits economies of scale. According to KPMG, a consultancy, Belgium has “increased its attractiveness as a prime location for companies involved in research and development activities and in the exploitation of patents.” The country’s location, transportation facilities and infrastructure offer considerable advantages to potential investors, KPMG says.

General investment levels have declined across the OECD since the onset of the financial crisis in 2007. Belgium withstood that negative trend comparatively well, with investment as a share of GDP hovering around 23% (comparable to France and Austria, and three points above Germany or the Netherlands, according to IMF data). Specific R&D investment stands at 2.5% of GDP, which is lower than in Germany, Denmark and Austria, but ahead of France, the Netherlands or the EU average (Eurostat data).

In spite of this, Belgium still suffers from a chronic shortage of new and innovative enterprises. Dumont and Kegels (2016) write that “Belgium performed rather well in terms of net job creation over the period 2000 – 2014, in comparison with […] neighboring countries. […] However, our results underline the importance of the decrease in industry-level productivity growth as the main explanation of the aggregate productivity-growth slowdown. […] Belgium stands out unfavorably from other OECD countries, in its low entry of new firms. […] The specific tax benefit for young innovative companies, introduced by the Belgian federal government in 2006, and the Start-up Plan that was initiated in 2015, seem to be good practice in targeting tax incentives on young firms [… It] seems that access to finance is the major barrier for entrants and young firms in Belgium. […] Despite improved fiscal incentives, Belgium remains technologically considerably behind other European countries of a similar size such as Denmark and the Netherlands. While some indicators such as patent registration and monetary returns may be improving, the technological content of the country’s exports is progressively eroding. Universities are chronically underfunded […]. This should not overshadow important exceptions; a highly skilled work force is present, and fiscal incentives have attracted some research-intensive firms in the chemical, pharmaceutical, and more recently computer-science sectors (such as Google, in the latter category).”

Citations:
Dumont and Kegels (2016): http://www.plan.be/admin/uploaded/201606240814370.WP_1606.pdf

Eurostat on R&D expenditures:
http://ec.europa.eu/eurostat/tgm/graph.do?tab=graph&plugin=1&pcode=tsc00001&language=en&toolbox=data

IMF for total investment:
http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/weorept.aspx?pr.x=20&pr.y=14&sy=1998&ey=2022&scsm=1&ssd=1&sort=country&ds=.&br=1&c=122%2C124%2C138%2C132%2C134&s=NID_NGDP&grp=0&a

Global Financial System

#8

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
8
Belgian banks suffered extensively during the global financial and economic crisis, and the Belgian government was more proactive than many of its European peers in restructuring banks. Yet Belgium is clearly too small to be able to restore financial stability alone. Indeed, some of the largest Belgian banks are structurally linked to other European banks, or have in fact become subsidiaries of larger banks with headquarters based in neighboring countries (e.g., ING, BNP Paribas). This has led the government to promote international efforts to restore financial stability and combat financial fraud and tax evasion (from which Belgium is a clear loser, in spite of repeated initiatives to recover revenues lost through tax evasion using banks based in countries such as Luxembourg). Belgium also took an active part in the creation of the so-called banking union in the euro zone, and has sought to improve banking supervision within its borders. Various scandals such as the Panama and Paradise papers press leaks have also given new impetus to the government’s efforts to improve banking transparency. Indeed, some Belgian investigative journalists were instrumental in these projects, working alongside peers from other countries. In October 2018, Belgium’s judiciary was granted comprehensive access to citizens’ financial records. The purpose is to improve the fight against financial criminal activities, as investigators previously could only access citizens’ financial information through the banks and credit institutions.

Citations:
http://plus.lesoir.be/118686/article/2017-10-11/panama-papers-les-socialistes-maintiennent-la-pression
http://plus.lesoir.be/123189/article/2017-11-08/paradise-papers-meme-letat-belge-senvole-aux-iles-vierges#123186
https://www.lecho.be/economie-politique/belgique/federal/la-justice-aura-desormais-acces-a-toutes-les-pistes-financieres/10064659.html
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