Belgium

   

Economic Policies

#22
Key Findings
Hampered by indebtedness and structural weaknesses, Belgium falls into the middle ranks internationally in terms of economic policies (rank 22). Its score in this area has increased by 0.2 points 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. However, growth has been sluggish, productivity has not improved, and labor-market mismatches are widening.

Unemployment rates are not high by euro-zone comparison, but employment rates have stagnated at a relatively low level. Labor income is strongly taxed, while capital income is often untaxed or inefficiently taxed. Promising corporate-tax reforms are underway, but loopholes and exemptions have perpetuated distortions and undermined incentives for entrepreneurs.

Public infrastructure and higher education are underfunded. The government’s heavy-handed reform style has provoked strikes and political unrest, doing little to help the investment climate.

Economy

#16

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
7
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 P2); 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 current 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.

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

#28

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 area dipped by 3.5 percentage points between 2008 and 2013, but by 0.8 percentage points in Belgium, reflecting the effectiveness of the Belgian social safety net.

However, this was achieved at the cost of structurally low employment rates in Belgium (67.7% in 2016 and 68.5% in 2017), well below the EU2020 target of 73.2%. In comparison, levels in the euro area were 70.9% and 72.3% in 2017, respectively. In spite of its 2017 pickup, the country’s labor-market participation rate is actually falling behind the rate in neighboring Germany and the Netherlands (Eurostat Employment rate statistics).

The analysis of the European Semester points to multifactor structural issues that are hard to address in Belgium’s complex institutional setup. One issue is the “restrictive regulatory framework in services. […] As a result, competition is subdued in these sectors with low entry rates of new companies coming into the market” (Council of Europe recommendation of 13 July 2018, paragraph 20). Another issue is the major skill mismatch, and the unemployment trap for low-wage earners, one of the European Union’s highest (paragraphs 17 and 18). Other analyses also point to the rigid wage structure, which links wage to employment experience instead of productivity, which in turn also explains the structurally high underemployment of people aged above 55.

Citations:
Council of Europe’s recommendations: https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1538474984830&uri=CELEX%3A32018H0910%2801%29

Eurostat’s Employment rate statistics: https://ec.europa.eu/eurostat/tgm/table.do?tab=table&plugin=1&language=en&pcode=t2020_10
OECD’s analysis:
https://read.oecd-ilibrary.org/taxation/taxing-wages-2018_tax_wages-2018-en#page199

Taxes

#19

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

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
By OECD standards, Belgium’s tax structure is inequitable. The tax base is too narrow, and puts excessive pressure on labor income (along with Italy, Belgium has the OECD’s highest effective tax and social security wedge on labor), which in turn produces incentives for tax avoidance and evasion. Conversely, much capital income (e.g., housing rents, capital gains and some multinationals’ profits – a significant sum given the presence of a large number of such firms in the country) is either inefficiently taxed or not taxed at all. Consequently, while horizontal and vertical equity within each income source (i.e., labor, capital and corporate income) are guaranteed in theory, differential treatment and a lack of information undermine this principle in practice.

The Council of Europe’s July 2018 recommendations remain tough regarding Belgium’s tax reforms, which are deemed insufficient and ineffective for stimulating economic growth. For example, Belgium maintains too many tax loopholes and exemptions to actually reduce distortionary incentives or to stimulate entrepreneurship. The council’s recommendations also emphasize (paragraph 9) that “Based on the Commission 2018 spring forecast, there is a risk of a significant deviation from the recommended adjustment path toward the medium-term budgetary objective in 2018 and over 2017 and 2018 taken together.”

Nonetheless, some significant and positive developments must be noted. Due to increasing pressure from the European Union, Belgium is engaging in deep reforms of its corporate tax structure. According to PwC, “the standard corporate-income tax rate of 33% would be lowered to 29% in 2018 and to 25% as from 2020. SMEs would even see a decrease in the rate to 20% as from 2018 for the first bracket of €100,000 profit.”

Citations:
Council of Europe’s recommendations: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018H0910(01)&from=EN

https://www.pwc.be/en/news-publications/news/tax-reform.html

http://www.doingbusiness.org/data/exploreeconomies/belgium

Budgets

#32

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, health care 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

#15

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

#9

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
Back to Top