Belgium

   

Economic Policies

#20
Key Findings
As it makes further attempts to address high debt levels, Belgium falls into the middle ranks internationally in terms of economic policies (rank 20). Its score in this area has increased by 0.2 points since 2014.

While the economy has largely recovered from post-crisis adjustments, recent shocks including terrorist attacks have acted as a brake on growth. Seeking to address high debt levels, the government has limited wage growth, tightened unemployment and health care benefits, and lowered taxes. While the deficit increased in 2016, overall debt levels may have peaked in 2014.

Unemployment rates are not high by euro-zone comparison, but employment rates have stagnated due to a number of labor-market weaknesses and distortions. Labor income is strongly taxed, while capital income is often untaxed or inefficiently taxed. Promising corporate-tax reforms are underway.

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

#18

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 area 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 area. The adjustments initiated in the wake of the economic crisis have restrained economic growth for several years, but substantial improvements on that front are now evident.

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. This resulted in erosions of the country’s export share within world markets. 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 (unfortunately 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, we can identify: 1) structurally low levels of public infrastructure investment (as much as a full GDP point below levels in France and the Netherlands – see the WEF’s competitiveness report and/or the OECD’s economic survey of Belgium); 2) employment rates that remain consistently low as compared to the OECD average, especially among youth; 3) low levels of GDP per hour worked in comparison to the OECD average; and 4) chronic underfunding of the higher-education sector, meaning that Belgium’s once-strong position in terms of worker skills is likely to continue 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

#27

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 see increases as dramatic as those elsewhere in Europe, reflecting the effectiveness of the Belgian social safety net. Economic inequality rates also remain well below the EU average. Eurostat and National Bank of Belgium data show that standardized unemployment rates remain low in comparison with the euro zone average.
Nevertheless, labor-market performance has declined in recent years. Unemployment-rate data have masked stagnation in the employment rate. This means the country’s labor-market participation rate is eroding in comparison with Germany and the Netherlands. However, it is on par with France’s, another poor performer (see Eurostat’s Employment rate statistics)

According to several analyses (including that of the Council of Europe), this employment-rate sluggishness is attributable to an insufficiently strong link between wages and productivity; financial disincentives to work (in part due to high taxes and social contributions on labor); increasing mismatches between the demand and supply of labor skills (reflecting low levels of investment in higher and continuing education); workers’ insufficient intra-regional mobility (that is, between Flanders, Wallonia and Brussels); and pockets of high unemployment especially in Brussels and the former industrial basins in Wallonia.

Citations:
Council of Europe’s recommendations: http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32017H0809(01)&from=EN

Eurostat’s Employment rate statistics: http://ec.europa.eu/eurostat/statistics-explained/images/3/39/Employment_rate_by_sex%2C_age_group_20-64%2C_1993-2016_%28%25%29.png

Source: NBB (2017). “Economic indicators for Belgium (2017-45)”. https://www.nbb.be/doc/dq/e/dq3/histo/iee1745.pdf

Taxes

#21

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.

Several factors have prevented the country from tackling these issues. There is a lack of political willingness to engage in significant tax-system reform, and no wealth registry that would enable detection of mismatches between declared income and spending. Moreover, federal-level fiscal administration is decidedly suboptimal, with the government seemingly unable to effect improvements in performance.

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. Belgium is technically numbered among the most equitable countries worldwide on the basis of measured inequality, but this is based on official taxed income, which is blind to untaxed incomes. Since taking office, the present government has additionally tasked itself with reducing government spending as a share of GDP. Its efforts have been disproportionately focused on health care and social security spending, which may increase purchasing-power inequality in the medium term.

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.”

In its March 2016 recommendations, the Council of Europe wrote that “Belgium did not make sufficient progress toward compliance with the debt rule in 2015. […] The [Belgian government’s] revised medium-term budgetary objective, set at a balanced budgetary position in structural terms, is expected to be reached by 2018. However, the recalculated structural balance still points to a structural deficit […] in 2018. […] The macroeconomic scenario underpinning these budgetary projections is plausible. However, the measures needed to support the planned deficit targets from 2017 onward have not been sufficiently specified.” This body also emphasized that, “[t]here is still considerable scope for improving the non-cost dimension of external competitiveness. To safeguard and enhance current welfare levels, more emphasis should be placed on productivity gains and investment in knowledge-based capital.”

Citations:
Lack of administrative information on wealth: http://www.lecho.be/actualite/archive/L_absence_de_cadastre_des_fortunes_complique_la_tache_du_fisc_belge.9828652-1802.art?highlight=cadastre%20fortunes

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

https://www.pwc.be/en/news-publications/news/tax-reform.html
http://www.doingbusiness.org/data/exploreeconomies/belgium#enforcing-contracts)

Budgets

#31

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 was hit by several successive shocks in 2015 and 2016. The refugee crisis produced an unanticipated increase in spending that will continue in the medium term (though successful integration of the migrants into the labor force should eventually compensate for this spending, and even prove a net benefit). Then, Brussels was hit by a terrorist attack in March 2016. On top of its direct impact on the population, this sequence of shocks had significant negative effect on the economy, both directly (e.g., in the tourism sector) and indirectly (by producing a negative image), as well as on the government’s budget balance due to a strong increase in security-sector spending.

In parallel, the government introduced tax cuts that reduced government income. As a result, the government deficit increased in 2016 despite a drop in interest rates. Cutting the structural deficit will require additional effort.

Despite these challenges, National Bank of Belgium data indicate that Belgium’s consolidated gross public debt actually peaked in 2014, at 106.8% of GDP. At the time of writing, analysts expected this figure to decrease to 103.8% of GDP by the end of 2017, and to 102.7% by the end of 2018, a significantly better outlook than forecast a year previously. However, these forecasts focus only on the government’s explicit debt. The implicit pension debt related to entitlements that will be owed to current workers in 10 to 20 years still represents a ticking time bomb.

Regarding the precision of these forecasts, two opposite pieces of information are relevant. On the one hand, a number of the government’s past deficit predictions have proven to be overly optimistic. The recent corporate-tax reform was touted as being budget-neutral, but that claim should be taken with a grain of salt. On the other hand, a recent European Central Bank study estimated that the output gap in the euro zone has likely been underestimated by a factor of at least two. If this is true, Belgium’s structural deficit is actually much lower than estimated by the European Commission.

Citations:
https://www.nbb.be/doc/dq/e/dq3/histo/iee1745.pdf
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1966.en.pdf?c79b834f95a2971a94c1c47de3685747
Public finance sustainability: http://www.plan.be/admin/uploaded/201603311238220.Rapport_mars2016_FR.pdf

Research and Innovation

#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

#11

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 Markets
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 area, 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.

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
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