Key Challenges

Still recovering from recession
Belgium is still recovering from the Great Recession . As in most other OECD countries, this creates substantial economic and political tensions. At the same time, Belgium’s moderate-to-good performance means that there is a lot of room for improvement, with the potential to deliver substantial economic growth.
Institutional structure needs reform
As identified in this report and several of the European Council’s European Semester recommendations, Belgium’s institutional architecture is far from optimal. Take environmental policy as a representative example, Belgium’s federal government is responsible for reforming the income tax policy to reduce reliance on company cars. However, car taxation is a regional competence, which has led to divergence between the three regions. Similarly, the federal government has decided to fully phase out nuclear energy by 2025, but the development of new power plants require regional and local approvals, and the regions cannot agree on a common policy. The same web of constraints and overlapping responsibilities largely explains why Belgium failed to reform the national train company effectively or create a fast regional network around Brussels, or why telecom companies cannot thrive in the country (as regulation for electromagnetic emissions has also been regionalized, leading to divergence between regions).
These problems are well known and the mere willingness to address them would deliver substantial improvements in a short period of time. Moreover, there are strong linkages between the key challenges.
Employment rate
trails peers
First, Belgium’s employment rate is four percentage points below the EU average and 10 percentage points below Germany’s. Convergence to the EU average would increase GDP by 3% if these additional workers worked at 75% of the productivity of the average Belgian worker. Converging to the German level would increase GDP by 5% to 6% if the productivity of the additional workers was even as low as 50% to 60% of the Belgian average.
Pension problems are particular concern
This would have very positive collateral effects. Belgium ought to address the long-term sustainability of its public finances, with a looming pension crisis – accrued-to-date pension liabilities represented between 300% and 500% of GDP in 2015 (Brys, 2017) – of particular concern.
Opportunity for climate-change policy
Second, Belgium is trailing behind on its Paris Agreement commitments. Due to the institutional reasons described above combined with a lack of perceived political benefit, the country postponed the required adjustments. However, public awareness and demands have increased significantly in recent years, which has created a window of opportunity. One needed adjustment involves improving the energy efficiency of houses, which would also create additional jobs. Another needed adjustment involves reducing people’s reliance on automobiles and taxation could be used to achieve this goal.
Transfers are excessive share of budget
Third, transfers and financial entitlements comprise an excessively large fraction of the government budget. The two main issues in the country are the pension problem, and regional inequalities between Flanders, and Brussels and Wallonia.
The last two federal governments initiated important pension reforms and tightened access to unemployment benefits. What is now needed is to provide real job opportunities for the targeted people. This could be achieved by investing in (re)training and pursuing policies that will accelerate enterprise creation.
Cross-regional subsidies remain contentious
The other thorn in the Belgian political landscape is the higher levels of unemployment and lower level of entrepreneurship in Brussels and Wallonia (even though it differs substantially across sub-regions in Wallonia). This creates strong resentment in Flanders, which cross subsidizes these regions. Some of these transfers are scheduled to stop, but faster convergence between the regions is necessary.
New jobs are in low-productivity sectors
Fourth, while Belgium has one of the highest labor productivities on the planet, recent developments have been less positive. This is largely explained by the fact that net job creation took place in low productivity services. Recent efforts at boosting research and development could be strengthened and reoptimized (see Dumont 2019). The European Semester identified a large number of hurdles to the creation of innovative firms, which should be addressed.
Low investment in
higher education
A further hindrance to improvements in productivity has been Belgium’s chronically low investment in infrastructure and higher education. Addressing the first and third challenges would automatically create more financial room for such investments.
Integration should
be key priority
The fifth challenge is perhaps the most contentious in the current political climate. Inequalities are rising, among others between people of a migrant and native background. Fostering better integration, both in schools and in the job market, should be a key priority. However, rising populism and bigotry will make it hard to increase spending on such integration.
Inequalities in education must be addressed
Potential benefits should however not be underestimated. Belgium’s education performance, expressed by its PISA scores and skills mismatch in the labor market, has been deteriorating. This is largely driven by rising inequality in educational performance. Schools and higher education institutions have not been adapted to the increasing diversity of the Belgian population, and this has raised cultural and employability hurdles. Integration will remain a major issue in Belgium over the next decade.
Bodart, Dejemeppe, and Fontenay (2019) “Évolution de l’emploi en Belgique : tentons d’y voir plus clair,” Regards Economiques No 146.

Brys, Yves (2017). “Accrued-to-date pension entitlements in Belgium,” Belgian Federal Planning Bureau Working Paper 6-17.

Dumont, Michel (2019). “Tax incentives for business R&D in Belgium. Third evaluation,” Federal Planning Bureau Working Paper 4-19.

European Commission, DG TAX UD (2019) “Taxation Trends in the European Union”

Flanders Investment and Trade (2019) “Belgium is Europe’s #5 foreign investment destination,” 9s-5-foreign-investment-destination

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

Koutroubas, Theodoros, et al. (2011), ‘The complex community mosaic in Belgium,’ in Michael Emerson (ed.), Interculturalism: Emerging societal models for Europe and its Muslims (Brussels: Centre for European Policy Studies), 55-76.

Party Polarization

Linguistic division is cultural cleavage
Being a country of coalition governments, elite intermediation and consensus, the Belgian party system is not highly polarized. However, it suffers from a deep cultural cleavage along its main “linguistic” division between the Flemish and Francophone parts of the country, with basically two separate and asymmetric party systems (i.e., with different weights for the respective party families), and the presence of some specifically regionalist/nationalist parties. In the Brussels region, the two party systems somehow coexist, leading to quite broad coalitions comprising both Francophone and Flemish parties.
Seperatist parties
gaining ground
Flanders is richer, more entrepreneurial and has lower unemployment than Wallonia. The temptation to split the country in two can therefore be strong in periods of crisis. In the last elections, the two main Flemish parties were the New Flemish Alliance (NV-A) in Flanders, a party in favor of “confederalism” (i.e., no formal independence in the form of a new country, but effective separation in terms of most regal competences), and the populist, radical right-wing Vlaams Belang, who herald a harder version of independence.
Elections further complicate policymaking
On the other hand, the NV-A was central in the last federal government and actually secured the implementation of several points on its economic agenda. This, together with the completion of a number of interregional transfers, could help reduce this tension. Nevertheless, the May 2019 elections delivered even more asymmetric regional parliaments, as well as asymmetric government coalitions in the three regions, which will further complicate the coordination of policymaking. (Score: 5)
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