COMMISSION STAFF WORKING DOCUMENT Macroeconomic Imbalances - Belgium 2014
Date: 2014-03-05
Institutions: European Commission
Subjects: Belgium, Euro Group (euro area), budget deficit, competitiveness, economic growth, indebtedness, labour market, macroeconomics, stability pact













EUR-Lex - 52014SC0075 - EN











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52014SC0075

COMMISSION STAFF WORKING DOCUMENT Macroeconomic Imbalances - Belgium 2014 /* SWD/2014/075 final */









Results of in-depth reviews under
Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic
imbalances
Belgium continues to experience macroeconomic imbalances, which require
monitoring and policy action. In particular, developments with regard to
the external competitiveness of goods continue to deserve attention as a
persistent deterioration would threaten macroeconomic stability.
More
specifically, a continuing worsening of competitiveness, including its non-cost
dimension, may engender negative consequences for the economy. The ability of
manufacturing to compete internationally has been hampered, which is reflected
in eroding producers' margins and in job destruction. Squaring high labour
costs with sustainable job creation and high standards of living requires a
push towards products higher up in the global value chains. At the same time, a
further decoupling between fast wage and slow productivity growth needs to be
prevented. In this respect, Belgium has taken steps that are expected to
produce effects in upcoming years. Yet, preserving the manufacturing basis
requires more ambitious action, all the more so with reforms unfolding in
competitor countries. This is related to labour taxes and making wage formation
more responsive to economic and sectorial realities, and addressing persistent
problems with regard to labour market functioning. Belgium's high public debt
remains a concern for the sustainability of public finances. On the positive
side, however, Belgium has managed to stabilize its public debt ratio, is
estimated to have met the recommended deficit target in 2013, and is projected
to keep the deficit below 3 per cent of GDP. Moreover, long average maturities,
relatively reduced interlinkages with the domestic financial sector and a
relatively healthy private sector temper risks for the wider economy.
Excerpt of country-specific findings on Belgium, COM(2014) 150 final,
5.3.2014
Executive Summary and Conclusions 7
1.       Introduction  9
2.       Macroeconomic
Developments 11
3.       Imbalances
and Risks 17
3.1.     Competitiveness 17
3.1.1.  Product
specialisation  18
3.1.2.  Export
orientation  19
3.1.3.  Cost
competitiveness 20
3.1.4.  Functioning of
the labour market 28
3.2.     Indebtedness 36
3.2.1.  Recent
evolution of the public debt 36
3.2.2.  Risks of
short-term fiscal stress 37
3.2.3.  Long-term
sustainability risks of the Belgian public debt 39
3.2.4.  Inter-linkages
with the financial sector 41
3.2.5.  The public
debt and the overall indebtedness of the Belgian economy  41
4.       Specific
Topic: The Belgian tax system in the context of macro-economic imbalances 49
5.       Policy
Challenges 55
References 58
LIST OF Tables
2.1.     Key
economic, financial and social indicators - Belgium   15
3.1.     Manufactured
exports by type (% of total) 18
3.2.     Main export
markets of Belgium (% of total) 19
LIST OF Graphs
2.1.     Decomposition
of potential growth  11
2.2.     Activity
rate (2012, %, 15-64y) 11
2.3.     Sectors'
share in GVA (%) 12
2.4.     Breakdown
of current account balance  12
2.5.     NIIP by
sector 13
2.6.     Total debt
decomposition (consolidated) 13
2.7.     Decomposition
of consolidated credit flows 14
3.1.     Evolution
of export market shares for goods (2000=100) 17
3.2.     Decomposition
of export market share changes for goods 17
3.3.     Business
enterprise researchers per 1000 employees 19
3.4.     Dynamism
and competitiveness of good exports (top-10 destinations, 2010-12) 19
3.5.     REER
measurements 20
3.6.     Nominal
unit labour cost (2005 = 100) 21
3.7.     Evolution
of profit margins in the manufacturing sector 24
3.8.     Capital
stock/hour worked (2000 = 100) 24
3.9a.  Value added in
industry (excl. building & construction, % of total) 25
3.9b.  Value added in
manufacturing industry (% of total) 25
3.10.   HICP (annual
% change) 25
3.11.   RUEC levels
in Belgium and neighbouring countries 28
3.12.   Counterfactual
comparison of RUEC in Belgium and neighbouring countries 28
3.13.   Employment
rates (2012; %) 29
3.14a.                                                                    2012 employment rate (%) by regions and NUTS2 regions 29
3.14b.                                                               2012 unemployment rate (%) by regions and NUTS2 regions 29
3.15.   Unemployment
traps (2012) 31
3.16.   Beveridge
curve  32
3.17.   Employment
rate by highest educational attainment 33
3.18.   Gross monthly
earnings per skill level and age (2011) 33
3.19.   Gross and net
public debt (% GDP), BE vs. EA   37
3.20.   Contribution
to the change in the public debt ratio (pps. of GDP) 37
3.21.   Public
interest expenditure and implicit interest rate  37
3.22.   Spread of
selected government bonds vis-à-vis German bunds (10y) 38
3.23.   Gross debt
projections (% of GDP) - sensitivity analysis 39
3.24.   Debt
decomposition, all sectors (non-consolidated) 41
3.25.   Total debt
decomposition (consolidated) 43
3.26.   Breakdown of
private sector debt (consolidated) 43
3.27.   Leverage of
households 44
3.28.   Debt service
to income ratio (households with debt payments) by income  44
3.29.   Debt to
assets ratio by income level 45
3.30.   Net assets
decomposition, all Sectors (non-consolidated) 47
4.1.     Distribution
of taxation and overall tax burden (2011) 49
4.2.     Revenues
from property taxes (2011, % GDP) 50
4.3.     Revenues
from environmental taxes (2011, %GDP) 51
LIST OF Boxes
3.1.     Report of
the Expert Group on Competitiveness and Employment 23
3.2.     Reduction
of VAT on electricity for households 26
3.3.     EPL:
harmonization of blue and white collar legislation  35
3.4.     The sixth
reform of the Belgian State  40
3.5.     The Belgian
financial sector 42
3.6.     The Belgian
housing market 46
LIST OF Maps
No table of contents
entries found.
In April 2013, the Commission concluded
that Belgium was experiencing macroeconomic imbalances, in particular as regards
developments related to external competitiveness and public indebtedness. In
the Alert Mechanism Report (AMR) published on 13 November 2013, the Commission
found it useful, also taking into account the identification of imbalances in
April, to examine further the persistence of imbalances or their unwinding. To
this end this In-Depth Review (IDR) provides an analysis of the Belgian economy
in line with the scope of the surveillance under the Macroeconomic Imbalance
Procedure (MIP). The main observations and findings from this analysis are:
·       The twofold trend of a deteriorating current account balance and
worrying export market share losses continues. The
orientation towards less dynamic, geographically close export markets and
declining cost competitiveness keeps on driving these trends. While product
composition is considered a more neutral contributor, a specialization towards
products situated at the middle range of value chains has not been able to
compensate for these losses. A further expansion of the innovation scope and a
deeper penetration of technology in products remain therefore crucial to
reconcile sustainable job creation with Belgium's high labour costs. The
strongly positive net international investment position mitigates for the risks
of a deteriorating external position.
·       Labour costs are considered to play a prominent role in the loss in
external cost competitiveness. Especially
manufacturing activities are confronted with the consequences of fast wage
growth on their ability to compete internationally, which is reflected in
eroding margins and job destruction. The Belgian authorities have initiated
several measures to prevent the relative wage gap from widening, though their
effect will only materialize slowly while the scope of the identified challenge
calls for the instigation of a higher sense of urgency. As a consequence,
narrowing down the gap effectively in order to preserve Belgium's manufacturing
basis would require more ambitious and more timely action, including the
long-awaited tax overhaul with a rebalancing towards non-labour taxation and
making wage formation more responsive to economic realities and sectorial
differences.
·       Persistent problems with regard to the functioning and the
adjustment capacity of the labour market contribute to the overall problem of
competitiveness and erode the economy's growth potential. The overall employment rate stagnates at a below average level.
Moreover, labour participation of specific target groups and in certain
geographical areas is very low, resulting in higher risks of poverty and social
exclusion. Driving factors are understood to be the disincentivizing fiscal
treatment of labour and its interaction with unemployment benefits, skill and
geographical mismatches, suboptimal activation policies, the widespread use of
early and pre-retirement schemes and wage rigidities due to the wage setting
mechanism. Government measures have not been able to address the persistent
malfunctioning of the labour market. 
·       Public debt remains high, at around 100% of GDP, but a number of
factors temper related macro-economic risks and government action prevented a
further rise since last year's IDR. Contingent
liabilities related to guarantees provided to the financial sector have been
reduced, but their level remains sizeable (12% of GDP), entailing the risk of
spill-overs from the financial sector to the government sector. A large share
of the Belgian public debt is domestically owned, which in case of financial
stress on the sovereign would further reinforce the negative feedback loops.
Current financing costs are low and the risk of fiscal stress in the short term
appears limited thanks to a relatively long average maturity of public debt.
However, a sustained period of higher interest rates would have a substantial
budgetary cost, complicating the gradual return to a balanced budget.
Macro-economic risks related to this high public debt level are mitigated by
the healthy state of the private sector: the net asset position of households
is very positive and the indebtedness of non-financial corporations is
relatively contained when excluding intra-group loans. In sum, while the
government carries a large debt, the net asset position of the Belgian economy
(+45% of GDP) is positive as compared to a negative net asset position in the
euro area (-24% of GDP).
The IDR also discusses the policy
challenges stemming from these developments and what could be possible avenues
for the way forward. A number of elements can be considered:
·       Wage formation is a strand for which the Belgian authorities could
unfold a more ambitious reform agenda. A first
element would be the tightening of the Law of 1996 in order to prevent future
problems from arising, including by the inclusion of a direct link between
margins for wage growth and productivity and the introduction of a higher
degree of sectorial differentiation. Secondly, several options would render the
practice of automatic wage indexation less harmful in times of economic
distress by reconciling short-term concerns of individual purchasing power
protection with the longer-term concern of safeguarding overall employment.
·       The current approach of repeated, small reductions in the parafiscal
pressure on labour could be replaced by a global rethinking of the design of
Belgian taxation. This would entail a
revenue-neutral shift in the tax burden from labour to other sources of
revenue, both at the federal and the regional level. VAT and PIT carry
important scope for tax base widening through the reconsideration of high tax
expenditures. In addition, an increase in the standard
VAT rate may be considered as this would generate substantial
revenues with limited spill-over effects. Other areas that may be explored in a
global redistribution of the tax burden include (recurrent) property taxation,
the use of currently underdeveloped aspects of environmental taxation
(including the fiscal treatment of company cars) and the taxation of certain
types of financial income. 
·       Squaring Belgium's high labour costs with sustainable job creation
and the conservation of a high standard of living would require the
strengthening of non-cost competitiveness through a reorientation towards
products with a higher technological content than is currently the case. To nurture the innovative prowess of the Belgian economy and
facilitate the growth of innovative companies, policymakers could further
enhance the emphasis on support to clusters and aim for a simplified subsidy
structure in order to stimulate business spending on research and development.
Another crucial factor to accelerate the transition towards a knowledge-based
economy will be to assure the labour market of sufficient, aptly skilled
workers in order to address skill mismatches. 
·       The reduction of the public debt burden continues to represent one of
the country's main policy challenges in the medium to long term, all the more
given the lower growth potential of the Belgian economy, the high projected
impact of ageing in Belgium and the already high level of taxation. So far, strategies to reduce the public debt level were partly
built around the sale of assets. However, further expenditure-based deficit
reduction in itself, in line with the commitment by Belgium to reach its Medium
Term Objective in 2016, will remain necessary in order to put the debt ratio on
a sustainable downward path. In this respect, the increased fiscal
decentralisation requires a rigorous implementation of agreed fiscal
coordination arrangements and a balanced contribution by all layers of
government to the consolidation. Also the implicit debt associated with an
ageing population would have to be addressed by further pension reforms in
order to prevent new increases of the debt level in the medium term.
Simultaneously, as a tax shift away from labour to other sources would help
boost employment and growth, it would be supportive for deficit and debt
reduction. Making the taxation of savings gradually more neutral with respect
to the type of financial product could diversify the channels through which the
large financial assets of Belgian households are allocated to the real economy.
On 13 November 2013, the European
Commission presented its second Alert Mechanism Report (AMR), prepared in
accordance with Article 3 of Regulation (EU) No. 1176/2011 on the prevention
and correction of macroeconomic imbalances. The AMR serves as an initial
screening device helping to identify Member States that warrant further
in-depth analysis to determine whether imbalances exist or risk emerging.
According to Article 5 of Regulation No. 1176/2011, these country-specific
“in-depth reviews” (IDR) should examine the nature, origin and severity of
macroeconomic developments in the Member State concerned, which constitute, or
could lead to, imbalances. On the basis of this analysis, the Commission will
establish whether it considers that an imbalance exists in the sense of the
legislation and what type of follow-up in terms it will recommend to the
Council.           
This is the third IDR for Belgium. The
previous IDR was published on 10 April 2013 on the basis of which the
Commission concluded that Belgium was experiencing macroeconomic imbalances, in
particular as regards developments related to external competitiveness and
public indebtedness. Overall, in the AMR the Commission found it useful, also
taking into account the identification of an imbalance in April, to examine
further the persistence of imbalances or their unwinding. To this end, this IDR
takes a broad view of the Belgian economy in line with the scope of the surveillance
under the Macroeconomic Imbalance Procedure (MIP).
Against this background, Section 2 starts
with an overview of the general macroeconomic developments while Section 3
looks more in detail at how the earlier identified imbalances and their
underlying risks have evolved. This is followed by a specific focus on the tax
system in Section 4 and policy considerations in Section 5.
Potential growth down from pre-crisis level
Notwithstanding a cautious improvement
of economic performance in the second half of 2013, growth is not projected to
reconnect with pre-crisis rates. The growth
potential of the Belgian economy is currently estimated a little below 1%,
about half of the pre-crisis level, and would rise only modestly over the
medium term. While the contribution from all components has fallen over the
past decade, the very low gains from total factor productivity are particularly
notable. This points to problems regarding the capacity to engender innovation
and efficiency gains.
Potential growth would also benefit from
an improvement in the dismal activity rate, which reached 66.9% in 2012. Belgium's low activity rate relates to a number of lasting economic
problems identified in previous vintages of the European Semester. Factors such
as high labour taxation, persistent unemploy­ment and inactivity traps, and
modera­tely effective active labour market policies are understood to put a
brake on labour supply. Conversely, on the demand side job creation is hampered
mainly by high labour costs. These labour costs are also a key element within
the context of deteriorating external cost compe­titive­ness, which has become
more prominent and pressing in recent years and is discussed in section 3.1. To
address the underlying drivers, the govern­ment took a first series of measures
in recent years. These include incentives to take up work by means of altered
unemploy­ment benefits and the tax treatment of the lowest wages, the
restriction of access to early retirement and reductions in social security
contributions. 
While broadly stable, social indicators
suggest some areas for concern. Belgian elderly
continue to face a somewhat higher risk of poverty or social exclu­sion than on
average in the EU. For children this risk has been rising as well. Furthermore,
the early school leaving rate has increased in recent years. The number of
people living in households with low work intensity is above the EU average and
increasing. This contrasts with a still low in-work at-risk-of-poverty rate,
which underscores how inducing higher employment would not simply raise the
economic potential, but would also help to shield against risks of social
exclusion. 
The Belgian economy has been reorienting
towards the services sector. Between 2000 and 2012
the industry (excl. construction) shed 110,000 positions while service sectors
added 477,000 jobs, mainly in professional, scientific and technical
activities, and administrative and public services. There are no signs of this
shift slowing down immediately. This transformation of the economic landscape
also comes to the fore when looking at the sectorial decomposition of gross
value added (GVA) with the manufacturing and services sectors respecti­vely
losing and gaining around 7 pps. between 1996-2012. As regards the income
decomposition of GVA a stable distri­bution among compensation of labour on the
one hand and capital on the other hand appears, hove­ring respectively around
58% and 42% of GVA.
External position remains strong, despite wea­kening
current account balance
Whereas positive net exports prevented a
sharp downturn in 2012-13, this disguises a longer-term trend of a
deteriorating current account balance. According to
estima­tions by Commission services, the current account deficit (BoP
definition) continued to widen in 2013. Aside from this widening deficit, also
the longer-term evolution of the current account catches the eye. A surplus of
around 5% of GDP at the turn of the century dwindled gradually until 2008, when
it turned negative([1]). Estimates
for the cyclically-adjusted current account balance (i.e. the level that would
prevail if both the domestic and trading partner economies were at potential
output) indicate that only a fraction of the deterioration can be attributed to
cyclical factors. 
The deterioration in the current account
is predominantly driven by the downward evolution of the goods balance. The latter deteriorated by 6.5 pps. over 2002-12, reflecting both
a price and a volume effect. The substantial surplus of about 2% of GDP which
trade in services continues to record has not been able to compensate for the
downward trend at the goods side and seems to have stabilised recently
following years of steady expansion. The slow shift in recent years of the
capital income balance from a modest surplus to a limited deficit has its
origin mainly in higher net outflows linked to direct investments and reflects
the effect of a low yields environment on the asset structure. 
At almost 50% of GDP, Belgium's overall
external position as measured by its NIIP can still considered to be sound. The Net International Investment Position (NIIP) is the balance
between external financial assets and liabilities. Whereas the current account
balance equals flows, the NIIP can be interpreted as the stock indicator of a
country's external position. A stabilisation of the current account near its
present level with nominal GDP growth at around 3.5% would entail a gradual
reduction in the NIIP, though the latter would nevertheless remain at
comfortable levels. Even in case the long-term trend is confirmed and a more
substantial current account deficit would emerge, the accumulated net external
assets imply that, at the current juncture, Belgium's current account deficit
can be considered sustainable in the medium term.
While external sustainability does not
seem to be a major risk, a closer look to the robust NIIP reveals that internal
equilibriums are neverthe­less affected. The
strongly positive NIIP reflects a comfortable creditor status by the private sector,
offsetting the structural debtor position of the public sector. The current
account corresponding to the difference between domestic savings and domestic
capital formation, the deterioration over the past ten years went hand in hand
with lower savings and broadly stable investments. The decrease in total
savings has in turn been primarily driven by lower household savings with
consump­tion growing faster than disposable income. 
Domestic debt mainly a matter of public debt 
Following a sustained reduction in the
debt burden until 2007, public debt has risen again to about 100% of GDP. Behind this reversal of debt dynamics lie a deterioration of public
finances and the repeated need for interventions in the banking sector. While
the recent return to primary surpluses and the sale of assets is expected to
have stabilised public debt, non-negligible contingent liabilities to the
financial sector and high projected ageing costs still threaten the medium-term
outlook of public finances.
Private sector indebtedness does not
appear to be a major concern but should be read against a background of high
public debt. Non-financial private corporate debt
is high in non-consolidated terms but when national intra-company loans are
excluded, debt is comparable to the EU average. Household debt is close to the
EU average and is mostly mortgage related. Last year's IDR presented a thorough
assessment of the housing market and found that a potential house price
correction would most likely not provoke major macroeconomic repercus­sions.
Indeed, the fast house price increase between 2000 and 2011 was not accompanied
by a higher interest burden for households, nor by an excessive house supply.
Furthermore, households' average annual redemption effort has remained broadly
stable as a consequence of wages growing faster than loan burdens and a
preference for financing at fixed rates. There is also no practice of
remortgaging in Belgium. Finally, risks for the economy appear contained with a
low default rate, which, at 1.2% in 2013, has remained stable in recent years.
Strengthening of financial sector continues
After recovering somewhat, credit growth
has been declining in the last two years but remains above the EU average with
lending rates to non-financial corporations among the lowest in the EU. This lower credit growth reflects on the one hand declining
financing needs and on the other hand a tightening of credit standards, driven
by new regulation and capital requirements in the financial sector. 
The financial sector has continued to
gradually strengthen and total financial assets have decli­ned significantly. The continuing restructu­ring in the sector resulted in a
rebalancing from external and inter-bank activities towards more traditional
activities and the domestic market. Capital injections have strengthened
capital ratios but profitability is still low and non-performing loans have
increased amid weak economic activity.
In May, Belgium will stage federal and
regional elections. While this may create a
reformist window of opportunity for the next government, the stalemate at the
federal level following the last two elections (2007 and 2010) with a caretaker
government in charge for respectively 6 and 18 months, gives rise to concerns
that Belgium may face a new period of political procrastination. This would
result in reforms being further adjourned and may trigger renewed financial
market pressures as was the case end-2011 when the spread on 10-year Belgian
government bonds relative to German bonds rose to 360 base points.
3.1.      Competitiveness
As highlighted in section 2, Belgium's
trade balance for goods has been displaying a steady decline. While the current
deficit level by itself does not point to an emerging imbalance, the evolution
is nevertheless symptomatic for an underlying problem of weakening
competitiveness, which has been identified as an imbalance in earlier IDRs and
is the subject of section 3.1. Addressing this core issue would therefore also soften
the negative trend on the current account.
One of the most prominent manifestations
of Belgium's deteriorating competitiveness is the dwindling of export markets
shares over the past decade. These losses did not
coincide with the economic downturn of 2008. Between 2003 and 2012 they fell on
average by 3.2% annually with only 2007 and 2009 seeing (modest) gains.
Moreover, the pace has accelerated in recent years with an average annual
decline by 5.3% during 2009-12 for goods and services and 5.9% for goods. As
highlighted in last year's IDR, market shares for services have been broadly
stable, but account only for a limited share in total exports.
Most EU15 countries have been recording
export market share losses but for Belgium these losses have been more
pronounced. The country has seen its share in total
European exports declining (see Graph 3.1). As a consequence, the Belgian
experience cannot be interpreted as a mere reflection of shifting global (or
regional) economic clout. In fact, Belgium's share in global economic activity,
which could be considered a rough proxy for expected export share evolution
given Bel­gium's open economy, has remained remarkably stable and even gained
some ground in recent years. In this respect, economic performance over the
past ten years did probably not fully reflect underlying dynamics given the
worsening external position. 
Export growth falling short of world
export growth can be rooted in three broad factors.
(i) a product specialisation in goods for which demand is progressing
relatively slowly, (ii) a geographical orientation towards slower growing
markets or (iii) the inability to compete effectively internationally, i.e. a
loss in competitiveness. A decompo­si­tion of export growth gives insight into
the importance played by these different drivers. A common and instructive
approach in this regard is a 'constant market share analysis'. The results of
such a basic shift-share analysis for Belgian good exports for the respective
periods 1997-02, 2002-07 and 2007-12 are visualized in Graph 3.2. Belgian exports of goods grew faster in
1997-02 than global imports, while they fell short in the subsequent periods.
The initial gain in export market shares was predominantly driven by
competitiveness (in a broad sense). Subsequently, the contribution by competitiveness
factors turned negative, triggering a steady decline in export market shares
since the turn of the century. Geographical orientation seems to have become
another important driver behind overall export losses, indicating a
disproportionate orientation towards less dynamic export markets. The third
subcomponent, product composition, shows a slightly negative contribution for
all periods considered. This implies that the Belgian export configuration is
broadly aligned with global patterns, but also that Belgium fails to specialise
in products characterized by a more dynamic demand, which could have limited
overall export market share losses. 
The following sections take a closer look
at the drivers behind the observed deterioration in Belgium's performance on
international markets. Product specialisation, export orientation,
cost-competitiveness and labour market aspects are discussed respectively.
3.1.1.   Product
specialisation
Though factor prices usually play an
important role in a company's ability to compete success­fully on international
markets, the kind of products that are fabricated also matters. Producing and trading a range of (finished) products with a higher
value added makes it easier to pass on labour costs to final prices as
competition for this type of products is mostly based on non-price aspects such
as quality (ECB, 2013). As mentioned, Belgium's product composi­tion does not
appear as particularly problematic, but at the same time it has not been able
to compensate for deteriorating competive­ness or weak export market growth.
Recent data confirms last year IDR's finding that Belgian companies export
relatively little capital goods, less than half of the share of the average
euro area country (see Table 3.1). Conversely, intermediate goods have a
higher share in manufactured exports compared with other euro area countries,
which is also the case for imports. This exposes Belgian exports relatively
more to international competition on the basis of cost factors. A high share of
intermediate goods is for example exported to Germany([2]) with Belgian exporters having to compete with companies from newer
EU member states and emerging markets. These countries are generally better
positioned to compete on cost terms and, contrary to Belgium, have seen their
share in German intermediate imports rising over the past decade. 
The balanced findings of last year's
section on Belgium's innovation capacity remain valid. Total R&D spending has risen in recent years and reached 2.2%
of GDP in 2012; up from 1.9% in 2002 but still falling considerably short from
the EU2020 target of 3%. Compared with Scandina­vian countries and Germany a
substantial gap remains due to comparatively lower R&D spen­ding in Belgium
by both businesses and public entities. It should be noted though that enhanced
public support for R&D has borne fruit (FPB, 2013), which bodes well for a
further intensifica­tion of business R&D outlays. Nevertheless, busi­ness
R&D expenditures are highly concentrated in a small number of
(international) companies in essentially one sector (pharmaceuticals), which
narrows the base for innovation. In the case of research, labour costs are
generally not the most important factor. Moreover, the issue has been addressed
by initiatives such as the federal payroll tax incentive to lower R&D
personnel costs. Yet, for actual manufactu­ring activities that could derive
from performed research, labour costs are of higher importance. Finally,
R&D and the develop­ment of activities with a higher value added are
hampered by skill availability, which helps to explain a relatively low
penetration of researchers in overall employment (see Graph 3.3). While Belgium disposes of an overall
qualified work­force, the number of graduates in science, mathe­matics,
engineering and technology (STEM) remains low.([3]) The creation of substantial high-tech em­ployment in Belgium over
the past decade (Vives, 2013), highlights the importance of adequate in­flows
of accurately qualified workers, all the more as research points to the high
potential of job creation in the slipstream of  high-tech employment.
Competition in services in Belgium is
limited by a number of regulatory barriers. Service
provi­ders face obstacles when entering the market and offering services, for
example different authorisa­tion systems are in place at regional level. The
retail sector continues to be subject to a number of regulations and
operational restrictions which hinder its development and means retail prices
in Belgium are more than 10% above the euro area average. 
3.1.2.   Export
orientation
As indicated by the above shift-share
analysis, Belgium's orientation to less dynamic markets has been hampering
export performance. Earlier analysis pointed to the
high concentration of exports to European countries, particularly the neigh­bouring
ones. Graph 3.4 highlights that Belgium is mainly
exporting towards markets that are growing slower than global imports and that
it has also been experiencing competitiveness losses vis-à-vis its competitors
on these markets.
Nevertheless, the importance of
traditional export markets has gradually decreased.
This has been especially true in recent years with exports becoming more
diversified and the direct relevance of markets such as for example India,
China or Turkey rising rapidly (see Table 3.2). While, on the one hand, this reflects
slower export growth to traditional markets, on the other hand, export growth
to emerging markets has also accelerated in general, implying that the gradual
reorientation does not merely reflect a relative shift as a conse­quence of
sluggish import growth across Europe.
Moreover, the share of exports going to
Euro­pean countries in general and to neighbouring countries in particular, is
less important when data are corrected for re-exports. The latter are high for countries with large international ports
such as Belgium and the Netherlands. This also comes to the fore when exports
are measured in value added terms (NBB, 2013). In 2009, the last year for which
data are available, the EU27 represented 64.6% of total value added exports as
compared with 75.5% when looked at gross exports. Especially the relevance of
the three neighbouring countries falls notably, while EU12 countries but also
Italy and the UK become more prominent, as do for example the United States
with third countries' exports comprising significant Belgian value added. 
Nevertheless, even when measured in
value added, Belgian exports have been losing global market shares. Between 1995 and 2009 the loss amounted to 26%. This compares to
more shallow EA12 and EU27 losses of respectively 15% and 3% over the same period.([4])  
3.1.3.   Cost
competitiveness
A. Labour costs
An appreciating real effective exchange
rate (REER) points to a loss in relative cost competitiveness. As the deterioration of the current account and the loss in export
market shares have their origin in the export of goods, the REER deflated by
unit labour costs in the manufacturing sector can be considered the most
appropriate gauge of cost competiveness for Belgium.([5]) Graph 3.5 indicates a sharp deterioration of
relative labour cost competiti­veness in the manufacturing sector since the
turn of the century; i.e. an appreciating REER. Other, less narrow measure­ments
of cost competitiveness are also included in Graph 3.5: REER deflated with consumer prices and
with export prices. All three run broadly parallel until 2006 when a decoupling
appears. The REER deflated with ULCs in the manufacturing sector seems,
however, the most relevant for mentioned reasons. 
REER correction through nominal exchange
rate adjustment is no longer possible for Belgium as the euro exchange rate
reflects dynamics at the aggregate euro area level.
As a consequence, and as recent experience by some countries confirms, a too
divergent evolution of a country's relative competitiveness could generate
imbalances which in turn may trigger strained corrections or result in welfare
losses if left unaddressed. Therefore, it is paramount to assure that
competitiveness developments are aligned with those in trading partners. 
Relative wage dynamics are a key
determinant of Belgium's cost competitiveness. Two
features characterize the Belgian wage-setting system: a national, two-year
wage norm which determines the maximum real wage increase in the private sector
based upon which negotiations take place at lower levels, and the quasi
universal practice of automatic wage indexation based on the so-called 'health
index'.([6]) As
highlighted in previous IDRs, wage costs and productivity have decoupled in
recent years. While still high in absolute terms, average labour productivity
growth in 2007-12 has been around zero. At the same time, nominal wage growth
has advanced fast under the impetus of wage indexation, driven in turn by high
price pressures. As Graph 3.6 shows, prior to the 2008-09 crisis
Belgian ULCs rose faster than those in the aggregate euro area and main trading
partner countries, though not alarmingly. As of 2009, however, a marked
deviation emerges compared with the EA17, in spite of accelerated ULC growth in
leading trading partner Germany. This reflects measures in other countries such
as Spain to curb ULC growth. Current projections indicate that ULC growth in
Belgium would be lower in 2014-2015 as compared to preceding years. However,
this will be insufficient to correct for the deviation accumulated in the past.
If left unchecked, this deviation may further reinforce the long-term trends of
capital deepening through automation or outright delocalisation of activities,
both of which have a negative impact on employment with less productive labour
being pushed out of the labour market (see below).
Belgium is one of the Member States
where the practice of linking wages to cost-of-living increases is most
widespread. This has the merit of ensuring social
peace but also carries negative economic implications. While wages in other
countries do follow domestic price evolutions over the medium term as past
experience has demonstrated, the absence of an automatic adjustment
makes purchasing power corrections dependent on wage negotiations. As Bodart
& Shadman (2013) point out, the outcome of such negotiations will be a
function of the business cycle and the situation on the labour market, making
adjustment in the short term generally less rigid than is the case in Belgium.
This helps to explain why hourly wages grew by 3.3% on average annually between
2007 and 2012 in Belgium, compared with 2.3% in Germany and the Netherlands and
2.6% in France and the euro area. Wages in Belgium have been adjusted faster to
(higher) price pressures, despite the economic environment. In the short term,
wage indexation in its current form may thus affect competitiveness, leading to
job and export market share losses which may become permanent over the longer
term as a new equilibrium arises (Bodart & Shadman). Moreover, as Bogaert
& Robette (2013) and Bodart & Hindriks (2013) point out, lower incomes
have suffered considerable purchasing power losses despite the indexation
mechanism.
When in November 2012 the Belgian govern­ment
stated its goal to close the accumulated wage gap with its main trading
partners by 2018, there was no agreement on the precise size of this gap. The latter is commonly measured for policy goals in terms of the
evolution of hourly labour costs in the private sector since 1996 (when the Law
on Competitiveness and Employment was adopted) compared to Germany, France and
the Netherlands.([7]) However,
this measurement only includes direct reductions of social security
contributions, not the 'wage subsidies' to which the Belgian authorities have
taken increasingly recourse over the past decade. In addition, only an
aggregated calculation of the wage gap is used, regardless of sectorial dispari­ties.
Finally, when looking at hourly labour costs in isolation, productivity
dynamics are put aside. These shortcomings, in addition to the arbitrariness of
the year of reference, have stirred debate on exactly how large the effective
wage gap is. In an attempt to straighten out the lasting controversy, the
authorities set up an Expert Group, which published a first report in July
2013. Though it did not manage to end the conceptual muddle that has blurred
the debate with regard to labour costs developments in Belgium, the report
discusses numerous relevant issues (see Box 3.1). The Belgian government has
commissioned a follow-up report by June 2014.
As the Expert Group report points out,
in parti­cular Belgium's industrial sectors and more specifically manufacturing
activities are faced with a serious problem of deteriorating cost
competitiveness. This is well illustrated by the
evolution of profit margins. The average cross-industry margin has been
hovering between 25% and 30% in recent years. While this compares favourably to
the situation in France, it is below margins realized in Germany and the Netherlands,
even if the difference with the latter two is limited and constant. Moreover,
the stability of the average margin disguises a trend of deteriorating
performance by manufactu­ring activities, with margins notably below those in
Germany and the Netherlands, where they have been increasing in recent years
(see Graph 3.7). If (all) wage subsidies are taken into
account, margins improve somewhat, though the negative trend remains, as does
the significant gap with the Netherlands and Germany, where wage subsidies play
only a marginal role. 
Belgium combining high hourly labour
costs with a high level of productivity, especially in manufacturing, raises
the question to what extent high wages drive high productivity. Indicators point to the presence of capital deepening in Belgium ([8]) as can also be seen in Graph 3.8.([9]) This suggests that the high aggregate level of productivity is to
some extent the result of labour being replaced by capital inputs and a steady
shift towards activities at the higher end of the salary scale with ever more
capital intensive production techniques being applied and the average wage
rising together with the share of qualified labour. This, however, has negative
effects on employment, with less skilled labour being pushed out of the labour
market and a higher risk of labour market mismatches. The higher level of
productivity thus partly explains Belgium's low labour participation, in
particular among low-skilled workers (see section 3.1.4)
What is more, the capital deepening of
the Belgian manufacturing industry seems not to have put a brake on the
long-term trend of deindustrialisation. Graph 3.9 shows how the (manufacturing) industry
in Belgium has lost relatively more ground in terms of total value added than
in other countries. Although a comparable loss is seen in France, the
Netherlands and Germany have been able to stop and even reverse the downward
trend, demonstrating that it is not inescapable. Belgium's share in the total
value added in the euro area fell by 11% between 2000 and 2012, a less bad performance
than France (-20%), but compared to +12% and +9% for Germany and the
Netherlands. 
The already high degree of capital
deepening lowers the scope for future productivity gains, which erodes
potential growth. This is of particular concern as
market services have not been able to realise a strong productivity growth and
the attained level is still lower than in the industry (NBB, 2013). It may also
entail the risk of accelerated delocalisation in the future. 
The strong bias towards job creation in
the non-tradable sector with the help of wage subsidies and public sector jobs
has been compensating for steady net job destruction in the industry. The crisis years only accelerated a process of net job losses in
most industrial sectors. This has been especially true for the car assembly
industry, textiles, metallurgy, chemicals and non-ferrous metals, all
labour-intensive sectors (Vandekerckhove, Struyven & Heylen, 2013).
B. Government action with regard to cost
competitiveness 
In order to avert the relative wage
difference with neighbouring countries from widening further, the Belgian
authorities imposed a freeze of real wages (i.e. zero wage norm) on the social
partners for 2013-14, a decision which will most likely have to be extended in
2015-16. Other actions to curb the wage gap
included a series of modest reductions in social security contributions for
employers – as elevated labour costs are rooted in high taxation – and method­logical
interventions on the measure­ment of price pressures by the health index.([10]) Price pressures as measured by the standardised HICP have on average
been 0.4 pp. higher than in neighbouring countries over the past decade (see
Graph 3.10). This difference can to a large extent
be attributed to energy products, with an average price differ­rence of 1.3
pps. over the same period. Fluctua­tions of international energy prices have a
more pronounced effect on the Belgian economy([11]) with the impact of an oil shock on competitiveness being larger
than in the neighbouring countries (Bodart & Shadman, 2013). 
Government measures to foster
competition and increase transparency on domestic energy markets have, however,
reversed this price differential since mid-2012.
This has resulted in overall inflation converging with euro area inflation and
the average price growth in neigh­bouring countries (see Graph 3.10). This reduced inflationary pressure
may make it somewhat easier for Belgium to achieve wage moderation given the
reduced impact of wage indexation on total wage growth. However, like in past
years, core inflation continues to reach a higher level than in neighbouring
countries. This could be attributed both to suboptimal functioning in certain
product markets (EC, 2013) and to second round effects from a widespread
practice of price indexation across sectors (e.g. rent prices, insurance
policies).
At the end of 2013 the Belgian
authorities announced an inter-federal 'Competitiveness and Employment Pact'. At the federal level, this included a reduced VAT rate on
electricity (see Box 3.2) as well as three additional structural
reductions of social security contributions (in 2015, 2017 and 2019) of EUR
450mn each, one third of which would be allocated to linear reductions, one
third to low wages and one third to sectors exposed to international
competition and whose growth potential is at risk because of the evolution of
labour costs compared to productivity.  These (prospective) reductions would be
accompa­nied by some smaller measures targeting among others SMEs, shift work
and young unemployed. As part of the Pact, the Regions also announced some
initiatives, including a EUR 125mn budget to reduce wage costs for employees
under 30 and above 55 in Flanders.
Many of the announced measures carry an
important, though unfunded, future budgetary impact. This is the case for the triple reduction by EUR 450mn of
employer's contributions([12]) as well as
the lowered VAT rate on electricity if made permanent. Putting in place accompa­nying
financing measures would have made them more credible and, even more important,
reconci­led the outgoing coalition's ambition to improve cost competitive­ness
during the next legislature – the triple reduction has been stipulated
through legislation – with the already very tight budgetary margins during that
period. 
Aside from measures to correct past
excessive wage growth, the government has unsuccess­fully sought to alter the
Law of 1996 to prevent future decoupling of wages and produc­tivity. Several reform options are reported to have been discussed but
negotiations have stalled as a conse­quence of disagreements within the
coalition government and the reform has eventually not been included in the
2013 Competitiveness Pact. As a consequence, the reform is likely to be post­poned
until after the May elections. In case of a renewed protracted period of
government negotia­tions, this would mean that the new Law may not be in place
in time to be applicable to the 2015-16 Inter-Professional Agreement. One of
the reform options discussed would introduce a more stringent method to set the
wage norm with social partners being legally obliged to factor in past relative
wage evolutions in order to set the norm in such a way that the accumulated
wage gap would be progress­sively narrowed. Another proposed modification would
require the government to intervene in a legally binding way whenever partners
do not come to an agreement or fail to comply with the stricter stipulations of
the Law. More severe sanctions would also be introduced for employers in case
of non-compliance with the wage norm by lower-level collective agreements.
If adopted such reforms would make the
existing wage bargaining framework more coercive, though there would still be
important shortcomings. A first one is the lack of
a link between wage setting and productivity develop­ments in order to
safeguard employment over the longer term. Yet, the existence of sizeable sectorial
differences with regard to productivity means that introdu­cing productivity in
the wage setting at the inter-professional, national level would seriously
distort figures. Incorporating it at lower levels would therefore be more
appropriate. This would require a more decentralized procedure than currently
applied with the determination of a national wage norm. Such decentralisation
would enable industries and companies to square wage policies more aptly with
their performance and allow for labour inputs to be reallocated more gradually
from declining activities towards sectors in expansion.
Furthermore, even if the national wage
norm would be made more stringent, the wage gap could still widen as a result
of the pervasive practice of automatic wage indexation applied at the sectorial
level. While the current frame­work caps real wage
growth, it does not interfere with the freedom of social partners to conclude
wage indexation agreements at the level of their preference. As a consequence,
an important part of the wage growth margin falls beyond the scope of the Law
on Competitiveness and Employment and is excluded from wage negotiations, which
encumbers the economy's adjustment capacity. To mitigate the risk of
inflationary pressures fuelling nominal wage growth beyond the rise in relative
produc­tivity levels vis-à-vis neighbouring countries, one could consider a
system where the financial equivalent of increases in the health index is only
partially allocated to nominal wage increases while the remaining part goes to
other forms of (non-wage) compensation and/or invest­ment in training and human
capital. All-in agreements capping total wage growth would produce similar
results. 
C. Energy costs([13])
Energy being a key input in many
production processes, its relative direct costs represent a factor of
competitiveness for the industry. As a consequence,
in addition to labour costs, also energy inputs may be behind the observed loss
in cost competitiveness. However, another equally important factor is the
intensity of use. In order to provide a more comprehensive assessment of the
role that energy plays with respect to industrial competitive­ness, both
factors need to considered by looking at Real Unit Energy Costs (RUEC), i.e.
the amount of money spent on energy (including non-commodity elements such as
taxes) in order to obtain one unit of value added. For the manufactu­ring
sectors the level of RUEC in 2011 in Belgium is comparable to that in the
Nether­lands, but higher than in France and, particularly, Germany (Graph 3.11). According to estimations this was
still the case in 2013.([14]) 
Disentangling the change in RUEC during the period 1995-11 by means
of a shift share analysis shows that in Belgium the increase in RUEC in the
manufacturing sector is for a comparatively large part driven by restructu­ring
and interaction effects. This indicates that to a
larger extent than in the neighbouring countries, there has been an increase in
the shares of manufacturing industries with (i) relatively high initial energy
costs or with (ii) energy costs that rose rather strongly. This suggests that
it is the production structure, rather than the energy unit costs, which causes
the comparatively high RUEC in Belgium. This is confirmed by counterfactual
analysis which shows that, under the assumption that manufacturing sector
shares in neighbouring countries would be identical to the actual shares in
Belgium, RUEC in the manufacturing sector would actually be higher in the
neighbouring countries than in Belgium in 2011 (see Graph 3.12).
3.1.4.   Functioning
of the labour market
The impact of the crisis on employment
has been relatively contained. This is partly due
to the stepping up of short-time working schemes and a more intensive use of
job support and activation measures in recent years. Unemployment rose from
7.6% in 2012 to 8.4% in 2013, compared to the EU28 average of 10.9%. However,
labour market performance is characterised by vast disparities among population
sub-groups (see Graph 3.13) and areas (see Graph 3.14).([15]) As a result, tight labour markets and growth-hampering skill
shortages in certain areas and sectors coexist with persistently high
unemployment in others. 
These deep-rooted labour market problems
continue to result in a chronic underutilisation of labour. Activity and employ­ment rates remain stagnant and below the EU28
average (72.5% vs. 76.5% and 67.2% vs. 68.2% respectively in 2012). Long-term
unemployment as a percentage of total unemployment is consistently high and has
been persistently higher than the EU28 average for several years. It is only
recently, mainly as a result of the heavy toll of the crisis on the labour
market of a number of member states, that the long-term unemployment rate has
converged with that in the EU28 (45.9% in 2012 vs. 46.1%).
The low-skilled, the young, the elderly
and third-country nationals are the sub-groups least active in the labour
market, with levels well below the EU average (see
Graph 3.13). According to estimations by the OECD
(2013) the fiscal impact of bringing employment rates for third-country
nationals on par with nationals would be close to 1% of GDP, the highest among
EU countries. Furthermore, as can be read from Graph 3.14, high geographic employment and
unemploy­ment disparities persist, with for instance Brussels registering an
unemployment rate four times that of the neighbouring province of Flemish
Brabant. 
The middling performance of the Belgian
labour market is rooted in a number of factors.
These  include 1) the largest (and still increasing) tax wedge on labour in the
EU, which, through its interaction with the benefit system, creates sizeable
unemployment and inactivity traps for most categories of workers (cf. below);
2) considerable vertical and horizontal skill mismatches([16]) hampering the efficient allocation of resources in the labour
market; 3) only moderately effective activation policies; 4) a widespread
though diminishing use of early and pre-retirement schemes and 5) the wage
setting system leaving limited room for differentiation between industries,
taking away the possibility for more productive sectors to use wages to attract
qualified labour. In addition, some common practices such as rewarding sector
seniority with higher salaries, potential severance payments and early
retirement options continue to discourage mobility. 
These various factors contribute to
modest potential growth by undermining labour utilisation and its optimal
allocation, with adverse effects on overall productivity, the adjustment
capacity and, ultimately, job creation. In
addition, the labour market's underperformance puts a strong pressure on the
social security system and on public finances in general. In the context of the
macroeconomic imbalances procedure, the focus will be on unemployment benefits
and active labour market policies, which are more closely linked to public
finances and potential growth.
In order to increase incentives to take
up work the Belgian authorities have enacted a reform of the unemployment
benefit system and taken targeted measures to reduce the tax wedge on labour. Thus, for example the so-called 'work bonus' for the lowest wage
earners has been increased several times.([17]) While it can be expected that these measures will somewhat reduce
the unemployment and inactivity traps at the bottom of the pay scale, their
effect is not yet fully visible in the latest available data.([18]) Nevertheless, it is clear that the historic unemployment traps in
Belgium are both sizeable and pervasive. According to the latest figures
provided by the OECD tax and benefits model([19]), they are among the highest in the EU. 
Regarding the unemployment trap, out of
30 categories of workers identified in the OECD model, Belgium was scoring
better than or in line with the EU average in four categories in 2001, eight
categories in 2006 and in only six categories in 2012 (see Graph 3.15). In 2012, the unemployment trap for
low-wage workers earning 67% of the average wage when resuming work was above
the EU average for all family compositions, in particular for single persons
and two-earner couples with the main earner gaining 100% of the average wage. 
High unemployment traps have not escaped
political attention. Over the past few years, policy
makers have attempted to tackle the problem by means of targeted measures aimed
at the bottom of the pay scale.  Actions taken in past years have indeed led to
a decrease of the unemployment traps of very low salaries (up to 50% of the
average wage) for all family types. However, the trap has widened for workers
earning 67% of the average wage and above, with lone parents or singles being
again those suffering from the highest financial disincentives to work. All in
all, the only categories where Belgium scores better than the EU average are
very low income households (i.e. 33% or less of the average wage). 
When comparing to the three neighbouring
countries, the picture is more mixed. According to a
study by the Central Economic Council (2012), the net replacement rate in
Belgium varies strongly according to the salary level, with the lowest salaries
being more protected than in neighbouring countries and salaries as of 100% of
the average wage less protected than in all three neighbouring countries.([20]) When taking into account top-up social assistance benefits, the
average family of four will be better protected in Germany and the Netherlands
than in Belgium in the case of 67% of the average wage. For 100% of the average
wage, such families will be better protected initially in the neighbouring
countries than in Belgium though benefit decreases reverse the situation after
23 months in the Netherlands and 25 months in France and Germany. 
The recent reform of the unemployment
benefit system introduces some important novelties in the design of the
unemploy­ment insurance. The rate at which regular
unemployment benefits are reduced over time has been made steeper as of
November 2012. To this end, the net replacement rate was increased for the
first six months (to 65% of the gross salary capped at a reference gross wage
of EUR 2,370.8 for the first three months, and 60% of the same reference wage
for the next three months) and remains at the same level as before the reform
for the following six months (60% of the gross salary capped at EUR 2,209.6).
After this first year, unemployment benefits decrease in several steps at a
pace which depends on household composition and the length of the previous
contribution period. After between 16 and 48 months, job seekers fall back on a
lump sum slightly higher than social assistance benefits.([21]) Exceptions apply to temporary unemployed, certain categories of
elderly unemployed or with long tenures, and unemployed with disabilities.([22]) At the same time, eligibility conditions have been relaxed by
lengthening the reference periods used for the calculation of previous work
experience (from 18, 27 and 36 to respectively 21, 33 and 42 months) and by
assimilating to salaried work also periods of activity carried out in the
framework of labour market re-integration programmes. In addition, activation
policies and availability to work requirements have been stepped up. The
reforms also limited the period that young people over 18 years entering the
labour market can receive an 'insertion allocation' to a maximum of three
years.([23])
In order to increase labour
participation, it is crucial to find the right balance between, on the one
hand, combining well-designed benefit systems (with decreasing benefits over
time) with appropriate job search requirements and, on the other hand,
effective job search assistance and training opportunities.([24]) The reform
of the unemployment benefit enacted by the Belgian authorities constitutes a
step towards such an appropriate balance. However, the complexity of the
Belgian benefit calculation method might hamper the incentive effects of the
overall system. Also, the gradual extension of the coverage of activation
policies to include elderly age groups and the rising unemployment rate
increases demand for timely follow-up, job search guidance and retraining
services by the public employment services, which might worsen existing
capacity issues. 
Inactivity traps are also large and
among the highest in the EU. For those who
disqualify from the unemployment benefit system, or do not have access to it
but are rather covered by social assistance, inactivity traps are notably above
EU average for all categories of workers and family types. Data for 2012 show
that very low wage earners at 30% of the average wage suffer from very high
financial disincentives to work, notably if they are single parents, single
persons and one-earner couples both with and without children.([25]) A study by the Public Social Welfare Centre (2012) confirms that
single parents with dependent children earning close to the minimum salary will
still receive more money and benefits under social assistance than when taking
up work and are thus strongly discouraged from active job searching. In
addition, large low-wage traps exist for most categories of workers and family
types, which do not encourage low-skilled workers to work more hours or to make
efforts to progress and upgrade their skills due to the loss of the benefits
incurred when increasing their salary level. This in turn has an impact on
competitive­ness through lower productivity growth. 
Belgium's labour market is also
characterized by a high level of mismatch between skills and jobs. As can be observed from the evolution of the Beveridge curve (see
Graph 3.16), matching efficiency did not worsen
significantly after the crisis.([26]) In the period 2008-09, vacancies fell and unemployment grew,
before the mismatch was exacerbated in 2010 with higher vacancies and higher
unemployment. In 2011 and 2012, unemployment decreased and vacancies increased
before returning to around the 2010 level in mid-2013. 
A large and persistent mismatch
nevertheless exists between skills and jobs, with demand for the latter
concentrated on high-skilled profiles, against a largely untapped offer of
low-skilled workers. Furthermore, it appears that
the mismatch is particularly severe in Brussels, even if it affects the whole
country (Zimmer, 2012). As illustrated in Graph 3.17, more than 80% of the active population
with tertiary education is employed in Belgium, against an employment rate over
60% for medium-skilled workers and less than 40% for low-skilled workers. 
Even though the problem has been
recognized by the government, initiatives taken in order to increase the number
of graduates in sciences and engineering and redirect youth to technical
professions did not bear fruit so far. Belgium
still shows a below average rate for graduates from mathematics, science and
technology studies compared to the EU (1.26% vs. 1.68% of aged 20-29 in 2011).
However, it would benefit both workers and the economy if students would be
directed towards these fields considering that the salary difference between
low/medium-skilled and high-skilled for the same age category is sizeable (see
Graph 3.18) and a higher proportion of
high-skilled labourers in the total workforce would increase labour
productivity. 
Activation policies also matter to
increase the matching between skills and jobs.
Although Belgium is one of the countries with the highest expenditure on active
labour market policies in terms of GDP([27]), yields remain unresponsive as can be concluded from the still
below average employment rate, though at the same time the unemployment rate
has remained largely constant even in the face of the financial and economic
crisis. The latest reform of unemployment benefits also encompassed activation
policies with a quicker and more intensive follow-up of job seekers. This is
expected to improve the take-up of jobs by unemployed persons and better
orientate job seekers towards sought skills. 
The negative effects of unemployment and
inactivity traps on labour market participation are recognised by the Belgian
authorities. Steps are indeed taken to address the
issue([28]) but, while
their full effect still needs to materialise, it is doubtful that the enacted
measures will be ambitious enough to fully solve the issue. While the
unemployment trap at the bottom of the pay scale indeed somewhat decreased,
large unemployment traps remain pervasive for households with slightly higher
wages. 
Given the already sizeable decreases of
social security contributions on the lowest wages, this approach offers limited
room for additional tax wedge reductions. In that
respect, a thorough reform of the tax system would probably be more effective
(see section 4). A tax shift from labour to other bases could indeed help
making work more rewarding and incentivize unemployed persons towards
re-entering the labour market. Additional adaptations could also be considered
to reduce disincentives to take up work for second-earners, for example by
reducing the average effective tax rate for second earners with respect to
single individuals or by shifting (part of) cash-based child support to in-kind
benefits in order to facilitate labour market participation. Finally, the
implementation of the 6th state reform and the ensuing further
regionalisation of activation policies provide the opportunity for a
comprehensive review of the effectiveness of the various existing measures.
This opportunity can be seized to rationalise the existing activation and
employment incentive schemes and integrate them in a coherent policy tailored
to the needs of the regional labour markets. 
Conclusion on external competitiveness
Belgium continues to lose export market
shares at a worrying pace and faster than most other EU countries. This trend
is partly driven by the traditional focus towards geographically close, but
slower growing, markets. While there are signs that the latter factor is slowly
improving, the other important driver, cost developments, continues to burden
the ability of Belgian manu­facturers to compete successfully internatio­nally.
This loss in cost competitiveness surfaces through indicators such as profit
margins and job creation, which in turn threatens the potential for sustainable
growth. As a consequence, the loss of competitive­ness is still considered a
threat to the stability of the Belgian economy over the medium term. 
In recent years, the Belgian authorities
have initia­ted a series of actions to address this imbalance, in particular as
regards wage cost developments but also for example regarding the stimulation
of innovative activities in order to align the product mix better with labour
costs. However, the degree to which this will improve Belgium's competitive­ness
position depends on developments in other countries. Reforms being enacted
across Europe, Belgium needs to pay attention not to fall behind. This would
require both more ambitious and timely action, including a comprehensive tax
overhaul to rebalance taxation towards non-labour sources, reforming the wage
setting system to allow for more differentiation and cyclicality, and
addressing lasting mal­functions of the labour market.
3.2.      Indebtedness
In April 2013, the Commission concluded
that Belgium was experiencing macroeconomic im­ba­lances with regard to its
indebtedness, espe­cially concerning the implications for the real economy of
the high public debt. In this section we will look
at the recent evolution of the public debt level and further assess the
potential risks.
Last year's In-Depth Review also
concluded that the indebtedness level of the private sector, which is high in
terms of non-consolidated debt, did not point to emerging risks given the still
reasonable consolidated level. The high diver­gence
between both levels could be explained by the high degree of intra-group loans
of non-financial corporations, fostered by advantageous tax regimes, which do
not constitute a macro-economic imbalance. In this section, we will reassess
the validity of this conclusion.
3.2.1.   Recent
evolution of the public debt
According to the European Commission's
2014 Winter Forecast, the consolidated public debt reached almost 100% of GDP
at the end of 2013([29]), which
was also the level at the end of 2012. This is
substantially above the MIP threshold of 60% and also above the EA aggregate
(at 95% of GDP in 2013). However, despite massive interventions in the
financial sector and a deficit above the 3% of GDP threshold from 2009 to 2012,
the debt increase since the start of the financial and economic crisis is
substantially less pronounced in Belgium than in many other Member States and
then in the euro area on aggregate (see Graph 3.19). 
Since the increase in the debt level
went hand in hand with the accumulation of assets in the financial sector, the
net debt increase was more contained. It increased
by 8pps. of GDP since 2007 (compared with over 20pps. in the euro area). The
net debt ratio has remained broadly stable since 2011 and stands now at around
the level observed in 2005.
In 2013, the general government's
primary balance turned positive for the first time since the start of the
crisis. However, the negative snowball effect
continued, with interest expendi­ture – although historically low – exceeding
nominal GDP growth (see Graph 3.20).
In order to respect its own commitment
to keep the debt ratio below 100% of GDP in 2013([30]), the government sold several assets
such as the investment portfolio of Royal Park Investments (0.2% of GDP), the
participation in BNP Paribas Fortis (0.8% of GDP) and a claim on future rents
of the Berlaymont building (0.2% of GDP). KBC reimbursed a loan of 0.5% of GDP.
However, these operations have partly been offset by negative stock-flow
adjustments, such as the contribution to the EFSF and ESM (0.6% of GDP). 
Moreover, the sale of assets only improves the gross debt level, while their
effect on the net debt is neutral.
At unchanged policy, the gross debt
ratio is forecast to rise further in 2014, to 100.5% of GDP, mostly due to
stock-flow adjustments (contribution to the EFSF and ESM), and to start
declining in 2015. Current fiscal consolida­tion
commitments, if implemented, should ensure a steady reduction of the Belgian
public debt in the coming years. However, the reduction in the debt ratio
remains to be hampered by low inflation, subdued GDP growth, and, in the longer
term, by the impact of ageing (see section 3.2.3).
The following sections will put the high
public debt level of Belgium in perspective.
3.2.2.   Risks
of short-term fiscal stress
Despite the high level of its public
debt, Belgium seems to have rapidly regained market confidence after the sudden
increase in risk premia on Belgian government bonds towards the end of 2011. The country currently enjoys relatively low financing costs (see
Graph 3.21). By refinancing its debt at low rates,
the Belgian sovereign has been able to drastically reduce its interest burden,
even after debt levels started to rise again.
Today, interest rates on Belgian bonds
are historically low and spreads vis-à-vis German bonds converged to those of
core group countries (see Graph 3.22). On top of actions by the ECB and
political progress in the architecture of EMU, the regained market confidence
could probably also be attributed to Belgium's good past track record in
implementing large fiscal consolidation plans, notably in the '80s and '90s ([31]). Also the relatively healthy state of the private sector (see
below) could have played a role. However, as a kind of swing state between core
and peripheral member states, Belgium could see its risk premium rapidly rising
in case of renewed financial turbulence in the euro area or domestic political
instability.
Currently, Belgium does not seem to face
a risk of fiscal stress in the short term. The
average life to maturity of the (federal) debt portfolio ([32]) is relatively long, at 7.6 years at the end of 2013 (Belgian Debt
Agency, 2014). The Belgian government used the current juncture to refinance
the outstanding debt at low rates and pre-financed part of the 2014 financing
needs. The 12-month and 60-month refixing risk([33]) of the federal debt decreased from 20.3% and 56.8% at the end of
2012 to 15.8% and 51.3% at the end of 2013  (Belgian Debt Agency, 2014).
Although risks of short term fiscal
stress seem to be contained, a sustained period of higher interest rates on
government debt would have a substantial impact on Belgium's public finances (see also Graph 3.23). Higher interest expenditure would
have to be compensated by a higher tax burden or expenditure cuts elsewhere
which could in turn impact economic activity. In addition, inte­rest payments
to non-residents would deteriorate the balance of primary income and thus would
contribute to the deterioration of the external position of the country. As
discussed in previous sections, competitiveness problems are already exerting
pressure on the current account balance. 
Increased financing costs for the
government would also pass through to the private sector, driving up financing
costs for domestic financial institutions and ultimately for non-financial
companies and households, which would have a negative impact on investment and
innovation. Another channel to the real economy
goes through the cost of mortgage loans with a floating interest rate, which is
legally bound to the market interest rate of Belgian bonds. Lastly, the high
public debt level also reduces the capacity of public finances to face
potential adverse econo­mic shocks and thus increases the vulnerability of the
economy as a whole.
3.2.3.   Long-term
sustainability risks of the Belgian public debt
On top of the high public debt level,
Belgium's public finances also face an above average projected impact of
ageing, with ageing costs projected to rise by almost 5 pps. of GDP by 2030.([34]) At
unchanged policy ([35]), this is
projected to bring the debt level to almost 127% of GDP by 2030, while the euro
area aggregate debt ratio is projected to decrease according to similar
simulations. Moreover, these long-term projections are very sensitive to
changes in the underlying macro-economic scenario. A 1 pp. increase in the
interest rate assump­tions or 0.5 pp. lower GDP growth would bring the debt
level to 136% of GDP (see Graph 3.23). On the other hand, adequate progress
towards Belgium's Medium Term Objective (MTO)([36]), as required by the Stability and Growth Pact, would put the debt
on a sustained downward path, arriving at around the 60% of GDP threshold at
the end of the period.
In this context, it should be noted that
Belgium has already a relatively high tax burden.
Hence, the fiscal space to service a higher debt or reduce the debt burden
through revenue-increasing measures is limited. However, there is room to make
the tax system less growth distortive, notably through a shift in taxes away from
labour (see section 4).
On the other hand, public spending in
Belgium is highly decentralized. This is a particular challenge for debt
reduction, which is mainly situated at federal level. In addition, also the increase in ageing costs will mainly occur at
federal level. The recent state reform and revision of the special law which
organizes the financing of regions and communities (see Box 3.4) tries to address this challenge, among
others by indexing the amounts of financial transfers from the federal to
sub-federal level only partially to GDP growth.
Lastly, the sustainability of public
debt is also determined by the economy's growth potential. Section 2 highlighted the current low potential growth of the
Belgian economy, especially due to a gradual erosion of the contribution of
total factor productivity since the beginning of the nineties. Also the loss in
competiveness and the inefficien­cies in the labour market discussed in the
previous sections render the high debt level even more problematic, as they
weigh on growth prospects, and in turn make it more difficult to put the ratio
on a downward path.
3.2.4.   Inter-linkages
with the financial sector
Belgium still carries substantial
contingent liabilities due to guarantees granted to the financial sector,
although they have been substantially reduced since last year's IDR. In December 2013, outstanding guarantees stood at EUR 45.4bn (12%
of GDP), compared to EUR 59.6bn in 2012([37]). The maximum risk currently amounts to EUR 56bn (14% of
GDP) ([38]), mainly
related to the guarantee scheme for Dexia. The sale of the investment portfolio
of Royal Park Investments (a special purpose vehicle created in the context of
the Fortis rescue operation) and of the participation in BNP Paribas Fortis, as
well as the reduction of a loan to KBC  made the sovereign less exposed to
financial sector developments. Belfius, one of the four large banks on the
Belgian market, is still fully state-owned.
The interaction between the sovereign
debt and the financial sector also plays in the opposite direction, in
particular through the substantial public debt holdings on the financial
sector's balance sheet. Holdings of Belgian bonds
by the domestic financial sector increased strongly between 2008 and 2012, at
the expense of foreign bond holdings. While this increased concentration on the
home market may have acted as a buffer du­ring the height of the sovereign debt
crisis, it also reinforced the potential spill-over effects between the public
debt and the financial sector in case of a decrease in the market value of
government bonds. 
The trend of increasing exposure to the
domestic public sector has been partly reversed in 2013. Since the end of 2012, domestic exposure of credit institutions
fell from EUR 69bn to EUR 62bn and stabilized at around EUR 60bn for insurance
companies. However, the above-described negative feedback loops remain a source
of vulnerability in case of renewed financial stress.
The two main challenges faced by the
Belgian financial sector are meeting new regulatory requirements and boosting
the low profitability (see Box 3.5).
3.2.5.   The
public debt and the overall indebtedness of the Belgian economy
Belgium is not only characterized by a
high public debt, but also by high private sector indebtedness, at least in
non-consolidated terms. In 2013, the
non-consolidated debt level of the private sector stood at 243% of GDP,
slightly below its 2012 peak level, but well above the euro area aggregate of
160% of GDP (see Graph 3.24). This high level is mainly due to the
high indebtedness of non-financial corporations (at 188% of GDP).
However, last year's IDR concluded that
while the private sector debt was high in non-consolidated terms, it did not
point to emerging risks given the still reasonable consolidated level, which is
comparable to the euro area aggregate (see Graph 3.25) and fairly stable since 2008.([39]) For
Belgium, the difference between both ratios is relatively large (around 100% of
GDP), due to large intra-company lending
 (Continued on the next page) 
 Box (continued) 
of non-financial corporations, which have
been fostered by advantageous tax regimes, such as the system of coordination
centres which was replaced by a more general allowance for corporate equity
(ACE) in 2006. While this allowance made debt financing less attractive for
corporations, which may explain the drop in the consolidated debt ratio prior
to the crisis, it also constitutes an incentive for intra-group loans, which are
visible in the non-consolidated ratio.([40])
It should be noted that also
consolidated debt figures include some intra-group loans, notably cross border
lending and borrowing inside multinational groups.
Loans granted by foreign firms (excluding MFI) to Belgian non-financial
corporations, which accounted for almost 40% of GDP in 2012, could serve as a
proxy for this intra-group lending. As shown by Bruggeman and Van Nieuwenhuyze
(2013), the increase in such loans between 2005 and 2012 (+17 pps. of GDP) can
explain much of the rise in the consolidated debt ratio of non-financial
corporations between 2005 and 2012 (+26 pps. of GDP). During the same period,
bank lending to non-financial corporations only increased by 5pps. of GDP.
Lastly, the steady increase in the
liabilities of non-financial corporations has been accompa­nied by an
accumulation of assets. Net liabilities of this
sector stand at around 90% of GDP, which is below the euro area aggregate of
95% of GDP. Also other indicators of Belgian corporations' financial health do
not point to significant sustainability risks. As shown already in last year's
IDR, the rise in the debt-to-GDP ratio is not mirrored by an increase in
debt-to-assets or debt-to-equity ratios of non-financial corporations.
The risks related to high public
indebtedness are also somewhat tempered by the good financial position of
Belgian households. Household indebtedness is lower
(55.8% of GDP) than in the euro area (63.9% of GDP). However, it has continued
its increase in recent years (see Graph 3.27), while in the euro area as a whole it
has stabilized since 2009. Given that household debt is mostly
mortgage-related, this divergent evolution could be explained by the fact that,
contrary to most other euro area member states, the Belgian housing market has
not seen a price correction so far. Last year's IDR argued that a possible
downward correction of housing prices would only have a limited macro-economic
impact (see Box 3.6 for an update on the housing market). 
At the end of 2013, the National Bank of
Belgium took some measures to address potential risks of housing market
overvaluation: an add-on of 5pps. to banks' own
risk weights for Belgian mortgage loans; a horizontal review of banks' internal
risk based models for Belgian mortgage loans; a self-assessment and reporting
by banks on compliance with the European Banking Authority's opinions on good
practices for mortgage lending and on good practices for the treatment of
mortgage owners with payment difficulties.
Fewer than half of households are
indebted and three in ten Belgian households have a mortgage loan. In the lowest income quintile, around 25% of households are
indebted and 38.5% of their income is dedicated to debt service, which is
relatively high from a European perspective (see Graph 3.28). 
The overall increase in household
indebtedness has been mirrored by growing financial assets, resulting in a
relatively low and stable debt-to-financial assets ratio. This ratio stands at 20.4%, compared to 31% in the euro area as a
whole. Moreover, the debt to asset ratio is rather equally distributed in
Belgium (see Graph 3.29).
Overall, net financial assets of
households are highly positive (around 220% of GDP) and are now close to
pre-crisis levels. The recent recovery is mostly
related to the rise in equity prices, the volume effect having played less of a
role due to the slight reorientation of the household investor's profile to
less risky assets.([41]) Net
financial assets of Belgian households are substantially higher than the euro
area aggregate of 136% of GDP and the three main trading partners, with a ratio
of 192% for the Netherlands, 139.4% for France and 126.5% for Germany. However,
this favourable position of households may change in the long term, notably due
to reduced savings as a consequence of population ageing.
Net financial assets are somewhat more
evenly distributed than in the euro area on average. The highest income quintile owns 61.2% of net financial assets as
compared to 67.7% for the euro area aggregate. Moreover, the share of
households owning negative financial assets is smaller in Belgium.
However, this more even distribution of
financial assets between income groups is not fully confirmed by the
distribution of total net wealth. While 70% of
Belgian households own their main residence as compared to 60% in the euro area
(NL: 57.1%; FR: 55.3%; DE: 44.2%), the share of home owners in the lowest
income quintile (45%) is around the euro area aggregate (47%) (Du Caju, 2013).
On the other hand, the share of households with negative wealth is smaller in
Belgium (2.7%) than in the euro area (4.8%), and the three main trading
partners (NL: 11.7%; DE: 7.4%; FR: 3.9%).
In conclusion, while the public sector
carries a substantial net debt, the net asset position of the Belgian economy
is highly positive (+45% of GDP) and markedly above the euro area aggregate
(-24% of GDP), notably thanks to the net assets of households, which more than
offset the net liabilities of the public sector and the non-financial
corporations (see Graph 3.30).
The total level of taxation – or public
expendi­ture – reflects to a large extent collective choices regarding public
facilities such as the organisa­tion of welfare provisions, education and
public infrastructure. The level of taxation
therefore needs to be appreciated against public output. Yet, comparable
overall tax burdens may bring about quite divergent consequences for economic
development as the distribution across different types of taxation influences
taxpayers in dissimilar ways. In this respect, different types of taxation can
be ranked from less to more 'growth-friendly' with potential distortive effects
increasing with the overall tax burden. Put concisely, taxation in Belgium is
characterized by a high overall level with the tax burden skewed towards labour
(see Graph 4.1) and high nominal rates in combination
with narrow tax bases given the presence of significant tax expenditures, in
particular for VAT and personal income taxation (PIT).
The high tax burden on labour is due to
high employers' social security contributions (SSC) and high personal income
tax rates, including for medium income earners.
Employers' SSC account for the highest share of the tax wedge. The high tax
burden on labour goes hand in hand with weaknesses in the labour market
discussed in section 3.1.4. It is in this context that European recommendations
have called upon Belgian authorities to address the suboptimal tax design by
pursuing a general tax shift away from labour.([42]) Wage costs being one of the drivers behind the loss in external
competitiveness discussed higher, this tax reshuffle may help to address this
imbalance and increase the low activity rate that characterizes the Belgian
labour market. This would in turn support the country's growth potential, which
connects with the second broad challenge of assuring public finance
sustainability. Given that budgetary margins generated in upcoming years will
be needed in the first place to bring down the fiscal deficit, this implies
that in the short term tax reforms will need to be broadly revenue neutral and
assure stable revenue flows. Hence, a tax shift is currently the most realistic
way to alleviate labour taxation.
Despite the repeated call for a
comprehensive review of the tax system, no substantial progress has been made
so far.([43]) A consensus on the need to make more substantial inroads on labour
taxation seems nevertheless materialising among political parties – though the
financing side of tabled proposals appears less developed – and progress seems
feasible following the May 2014 elections at federal and regional levels. This
could be especially true as the devolution to the regions of certain tax competen­ces
regarding personal income taxation and targeted social security contributions
within the framework of the sixth reform of the state (see Box 3.4) may create
a window of opportunity. This focus aims precisely to look at potential ways
forward.
Redesigning the Belgian tax system
Two approaches (or a combination of
both) could be considered with regard to a lowering of labour taxation. Lower taxation upstream by a reduction in employers' SSC or
lower taxation downstream by reducing PIT or employees' SSC.([44]) This enhances respectively labour demand and supply which are both
hampered by high taxation. Reducing employers' SSC for low-skilled jobs carries
the highest potential for job creation according to Breemersch & Konings
(2013), who also highlighted the need for sufficient accompanying measures
(e.g. training) to overcome mismatches. QUEST simulations have comparable
findings for targeted SSC reductions (EC, 2013).
Regardless of the approach chosen,
compensa­ting revenues from alternative sources will have to be found in order
to ensure revenue neutrality. Provided the goal is
to make a serious dent in labour costs, a multipronged approach will be
needed.([45]) Making the
tax system more efficient implies that compensating revenues should have their
origin in tax bases that are stable over the economic cycle, are broad enough
and are less distortive from an economic point of view than labour taxation.
Economic distortion is understood to increase from taxation on property and
consumption (VAT, excise duties, environmental) over labour income to corporate
income (Arnold, 2008). 
Property taxation 
There seems to be scope to restructure
and possibly increase property taxation, mostly a regional competence in
Belgium. While total property taxation is already
relatively high compared to other countries (see Graph 4.2), this form of taxation, in particular
recurrent taxes on real estate or the taxation of value added on land property,
is considered among the taxes least detrimental to growth given the rather
inelastic tax base (Johannesson Lindén & Gayer, 2012; OECD, 2010). However,
it also appears ahead of least popular taxes.
On the one hand, recurrent taxes on
immovable property could be increased. Aside from a
stable source of revenue, their distortive effect is limited as already
highlighted.  Recurrent taxes currently represent only around 40% of total
property taxation. In this respect, cadastral values will have to be updated as
these estimates of imputed rent (the net annual revenue generated by renting a
building or plot of land) form the basis for recurrent taxes on immovable
property in Belgium.  While Belgian law stipulates that imputed rents have to
be re-estimated each decade, taxes are currently based on indexed rent
estimations for 1975. This way the tax base is significantly underestimated:
the value assessed through imputed rents is on average less than half the
market value (Høj, 2009). Moreover, over the last 40 years, the relative value
of property has changed drastically, even within municipalities, giving the tax
a regressive character in some situations, also considering the existence of
tax reductions in case of a low imputed rent. 
Dated imputed rents also serve as a
benchmark to determine whether a property can benefit from lower registration
rights. The obligatory registration of renting
contracts for private accommodation since 2007 may provide the authorities with
a good database for re-assessing imputed rents. Considering that regions are
the recipients of property taxes with the imputed income only playing a minor
role for PIT at the federal level, transferring the responsibility over the
re-assessment of imputed rents to the regional level would allow regions to
determine both tax rates and their basis([46]) and to employ these for the development of more holistic housing
policies. 
This may involve, on the other hand,
lower revenues from transaction taxes (regional registration rights in
Belgium). Currently, these are the highest of all
EU27 countries as seen in Graph 4.2. Lowering them further or generalizing
the carry-over of paid duties as already exists in Flanders([47]) may stimulate labour mobility and would facilitate switching
property according to effective needs. This may improve the proper functioning
of the property market, which may over time also facilitate price corrections
in certain areas and markets. Revised registration taxes would be one element
in the broader revision by regions of the fiscal treatment of ownership and
acquisition of real estate.
Environmental taxation
Environmental taxation is currently
under­developed in Belgium.([48]) Revenues are among the lowest across the EU. This is mainly due to
low revenues from energy taxation (see Graph 4.3). Cross-border fuel tourism may partly
explain these low revenues, but also other elements are under­stood to play a
role: lower excise duties on diesel than on petrol in combination with a higher
share of diesel cars, and low taxes on heating fuels. Heating support to
vulnerable households could potentially be organized more efficiently through
general welfare payments, rather than through the current generalized support
to energy consump­tion. In addition, Belgium does not apply an auto­matic
indexation of environmental taxes.([49]) Index­ing excise duty levels to inflation would prevent an erosion
of tax revenues and would help to maintain the impact of the tax on agents'
behaviour. 
Another important environmental issue is
the preferential treatment of company cars (and fuel cards) in the tax system. Despite measures to make the tax base of company cars (which are more
widespread than in other countries) CO2 dependent, the private use of company
cars conti­nues to be heavily subsidised. This encourages car ownership,
affects driving and commuting habits and imposes welfare costs on the society.
Finally, projections for greenhouse gas emissions by 2020 indicate that Belgium
will miss its 15% reduction target by 11 pps. (EC, 2013).
While this underpins the argument in
favour of a fiscal greening and an increase seems feasible through, among
others, higher excise duties, road pricing or
kilometre-driven charges, revenue expectations need to be
qualified somewhat. Indeed, environmental taxes are 'Pigovian' taxes: corrective consumption
taxes which aim to internalise externalities. As these taxes target a socially
desired behaviour, they may stifle an already relatively narrow tax base –
ambitions of moving towards a 'low-carbon economy' would resort the same
effect. As a consequence, effective revenues may disappoint in the long-run and
additional sources will need to be found for tax shift purposes. Furthermore, higher taxes on energy consumption need to be
reconciled with the need to safeguard competitiveness of the Belgian industry,
which is rather energy-intensive in composition as underscored in section
3.1.3. 
VAT
The efficiency of VAT revenues in
Belgium seems subject to improvement. In 2011 the
country had a VAT revenue ratio (actual revenues vs. revenues that would
theoretically be raised if VAT was applied at the standard rate to all final
consumption) of 47.9%, compared to a EU27 average of 49.4% and 55.6% and 55.1%
in respectively Germany and the Netherlands (EC, 2013).
Studies point out that this efficiency gap is not due to higher VAT evasion as
compared to other countries (CASE/CPB, 2013) but reflects the fairly widespread application of VAT exemptions and reduced
rates. These tax expenditures amoun­ted to 2.4% of GDP in 2012([50]) and apply to a relatively broad group of products, affecting
nearly 30% of the tax base. This suggests considerable scope for efficiency gains.
The standard VAT rate is 21%, comparable to
rates in neighbouring countries. In addition, two reduced rates of 6% and 12%
and a zero rate exist. 
-      0%: applicable to newspapers and periodicals;
-      6%: applicable to primary and socially important goods and services.
This intro­duces a certain degree of progressivity in the VAT given the higher
importance of such goods in the total consumption of lower income house­holds.
A comparable reduced tariff for basic goods exists in most other European
countries;
-      12%: applicable to e.g. restaurant meals and social housing.
Reducing the number of rates and
allocating products to the most fitting category would go a long way in
improving VAT collection. A first element would
most likely be the reconsideration of the appropriateness of maintaining the
12% reduced rate.  Some items currently taxed at this rate (e.g. social
housing) seem to qualify for the reduced VAT rate, though for most items there
does not seems to be sufficient justification for not applying the standard
rate.([51]) The main
item in this regard is the reduced VAT for restaurant meals, introduced as
recently as 2010 and carrying a budgetary cost of 0.1% of GDP.([52]) The 0% rate accorded to newspapers and
periodicals represents a comparable cost for Belgian public finances. At the
same time, the primary or social character of certain items currently taxed at
6% appears dubious (e.g. fresh flowers, sport and amusement tickets, original
pieces of art, antiquities,…), creating scope for applying the standard rate
for these products. 
In addition, also an increase in the
standard VAT rate could be contemplated. VAT has
proven a stable revenue source in the past, amounting to 6.9-7.1% of GDP during
2004-11. An additional advantage is the broad tax base, meaning that a slight
increase in the standard rate may yield considerable additional revenues with
probably only modest changes in consumer behaviour. In the context of its
budgetary exercise for 2013, the Belgian government already contem­plated an
increase of the standard VAT rate from 21% to 22% (and a simultaneous reduction
of the 6% rate), though this option was not retained in the end. Exemptions for
services by bailiffs, notaries and lawyers have been lifted in recent years,
while the decision to subject household electricity consumption to the reduced
rate of 6% (see Box 3.2) goes against the idea of a reorientation towards
consumption taxes.
When looked at in isolation, measures to
increase VAT efficiency may curb its progressiveness. However, value added taxes can be considered a blunt instrument for redistribution as reduced
rates do not allow targeting low-income households by
discriminating between identical consumption by lower and higher income groups.([53]) Yet, from a fairness point of view it is the degree of
redistribution of the overall tax system that matters. Furthermore, increasing
VAT revenues in order to reduce employers' SSC for low-wages([54]) would enhance job creation in this segment and increase disposable
income. 
Clearly, a tax shift in this direction
would have the biggest effect on external competitiveness provided the
resulting price effects do not (fully) transpire in wage growth. As De Mooij & Keen (2012) highlight,  a
shift towards VAT can accele­rate rebalancing but has essentially short- to
medium-term effects as over a longer time horizon  the price effect would
trickle through in wages. In particular within the Belgian context of automatic
indexation of wages a (partial) neutralization of a temporary uptick in
inflation would probably be required. 
PIT
Personal income taxation is
characterized by high marginal rates as applicable rates increase rapidly
already at the lower end of the wage scale. This
creates disincentives for the uptake of (extra) work and is reflected in the
high labour market traps discussed in section 3.1.4. A wide­ning of tax
brackets could be financed through a revision of the many tax expenditures that
exist in personal income taxes and which eat into the tax base. 
Though not all tax expenditures are
unwarran­ted or inefficient, a rationalization seems never­the­less necessary
as they are higher and more numerous in Belgium than in neigh­bouring
countries. They have been rising fast over the past
decade, reaching 2.4% of GDP in 2012. Aside from broadening tax bases, cutting
tax expenditures contributes to raising transparency and fairness while
reducing distortions, and lead to a favourable trade-off with growth in both
the short- and long-run (Carnot, 2013) given the distortive effect they often
resort through the creation of dead-weight losses. While generally favouring
higher incomes, tax expenditures do not fundamentally reduce the overall
progressivity of the Belgian PIT (Decoster, 2013). A comprehen­sive revision
would assess for every tax expendi­ture whether it is (i) opportune in terms of
policy goals, (ii) effective in moving towards these goals and (iii)
justifiable in terms of budgetary impact. Such a revision seems to impose
itself anyhow as several important tax reductions will become regional
competences following the sixth reform of the state (see Box 3.4), all the more
as budgetary means will only be partly transferred and the cost of several of
these reductions has been rising fast. Examples of costly tax expenditures
which are likely to give rise to distortive effects include reductions for
mortgage loans (0.33% of GDP in 2012, compared to 0.11% in 2008), private
pension savings (0.14% of GDP), and service vouchers (0.06% of GDP), though
there are a plethora of small measures that contribute to the complexity of PIT
and could possibly be reconsidered.
Another way to broaden the tax base of
PIT is pushing back the 'corporatisation' of personal income by subjecting
income of (quasi) indivi­dual companies to progressive PIT rates. As highlighted in Valenduc (2011) the significant difference in
marginal tax rates between personal and corporate income taxation has led to
the creation of many vehicles that, according to their judicial statute, are
companies but in reality often not aim at expansion and generate little to no
employment. 
A more far-reaching reform would entail
the fiscal globalisation of all revenues of private persons. This would subject all income from labour, capital, property,
social benefits etc. to a progressive tax rate and has been put forward by
Castanheira et al. (2014) as the initial globalisation of revenues has been
gradually eroded by government measures with the result than only labour income
is currently taxed progressively.
CIT
Corporate income taxes are considered
among the most growth-unfriendly forms of taxation as indicated higher and form
therefore no alterna­tive for labour taxation.
Nevertheless, also CIT qualifies for a base broadening, which would create
space to reduce the nominal corporate tax rate significantly. At 33.99% the
latter is among the highest in Europe. However, a long list of tax deductions
puts the effective tax rate a little over 26%, compared to 34.2% in France,
28.2% in Germany, 27.5% in the Netherlands and 24.9% in Luxemburg (ZEW, 2012).
A noteworthy tax expenditure in Belgian
CIT concerns the deduction for venture capital or allowance for corporate
equity (ACE). It was introduced in 2006 to
stimulate the self-financing capacity of companies and the attractiveness of
Belgium for multinationals after the phasing out of the coordination centre
regime. While the ACE has improved solvability of non-financial companies, its
(gross) budgetary impact has risen fast (from 1.1% of GDP in 2008 to 1.6% in
2012) while 30% of the deductions is done by companies with no employment
(Valenduc, 2013). Therefore, the Belgian authorities have altered the system
repea­tedly in recent years. There has been a gradual reduction in the
applicable interest rate (with an addition for SMEs), bringing it more in line
with market rates for Belgian government bonds. The possibility to carry-over
unused deductions has been abolished since 2013. A minimum corporate income tax
(the so-called 'fairness tax') has also been introduced for large companies
that pay out dividends from profits which were untaxed as a consequence of ACE
use and/or by the carry-forward of losses. Still, reserving the use of ACE for
new, reinvested capital flows would render the system more sustainable. In
addition, the specific anti-abuse rules could be reviewed to ensure their
effectiveness.
Other taxes 
Taxation for most financial income has
been increased and harmonized during consecutive rounds of budgetary
consolidation in recent years though a number of exemptions remain. A first one is the exoneration on saving accounts (0.12% of GDP in
forgone revenues in 2012) with savings taxation at 0.2% of GDP, among the
lowest in the EU. Another remaining exemption concerns realised value added on
financial assets held by households. Finally, income from property renting to
private persons could be taxed on the basis of effective revenues instead of
cadastral values given the problems with this tax base discussed supra.([55])
Excise duties on alcohol and tobacco,
sometimes referred to as 'sin taxes', have been increased repeatedly in recent
years. Given the narrow tax base, the possibilities
of cross-border shopping, and the change in consumer behaviour to be expected
from increases, the scope for additional revenues seems more limited.
Finally, collection costs stood at EUR 1.36
per EUR 100 of taxes in 2011 (OECD, 2013). This
places Belgium in the upper spectrum of the EU. Reducing these relativity high
costs towards the EU27 average of EUR 1.13 may contribute to a lowering of
labour taxation.
Conclusion
The high level of tax expenditure weighs
on the complexity and efficiency as well as the fairness of the Belgian tax
system. As a consequence, tax bases for VAT and PIT
provide ample scope for widening in the context of a tax shift away from labour
as to address the loss in competitive­ness. A general approach of tax base
broadening carries the advantage of a more efficient allocation of resources,
which in turn would benefit the economy's growth potential over time. In
addition, an increase in the standard VAT rate may be
considered as this would generate substantial revenues
with limited spill-over effects. Other areas to be explored in a global,
revenue-neutral redistribution of the tax burden include (recurrent) property
taxation, the use of currently underdeve­loped aspects of environmental
taxation and certain types of financial income.
A comprehensive rethinking of the
Belgian tax sys­tem could be complicated by the scattered fiscal competences
between the federal level and regional entities.
Each level could nevertheless take substantial action within its respective
compe­tences while ensuring appropriate co-ordination. In this respect the
sixth reform of the state may even facilitate the realisation of a tax shift
given the increase of regional surcharges in PIT and the transfer of a list of
tax reductions, both of which could be employed for targeted SSC reductions,
another new regional competence (see Box 3.4).
The analysis carried out in section 3
confirms that competitiveness and public indebtedness confront the Belgian
economy with important macro-economic challenges.
These were already identified under the MIP in preceding IDRs and relevant
policy responses were reflected and integrated in the country-specific
recommenda­tions (CSR) adopted by the Council in July 2013. The evaluation of
progress in the implementation of those recommendations will take place in the
context of the assessment of the National Reform Programme and Stability
Programme under the European Semester. Against this background, this section
discusses different avenues that could be envisaged to address the
above-mentioned challenges. 
External competitiveness
With regard to the first broad challenge of
external competitiveness different avenues need to be distinguished given the
composite nature of the observed loss. 
In order to allow for the high export
market concentration to diversify and take advantage of faster growing markets,
the authorities may aim to further enhance conditions for manufac­turing
companies to partake in or to expand their export activities. Scope for wider export involvement seems significant among the many
Belgian SMEs. Also the big regional differences in cross-border trade suggest
potential for improve­ment. Access to (long-term) financing and the inherent
risk of default are generally understood to represent the main barriers for
companies to cross borders. While companies often face inadequate prospects to
fund their expansion by means of private capital, at the same time, record amounts
stand idle on Belgian saving deposits. Policy makers may consider ways to
mobilise this sleeping capital for more productive means. Assisting companies
in moving beyond the small domestic market would also allow for their natural
expansion, which in turn would augment the potential for job creation. 
Market diversification may also result
from an alteration of the product mix engendered in Belgian facilities. As sequential IDR-analysis highlighted, exports are geared towards
the medium level in terms of value added. Squaring Belgium's high labour costs
with sustainable job creation and the conservation of a high standard of living
will require a reorientation towards products with a higher technological
content than is currently the case. To nurture the innovative prowess of the
Belgian economy some potential ways forward were already outlined in last
year's IDR. A first one is a further enhancement of support to clusters. Given
the importance of SMEs for the Belgian economy as well as their general underrepresentation
in export activity, bringing together compatible SMEs within specialized
clusters could compensate for a loss in traditional, mass production. Creating
the necessary conditions to allow for innovative firms to expand remains
another general challenge. Financial incentives put in place by Belgian
authorities (e.g. payroll tax incentive and tax credit to lower R&D
personnel and investment costs) are laudable initiatives to help innovative
firms to expand and Belgium to move closer to the 2020 target of 3% of GDP
spending on R&D. Access to subsidies is, howe­ver, still considered complex
and time-consuming, while available support is highly fragmented. Also, in
order for research performed in Belgium to lead to actual product development
in the country, attention could be paid to labour taxation as the elevated
level discourages manufacturing activities. Aside from financial initiatives, a
further administrative modernisation and simplifi­cation could be pursued
through for example a deeper penetration of ICT solutions considering that
administrative burdens affect smaller companies relatively more than bigger
ones. 
Relative dynamics of
productivity-adjusted wages are an important element with regard to eroding
competitiveness. In this respect, wage formation is
a strand for which the Belgian authorities could demonstrate more ambition in
order to restore Belgium's relative cost competiti­veness and prevent a further
decay of the country's manufactu­ring basis. 
A first element to consider is the Law
of 1996 and the wage norm defined under this Law.
Unsuccessful attempts to increase the effectiveness of the law mean that the
topic could be taken up again by the next government. So far, the political
debate on reform options has focused on the methodology used to arrive at the
norm, its legal status, the automatic correction mechanisms provided for in the
current legal framework and the role of the government in the entire process.
Discussions on how to establish a direct link between margins for wage growth
and productivity evolutions seem not to be on the agenda, although persistent
decoupling between both threatens employ­ment. 
Introducing a more decentralized
procedure of wage negotiation would enhance the overall resi­lience and
functioning of the Belgian economy. Determining a
national wage norm ignores important differences observed between sectors. If
wages would be entirely determined at a lower, i.e. sectorial, level, companies
would be enabled to square wage policies more aptly with their performance.
Furthermore, a higher degree of sectorial differentiation would allow for
labour inputs to be allocated away more gradually from declining activities
towards more dynamic sectors and avoid disruptions.  
Even in case of a reform of the Law of
1996, wage indexation means that a renewed wide­ning of the wage gap cannot be
excluded. The widespread practice of some form of
automatic wage indexation carries a high symbolic value in the eyes of both its
supporters and its detractors. Suggestions for refor­ming this character­istically
Belgian feature, including repeated calls in this direction by European
institutions, have stirred stiff resistance by some players and are perceived
as a dismantlement of the Belgian welfare state.  However, the tangible advantage
in the short term of swift purchasing power correc­tion is offset by risks of
creeping employment erosion over the longer term with insufficient versatility
in times of economic distress affecting competitiveness.  
Certain reforms would carry im­portant
advan­tages and render the system more sustainable in terms of employment. Indexation could for example be limited to a certain wage level
(i.e. indexing salaries in nominal terms compared to the current, regressive
proportional adjustment). This would at the same time guaran­tee effective
purchasing power and better reconcile wage devel­opments with economic
realities. Other options for using the entire margin and safeguard cost
competitive­ness more accurate­ly include the possibility to allow employers to
use part of the increase in the index for non-wage compensation such as pension
plans or to invest these means in human capital. Concluding all-in agreements
remains another viable option.
Given the practice of automatic wage
indexa­tion, domestic price developments are an important aspect behind nominal
wage growth. The notable efforts by the Belgian
authorities to enhance the functioning of product markets, in particular for
energy and telecommunica­tion, seem to bear fruit as reflected in price
developments. Continued monitoring in order to make these gains permanent
remains warranted, especially when considering that non-commodity price
components (e.g. energy distribution costs) have tended to rise fast in the
past. Making sure that all network tariffs reflect actual costs and are
incentive-based remains therefore crucial. Expanding attention to the
functioning of service sectors may be another goal. 
The current approach of repeated, small
reduc­tions in parafiscal pressure on labour could be replaced by a global
rethinking of the design of Belgian taxa­tion.
Employment growth would be supported by a broader approach of reduced labour
taxation as compared to the current emphasis on measures to reduce cost of
hiring for a limited number of workers in often non-tradable activities such as
the catering sector. A broad rethinking would involve a shift in the tax burden
from labour to other sources of revenue, both at the federal and the regional
level. While a broad consensus has developed on the need of such a
reorientation, no effective action has been initiated. Further­more, the source
of compensating revenues is more subject to disagreement. VAT and PIT carry
important scope for tax base widening. In addition, an
increase in the standard VAT rate may be considered as this would generate substantial revenues with limited spill-over effects. Other areas to
be explored in a global redistribution of the tax burden include (recurrent)
property taxa­tion, the use of currently underdeveloped aspects of
environmental taxation (including the treatment of company cars) and the
taxation of certain types of financial income. A point to be reckoned with
concerns the distributional effects a rethinking of the tax system may induce
and how overall pro­gressivity of the tax system would be safeguarded.
In order to boost the growth potential
of the economy it will be crucial to increase the labour participation rate of
underrepresented groups. Although in recent years
the government has taken measures to increase incentives to work and reduce
skill mismatches, the results are still inconclusive.  Persistently high levels
of skill mismatches suggest that active labour market policies are not playing
their role. In this regard, it is crucial to strike the right balance between,
on the one hand, time-responsive benefits and appropriate job search
requirements and, on the other hand, effective job search assistance and
training opportunities. In addition, the tax reshuffle discussed above, could
aim to lower disincentives for the uptake of (more) work, including by
second-earners. The uptake of work by the latter category may also be assisted
by a rethinking of the current cash-based child support towards a service-based
system.
Regarding job search assistance and
training, the complexity of the system and the increased capacity need for
effective assistance from the public employment services (PES) will have to be
addressed.  The latest reform of the state will
provide regions with the leverages to approach regional labour market
rigidities in a more tailor-made way, for example through job orientation,
retraining and activation policies. As a conse­quence, appropriate working
means for PES needs to be assured. Finally, more concrete steps could be taken
to stimulate the uptake of STEM-studies and alleviate labour market tensions. 
Public indebtedness
The high public debt level and the
possible implications for the real economy remain one of the main challenges
for Belgium. Debt reduction would not only reduce
the risks associated to the public debt, but would also provide the authorities
with more latitude to implement a fiscal policy aimed at improving the
competitiveness of the country, as well as to face unexpected develop­ments in
other economic sectors, such as financial markets. So far, strategies to reduce
the public debt level were partly built around the sale of assets. 
However, further deficit reduction in
itself, in line with the country's commitment to reach its Medium Term
Objective in 2016, will remain necessary in order to put the debt ratio on a
sustainable downward path. While the deficit is
estimated to have been brought below the 3% of GDP threshold of the Stability
and Growth Pact([56]), a large
fiscal effort (3% of GDP) remains to be made over the coming years in order to
reach the agreed targets. The high overall tax burden in Belgium and the
above-mentioned competitiveness challenge faced by Belgium imply limited room
for deficit and debt reduction by overall tax increases. Hence, deficit
reduction will have to come primarily from spending restraint. 
While Belgium's state structure became
gra­dually more decentralised over the last decades, the historically
accumulated public debt remained largely at the federal level. The recent reform of the state devolves further spen­ding
responsibilities and tax powers to regions and communities. In this context,
clear and transparent fiscal arrangements will be necessary. The sixth reform
of the state includes a revision of the Special Finance Act which rebalances the
financial flows between the federal and sub-federal authori­ties. A recent
cooperation agreement implementing the European 'Fiscal Compact' provides some
mechanisms for budgetary coordination. A rigo­rous implementa­tion and a
balanced contribution by all layers of government will be beneficial in order
to achieve a successful consolidation strategy.
Also the implicit debt associated with
an ageing population will need to be addressed by further pension reforms in
order to prevent new increases of the debt level in the medium term. Measures to strengthen the growth potential of the economy would
also contribute to the sustaina­bility of public finances.
Lastly, while prospective consolidation
needs limit the scope for overall tax decreases, they do not prevent a tax
shift that is neutral from a revenue point of view (cf. supra). A tax shift away from labour may boost employment and growth and
could thus even be supportive for deficit and debt reduction. Finally, making
the taxation of savings more neutral with respect to the type of financial
product could diversify the channels through which the large financial assets
of Belgian households are allocated to the real economy. This would have to be
implemented in a gradual way, in order to minimize the disruption to financial
institutions and the financial system.
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([1])  According to the National Accounts (NA)
approach the current account has been close to balance in recent years. While
the current account (NA) has on average been 1.6 pps. more positive than the
current account (BoP) during 2002-12, it also features a long-term declining
trend.
([2])  In 2000 16.9% of intermediate goods
went to DE, rising to 18.7% in 2006 and 18.9% in 2012.
([3])  In 2011 12.7% of the 20-29 year old
population had a tertiary graduate in science and technology, compared to the
EU average of 15.2%. Moreover, Belgium is one of the only countries to have
seen this ratio fall as compared to 2007, when it still reached 14%.
([4])  Based on OECD/WTO data on trade in
value added. The most recent year for which data are available is 2009.
([5])  This REER measurement uses the nominal
effective exchange rate versus a group of 36 countries representing 80% of
Belgian exports in 2012. DE, FR & NL represent 45% of Belgian exports and
are often used as a proxy for general developments.
([6])  The health index differs from the HICP
in that it excludes the price evolution of alcoholic beverages, tobacco
products and motor fuels.
([7])  See preceding In-Depth Reviews for a more
detailed discussion. The Central Economic Council's latest Technical Report (December
2013) puts the hourly wage gap at 4.8% at the end of 2012 and projects it to
shrink to 3.8% by the end of 2014.
([8])  Capital deepening, a rising capital stock per labour hour, involves a situation of expanding
activity with rising productivity per worker. 
([9])  For reasons of data availability, data
used are gross fixed capital formation in the private sector and hours worked
for the total economy. When hours worked in the private sector are used for
Belgium, the trend remains unchanged. 
([10]) A number of revisions were already
introduced as of 01/01/2013 (see Assessment of the 2013 NRP and SP for Belgium,
2013). A second set of revisions applies since 01/01/2014 and concerns the
composition of the commodity basket, the way in which the price of specific
products is computed and the index calculation method as such. With regard to
the latter, chain-linked weights have been introduced in national inflation
calculations, allowing for future changes in consumer behaviour to be faster
reflected in the health index.
([11]) Correlation between overall HICP and
energy price inflation in BE (2000-13): 0.89, compared to 0.73 for the EA, 0.66
for DE, 0.72 for FR and 0.34 for NL. 
([12]) The impact on the Social Security
budget of the repeated reductions in employers' contributions will be
compensated through higher transfers from the general budget ('alternative
financing'), which still makes it unfunded in aggregate terms.
([13]) This section draws to a large extent on
Energy Economic Developments in Europe, European Commission, DG ECFIN,
2014.
([14]) The RUEC estimates for 2013 are
obtained as follows. Per country two preliminary estimates are produced by
means of logarithmic extrapolation of the change in the periods 1995-11 and
2007-11 respectively. The reported estimate is calculated as the average of the
two preliminary estimates.
([15]) From 31.4% for a low qualified 3rd
country national to 82.7% for a highly qualified Belgian national (LFS, 2012,
20-64 years).
([16]) Vertical skill mismatch refers to a
situation where the level of skills a worker possesses is higher or lower than
is required in the job. Horizontal skill mismatch refers to a situation where
workers have the appropriate qualification level but different skills than
required for the job they occupy (Cedefop, 2009).
([17]) The ‘work bonus’ consists of a
reduction of employees’ social security contributions and of a personal income
tax credit for the lowest wages. Both elements have been reinforced in several
steps in January and April 2013 and in January 2014. 
([18]) The latest reform of the unemployment
benefit system (cf. infra for more details) has entered into force in
two phases.  The reformed 'insertion allowance' scheme applies since 01/01/2012,
whereas the new rules on unemployment benefits have entered into force as of
01/11/2012. The full impact of these reforms is therefore not yet taken into
account in the latest OECD data.  
([19]) OECD Tax and Benefits database.  
([20]) With the exception of a single person
who is better protected in Belgium than in Germany until reaching 120% of the
average salary.
([21]) EUR 474.4 cohabitant; EUR 711.6 single;
EUR 948.7 with dependent child.  
([22]) More precisely, the following
categories are excluded: unemployed persons with a minimum of 20 years of
employment (23 years from 01/01/2014); unemployed persons with children; single
unemployed persons from 55 years old and above; and unemployed persons with reduced
work capacity of 33%.
([23]) This period can be extended in some
cases by up to six months.
([24]) See Employment and Social Developments
in Europe 2013 (2014).
([25]) OECD Tax and Benefits database.
([26]) The Beveridge curve captures the
relationship between aggregate unemployment and vacancies. 
([27]) According to the Eurostat LMP database,
Belgium is spending 3.7% of GDP on all LMP categories, surpassed only by
Denmark and Spain; from which 1.38% of GDP on active LMP measures (categories
2-7: activation measures for the unemployed and other target groups including
the categories of training, job rotation and job sharing, employment
incentives, supported employment and rehabilitation, direct job creation, and
start-up incentives).
([28]) On top of the already enacted
reinforcements of the work bonus, future increases have been decided upon in
the framework of so-called Competitiveness Pact. More specifically, the federal
government decided to reinforce the tax dimension of the work bonus by three
times EUR 50mn in 2015, 2017 and 2019. 
([29]) This estimate is broadly similar to the
most recent official estimate from the national authorities (Geens, 2014).
([30]) 2013 Stability Programme of Belgium
([31]) This is also shown in a CPB paper by
Van Ewijk et al (2013), based on an 'at-risk' indicator which takes into
account the past policy responses. According to this paper, this 'at-risk'
indicator for Belgium is one of the lowest of the sample.
([32]) The federal debt represents 90% of the
general government debt.
([33]) The share of outstanding debt which
matures in a given time period or which is subject to changes in interest rates
(because of a floating interest rate).
([34]) DG ECFIN internal projections.
([35]) These projections start from the
European Commission 2013 Autumn Forecast, with the no-policy change assumption
translated into a structural primary balance kept constant (excl. ageing costs)
at the last forecast year (2015). The baseline scenario is based on the
following macro-economic assumptions for the long term: potential GDP growth is
assumed to rise to 1.6%. Inflation and change of GDP deflator are assumed to
stabilize at 2% in the medium term. Long-term interest rates are assumed to
rise to 5.1% and short-term rates to 4.2% (See also European Commission, 2012).
([36]) The MTO of Belgium is set at a surplus
of the government balance in structural terms of 0.75% of GDP.
([37]) Source: December 2013 EDP reporting by
Belgium and 2013 Stability Programme of Belgium.
([38]) i.e. the combined ceiling of all
guarantees granted to financial institutions. 
([39]) A statistical break (implemented in
2013) explains part of the jump in 2008.
([40]) For a detailed explanation, see 2013
IDR on Belgium.
([41]) Based on data from the National Bank of
Belgium (Belgostat).
([42]) "Establish concrete and time-specific proposals for shifting
taxes from labour to less growth-distortive tax bases notably by exploring the
potential of environmental taxes for example on diesel, heating fuels and the
taxation of the private use of company cars." Council Recommendation on
Belgium's 2013 National Reform Programme, 2013.
([43]) A parliamentary commission has
reflected on tax reforms and presented its report in February 2014. It takes a
broad view on taxation but does not put forward specific recom­mendations on
how a future government may proceed.
([44]) This is the approach taken by the Belgian 'work bonus' for low
wages.
([45]) The total wage cost in the private sector is about EUR 200bn: a
reduction by 1% requires in other words EUR 2bn (0.5% of GDP) in compensating
revenues.
([46]) Regions set the basic rate of recurrent property taxation, while
provinces and municipalities add surcharges to it. Since the devolution of
property tax powers to the regional level in 2002, regions can decide to use another
property tax base. They lack, however, the authority to re-estimate the current
tax base.
([47]) This would still be suboptimal as transferability would probably
only apply within individual regions.
([48]) The High Finance Council (2009) analysed environmental tax
aspects, including policy advice.
([49]) Moreover, energy products have been excluded from the 8% increase
in excise duties as of 1 August 2013.
([50]) See Inventaire 2012 des
exonérations, abattements et réductions qui influencent les recettes de l'état,
annex to the 2014 draft budget, Belgian Chamber of Representatives, 2013. 
([51]) Aside from the reduced rate of 12%,
there is also a so-called 'parking rate' of 12%, applicable to products such as
cokes, charcoal and lignite. While forgone revenues are limited, the
appropriateness of this rate can be questioned from an efficiency point of view,
the more given the polluting effect of these products. 
([52]) The ineffectiveness of a reduced VAT rate for restaurant services
has already been demonstrated for other countries.
([53]) According to estimations by Decoster & Spiritus (2012), an
increase in the standard rate from 21% to 22%, even without a lower reduced
rate, is mostly borne by higher (expenditures) deciles.
([54]) This shift from SSC to VAT has also a coordination advan­tage in
the sense that, contrary to for example environmen­tal taxation, full control
over VAT is situated at the federal level, which after the sixth reform of the
state remains responsible for implemen­ting structural SSC reductions such as
for low wages.
([55]) On a separate but related note, it should be highlighted that the fact that the method for determining the level of property income
from abroad for tax purposes (i.e. on the basis of effective rent) is less
favourable than that applied for equivalent income deriving in Belgium
raises a problem in terms of compliance with fundamental European freedoms. As
a consequence, the Commission has been asking Belgium to revise its taxation of
property income, in whichever way it sees fit, to put an end to this situation.
European Commission - IP/12/282, 22/03/2012.
([56]) European Commission 2014 Winter
Forecast.