COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for BELGIUM Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Belgium's 2014 national reform programme and delivering a Council opinion on Belgium’s 2014 stability programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Belgium, budget deficit, economic convergence, economic forecasting, economic reform, economic stabilisation, financial control, job creation, multilateral surveillance, public debt, social situation, stability programme, structural adjustment













EUR-Lex - 52014SC0402 - EN











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52014SC0402

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for BELGIUM Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Belgium's 2014 national reform programme and delivering a Council opinion on Belgium’s 2014 stability programme /* SWD/2014/0402 final */









CONTENTS
Executive summary. 3
1....... Introduction. 5
2....... Economic situation and outlook. 5
3....... Challenges and assessment of policy agenda. 7
3.1......... Fiscal policy and taxation. 7
3.2......... Financial sector 15
3.3......... Labour market, education and social
policies. 16
3.4......... Structural measures promoting sustainable
growth and competitiveness. 19
3.5......... Modernisation of public administration. 26
4....... Conclusions. 27
Overview table. 29
Annex. 35

Executive
summary

According to the
Commission 2014 spring forecast, real GDP growth in Belgium is expected to
accelerate to 1.4 % in 2014, driven mainly by domestic demand, which is
benefiting from improved confidence. Net exports
will continue to contribute positively to growth, though to a lesser extent
than in previous years. Unemployment, however, is expected to increase slightly
from 8.4 % to 8.5 % before marginally falling back in 2015. Inflation is
projected to remain below the 2 % threshold up to the forecast horizon because
of low price pressures and the government’s decision to cut the value added tax
rate on household electricity consumption.
Overall, Belgium has made some progress in implementing the 2013 country-specific recommendations. Belgium has reduced
its
deficit, to 2.6% of GDP in 2013, improved fiscal policy coordination between
government layers and enacted an old-age social security reform to increase
employment of older workers while making public finances more sustainable over
the long run. With regard to the latter, additional reforms will be required,
however, to address the sizeable ageing challenge. While measures were taken to
curb rising labour costs and to improve participation to the labour market, the
risk of decoupling of wages and productivity has not been effectively addressed
and employment performance remains marred by persisting structural issues. In
addition, there is room for greater synergies between education, training and
employment actors and policies. Finally, only limited progress has been
achieved in shifting taxes from labour income to less growth-distortive
revenues sources, in reducing operational restrictions in the retail and
services sectors and in decreasing greenhouse gas emissions from buildings and
transport. Overall, steps taken go in the right direction, but still need to be
supplemented by additional action.
As a result, Belgium continues to face important and interrelated challenges concerning the state and
sustainability of its public finances, the external competitiveness of the
economy, the functioning of its labour and product markets, and its greenhouse
gas emissions. The policy plans submitted by Belgium deal with most of these challenges, and broad consistency between the two programmes
has
been ensured. The
national reform programme has confirmed Belgium’s commitment to addressing
shortcomings in the areas of long-term sustainability of public finances,
competitiveness, the labour market, competition and the environment, though the
actions undertaken over the last year are not ambitious enough. The
national reform programme also lacks a forward-looking vision. The stability
programme demonstrates Belgium’s commitment to improving the budgetary position
towards the medium-term objective in line with the Stability and Growth Pact, yet
the fiscal trajectory is only indicative. In a number of
areas, more effective policy coordination between the various actors involved and
consistency between regional and national targets is required to meet the
targets set and the commitments made. 
·        
Public
finances:
  Belgium has brought its deficit below 3% of GDP. While it is expected to
remain below this ceiling, further deficit reduction remains necessary in order
to bring the high debt-to-GDP ratio resolutely on a declining path. The risks to
the long-term sustainability of public finances are high because of the high
projected ageing costs. The recent pension and pre-retirement reforms are important
steps towards improving the sustainability of the pension system but, given the
scale of the challenge ahead, they will have to be complemented by further measures.
The gap between the effective and the statutory retirement age remains wide,
the retirement age is not linked to life expectancy and the
cost-effectiveness of long-term institutional care could be improved. Lastly,
despite the high tax burden on labour, no major tax shift towards less
growth-distortive revenue sources has taken place. Piecemeal changes to an
already complex tax system have not helped Belgium to restructure a relatively
growth-distorting tax system nor served other objectives in which taxation
could play a role.
·        
Competitiveness:
Competitiveness issues persist, most notably with regard to manufactured goods.
These are due to high factor prices, particularly energy and labour costs,
which are insufficiently compensated by higher productivity levels and/or a
reorientation of exports to more dynamic markets or higher‑value‑added products.
Given the country’s specialisation in intermediate products, which are more vulnerable
to price competition, developments in unit labour costs are particularly
relevant. In recent years, Belgium’s labour costs have risen more than those of
its main trading partners and more than its productivity. Regarding non-cost
competitiveness, sophisticated and comprehensive policy plans at different
government levels to foster research and innovation are bearing fruit but support
schemes are complex, time-consuming and highly fragmented. Finally, persistent mismatches
on the labour market create bottlenecks to growth in specific sectors.
·        
Labour
market, education and training: Labour market participation
remains below average and high employment/unemployment disparities across
regions and population subgroups persist. The tax wedge on labour is very high
and unemployment and inactivity traps are pervasive. Professional mobility is limited,
high entry barriers for outsiders and a high mismatch between education and
training outcomes and labour market demand have negative impact on employment
and hamper growth. In particular, the share of early school leavers reaches
worrisome levels in certain regions. This is due to the significant share of
youngsters leaving the education system without qualification and to
unqualified newcomers/migrants. While improving, effective coordination between
the various public community and regional actors responsible for education,
training and employment continues to be a challenge.
·        
Product
markets:
Prices of goods and services are generally higher in Belgium than in other
Member States, reflecting weak competition and structural barriers. Operational
restrictions and obstacles to competition in the retail sector have yet to be
addressed and the risk of further increases of distribution tariffs requires an
effective policy response. Finally, restrictions on professional services remain
excessive. 
·        
Climate
and energy:
Without further measures or use of additional flexible mechanisms, Belgium will not meet its Europe 2020 target for reducing greenhouse gas emissions in
sectors not covered by the EU's emissions trading scheme. Challenges in the
transport sector have not been adequately addressed. A clear division of
greenhouse gas reduction efforts between the different government entities is
still lacking.

1.        
Introduction 

In May 2013, the
Commission proposed a set of country-specific recommendations (CSRs) for
economic and structural reform policies for Belgium. On the basis of
these recommendations, the Council of the European Union adopted seven CSRs in
the form of a Council Recommendation in July 2013. These CSRs concerned public
finances, the pension system, wage setting, product markets, taxation, the
labour market, and greenhouse gas reductions. This staff working document (SWD)
assesses the state of the implementation of these recommendations in Belgium.
The SWD assesses
policy measures in light of the findings of the Commission’s 2014 Annual Growth
Survey (AGS)[1] and
the third annual Alert Mechanism Report (AMR),[2]
which were published in November 2013. The AGS sets out the Commission’s
proposals for building the necessary common understanding about the priorities
for action at national and EU level in 2013. It identifies five priorities to
guide Member States to renewed growth: pursuing differentiated, growth-friendly
fiscal consolidation; restoring normal lending to the economy; promoting growth
and competitiveness for today and tomorrow; tackling unemployment and the
social consequences of the crisis; and modernising public administration. The
AMR serves as an initial screening device to determine whether macroeconomic
imbalances exist or risk emerging in Member States. The AMR found positive
signs that macroeconomic imbalances in Europe are being corrected. To ensure
that complete and durable rebalancing is achieved, Belgium and 15
other Member States were selected for a review of developments in the
accumulation and unwinding of imbalances. These in-depth reviews were published
on 5 March 2014 along with a Commission Communication.[3]
Against the
background of the 2013 Council Recommendation, the AGS, the
AMR
and the in-depth review, Belgium presented a national reform programme
(NRP) and a stability programme on 30 April 2014. These
programmes provide detailed information on progress made since July 2013, though
future plans are indicative in the stability programme and absent from the NRP
in light of the general parliamentary elections of May 2014. The information
contained in these programmes provides the basis for the assessment made in
this staff working document. The programmes underwent an inclusive consultation
process involving regional and community authorities as well as social partners
and civil society.[4]

2.        
Economic situation
and outlook 

Economic situation
In 2013, growth
and employment in Belgium were affected by weak capital formation and still
timid household consumption. The beginning of 2013 saw a drop in
investments and of both exports and imports which was not offset by still weak
private consumption. However, private consumption improved over the year and
capital formation began a fragile recovery. Expectations on the general
economic climate and confidence indices have gradually improved, reaching their
highest level since mid-2011. After falling by 2.5 % in 2013 due to a weak
start, capital formation progressively recovered, led by company investment. Net
exports have been able to compensate for negative domestic demand and to bring yearly
GDP growth to 0.2 %.
Despite renewed
employment growth since mid-2013, the unemployment rate has been rising, from
7.6 % in 2012 to 8.4 % in 2013. Although the figure stabilised
towards the end of the year at a level below the EU average, it remains high by
historical standards. In addition, overall employment was steady at a level below
EU average and the very low employment rate of specific groups (the
low-skilled, the young, the elderly and people with a migrant background[5]) is
worrisome.
Overall
inflation slowed down in 2013 to 1.2 % for the year, below the EU average of
1.5 %.
This deceleration is mainly due to lower import and input prices and government
measures to foster competition and increase transparency on domestic energy
markets. This reduced inflationary pressure might make it easier for Belgium to achieve wage moderation given the reduced impact of wage indexation on total
wage growth, which in the past has been one of the drivers behind wage
increases exceeding productivity growth. In the first few months of 2014,
inflation continued its downward trend, falling below levels observed in
neighbouring countries.
Economic outlook 
According to the
Commission 2014 spring forecast, real GDP is expected to accelerate over 2014
to 1.4 %, thanks to revived domestic demand, and a temporary contribution from
net exports. Both private consumption and investment are expected
to accelerate further towards the end of the year and then stabilise again as
of 2015 when domestic demand is foreseen to become the main driver behind a
real GDP growth rate of 1.6 %. Better labour market prospects, stronger income
growth and renewed investments will underpin this projected GDP growth. At the
same time, this will translate into higher import growth expected to outpace
export growth, while temporary competitiveness gains are vanishing.
The generally
low-inflation environment and the government’s decision to lower the VAT rate
on household electricity consumption are projected to result in a further
deceleration of inflationary pressures and to delay wage indexation for most
workers. Combined
with the real wage freeze and productivity gains, this will contribute
to slowing down the rise in unit labour costs. Unemployment is expected to rise
marginally in 2014 to 8.5 % on average, before decreasing slowly from 2015.
The macroeconomic
assumptions in Belgium's 2014 national reform programme and stability programme
are based on projections of 24 March 2014 from the Federal Planning Bureau and
on the Commission forecasts for the international environment. For
2013 and 2014, real GDP growth is projected at 1.4% and 1.8% respectively. This
is marginally more optimistic than the Commission's 1.4% and 1.6%, but still
within a reasonable margin. Inflation and unemployment rate projections are also
very close to the Commission's figures. On the other hand, the potential growth
estimates in 2013 and 2014 contained in the stability programme are
significantly higher than Commission's estimates based on the spring forecast.
As a consequence, the output gap and estimated impact of the cycle on the
government deficit are substantially more negative in the programme than in the
Commission's assessment. The national reform programme presents an impact
assessment for the reduction in social security contributions agreed in the Pact
on Competitiveness and Jobs, on top of the impact of the reduction of the VAT
rate on electricity. The simulations used two different hypotheses on the wage
evolution (controlled and free wages). Both have a positive impact on GDP growth
and employment and result in a reduction of nominal hourly wage cost, but the
impact is greater in case of controlled wages. According to those projections,
by 2020, those reductions would decrease labour costs between 0.19% and 1.1%,
which would increase employment between 0.09% and 0.27% and GDP between 0.11%
and 0.18%.

3.        
Challenges and assessment of policy agenda
3.1.                
Fiscal policy and taxation

Budgetary developments and debt
dynamics
The objective of
the budgetary strategy outlined in the 2014 Stability Programme is to reach a
balanced budget in structural terms by 2016 and to achieve the MTO the year
after.
Due to the end of the government's term and the national and regional elections
held at the end of May 2014, the fiscal trajectory contained in the programme,
which is based on the recommendations of the fiscal council (High Council of
Finance), is labelled as indicative. The programme confirms the previous MTO at
a structural surplus of 0.75% of GDP, which reflects the objectives of the
Pact. While the MTO implies a significant budgetary effort as shown by the
corresponding primary balance, there is a need to take into account the
implicit liabilities related to ageing. The programme foresees the achievement
of the MTO in 2017, one year later than the target year set in last year's
programme.
The 2013
headline deficit came out at 2.6% of GDP, just above the target of 2.5% of GDP
foreseen in the 2013 Stability Programme. The structural
deficit decreased from 3.0% of GDP in 2012 to 2.3%. The structural improvement
therefore attained 0.7 pp of GDP, below the target of 1 pp of GDP set in the
2013 programme. 
For 2014, the
Stability Programme reaffirms the headline deficit target of 2.15% of GDP as
planned in the Draft Budgetary Plan for 2014, which is slightly above the 2.0%
of GDP target set in last year's Stability Programme. The
improvement in the (recalculated) structural balance[6]
targeted in the programme amounts to 0.5 pp. of GDP, compared to 0.6 pp. of GDP
in the Draft Budgetary Plan, resulting in a (recalculated) structural deficit
of 1.7% of GDP in 2014. This is an upward revision compared to the
(recalculated) structural target of 1.3% of GDP set in the Draft Budgetary
Plan, due to the downward revision in potential growth and because a larger
part of the improvement of the headline balance will come from one-off factors.
The European Commission 2014 spring forecast projects a headline deficit of
2.6% of GDP in 2014. The difference with the programme is due to more dynamic
expenditure developments in the Commission's projections. Almost half of the
gap is situated at local government level. According to the spring forecast,
the structural balance does not improve further in 2014. Contrary to the spring
forecast, the Stability Programme assumes that around 0.25% of GDP of wage
subsidies would be transformed in direct reductions of social contributions,
which distorts the comparison of revenue and expenditure ratios between both
projections.
     || Box 1. Main measures Main budgetary measures ||   
   || Revenue || Expenditure ||   
   || 2013 ||   
   || ·      Increase in excise duties ·      Increase in taxes on revenue from financial property ·      Introduction of a minimum tax in corporate income taxation || ·      n.a. ||   
   || 2014 ||   
   || ·      Decrease in the VAT rate on electricity ·      Increase in excise duties || ·      Efficiency gains in the public administration ·      Only partial replacement of retiring civil servants ·      Capping (real) growth of health care expenditure at 3% ||   
   || 2015 ||   
   || ·      Decrease in social contributions || ·      n.a. ||   
   || 2016 ||   
   || ·      n.a. || ·      n.a. ||   
   || 2017 ||   
   || ·      Decrease in social contributions || ·      n.a. ||   
   || Note: The budgetary impact has not been reported in the programme. ||   
 Belgium has also taken macro-structural measures which are expected to boost economic growth and support the fiscal consolidation: structural reforms in the labour market and the pension system should stimulate the employment rate of elderly workers. Reductions in social contributions and taxes for low wage workers aim to make work financially more attractive. Labour demand is stimulated by a decrease in the wage burden, generally and for specific target groups, for companies. Competitiveness is further fostered by a real wage freeze and measures tempering inflation, which has a slowing impact on the automatic indexation of wages. Tax measures taken focus on taxation of consumption and capital and tried to avoid higher taxes on labour. 
The programme
targets a (recalculated) structural improvement of 0.6% of GDP in 2015 and of
0.9% of GDP in 2016 and 2017. Under the macro-economic assumptions of
the programme, this trajectory is consistent with a headline deficit of 1.4% of
GDP in 2015, 0.4% in 2016 and a return to a budget surplus of 0.6% of GDP in
2017. These targets are below those of the previous programme (deficit of 0.5%
of GDP in 2015, surplus of 0.4% of GDP in 2016), mainly due to a lower
(recalculated) structural effort targeted in 2015 compared to last year's
programme (0.6 instead of 1.2 pp. of GDP), while GDP growth has been revised
marginally upwards. None of the targets is supported by specified measures yet.
All targets set
in the programme are labelled as indicative, which hampers the credibility of
the trajectory. Moreover, the reduced powers of the different
governments due to the May 2014 elections pose a risk for the 2014 target,
which is not yet ensured according to the Commission's forecast. This would
result in the need for a bigger effort than projected in the programme for the
later years of the programme, in order to reach a balanced budget in structural
terms by 2016 and the MTO by 2017. Such a back-loading of the effort poses
risks to the attainment of the targets. Moreover, a protracted period of
political uncertainty after the elections as observed in 2007 and 2010 which
delays the adoption of additional measures could also put the 2015 target at
risk. Lastly, while targets are set in structural terms, there is a risk that
the authorities will stick to headline targets in case the latter turn out to
be less demanding due to positive cyclical effects or positive one-off factors,
as witnessed in 2014 (see above). On the other hand, if structural targets are
respected, the timing for returning to a budget surplus in nominal terms will
be dependent on the macro-economic conditions.
Box 2.
Excessive deficit procedure for Belgium 
Belgium is currently
subject to the corrective arm of the Stability and Growth Pact. The Council
opened the Excessive Deficit Procedure for Belgium on 2 December 2009 and
recommended to correct the excessive deficit by 2012 at the latest. On 21 June
2013 the Council decided that Belgium had not taken effective action in
compliance with the Council's recommendations and decided to give notice. Belgium was given a deadline of 21 September 2013 to take effective action to ensure a
sustainable correction of the excessive deficit by 2013. The Council also
decided that Belgium shall present structural measures for 2014 which ensure a
sustainable correction of the excessive deficit and appropriate progress
towards its medium-term objective.
The year following the correction
of the excessive deficit, Belgium will be subject to the preventive arm of the
Pact and should ensure sufficient progress towards its MTO. As the debt ratio
in 2013 reached 101.5% of GDP, exceeding the 60% of GDP reference value, during
the three years following the correction of the excessive deficit Belgium is also subject to the transitional arrangements as regards compliance with the
debt criterion, during which it should ensure sufficient progress towards compliance.
An overview of the current state of excessive
deficit procedures is available on: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm.
On 21 June 2013 the Council decided
to give notice to Belgium to put an end to the excessive deficit situation by 2013. Belgium reported on a quarterly basis on progress made and reported
on outstanding government guarantees in accordance with the additional
reporting requirements under Article 10(6)(b) of Regulation (EU) 473/2013
activated in December 2013. The 2013 headline deficit came out below the target
of 2.7% of GDP set by the Council. In 2014 and 2015, the deficit is projected
to remain below the 3% of GDP deficit threshold. Meanwhile, the (adjusted)
fiscal effort in 2013 fell short of the effort of 1% of GDP specified in the
Council Decision. A bottom-up assessment which estimates the size of the
additional fiscal effort on the basis of the discretionary revenue measures and
the expenditure developments between the baseline scenario underpinning the
Council Decision and the outturn, shows that Belgium has taken additional
measures for 2013 adding up to ¼% of GDP, in line with the amount of measures
deemed necessary to reach the structural target spelled out in the Decision.
After
the correction of the excessive deficit, Belgium will be subject to the
preventive arm of the Pact and should ensure sufficient progress towards its
medium-term objective (MTO). The planned annual
change in the (recalculated) structural balance in 2014 and 2015 is
appropriate. However, the Commission's spring forecast shows no actual
structural improvement in 2014 and, under the usual no-policy-change assumption,
a structural deterioration in 2015. The (recalculated) annual change in the
structural effort exceeds the minimum required effort in 2016 and 2017.
According
to the indicative information provided in the programme, the growth rate of
government expenditure, net of discretionary revenue measures, over 2014-2015
is expected to contribute to an annual structural adjustment towards the MTO by
0.5% of GDP. However, according to the Commission
forecast, the growth rate of government expenditure, net of discretionary
revenue measures, over 2014 and 2015 is not expected to contribute to an annual
structural adjustment towards the MTO by 0.5% of GDP. This is because the
growth rate of expenditure is above 0.0%, i.e. the lower reference rate under
the expenditure benchmark for these years. This breach would lead to a negative
impact on the structural balance exceeding the thresholds of significance as of
2015. This divergence stems from a different assessment of the 2014 budget
implementation and from the assumption of unchanged policy in the Commission
projections for 2015, whereas the programme is based on a consolidation
scenario.
Following
an overall assessment of Belgium's budgetary plans, with the structural balance
as a reference, including an analysis of expenditure net of discretionary
revenue measures, the adjustment path towards the MTO seems to be appropriate. However, according to the Commission's spring forecast, a significant
deviation from the adjustment path towards the MTO is expected as from 2014, which
could put the compliance with the requirements of the preventive arm of the
Pact at risk. 
In
its 2013 Stability Programme, Belgium committed to keep its public debt below
100% of GDP at the end of 2013. However, due to
reclassifications of a number of corporations inside the government sector,
mainly at the level of regional and local governments, the final figure came
out at 101.5% of GDP, and this despite the sale of a number of government
assets. In the Commission's forecast, the debt-to-GDP ratio is projected to
remain stable over the forecast horizon. Under the consolidation scenario of
the programme, it is projected to gradually decline over the programme horizon.
In
2014 and 2015, Belgium is in a transition period with regard to the debt
benchmark.  According to the plans, the debt
benchmark will be met at the end of the transition period. According to the
Commission forecast which is based on a no-policy-change assumption, the
transition towards compliance with the debt criterion will not be respected in
2014 nor 2015 and thus Belgium risks being put in EDP if corrective measures
are not taken. The size of contingent liabilities linked to guarantees provided
to the financial sector has further decreased from around 13.5% of GDP at the
beginning of 2013 to 11.3% of GDP in February 2014. 
Fiscal
frameworks
The sixth reform
of the state adopted at the end of 2013 devolves additional responsibilities to
the Belgian regions and communities as of mid-2014. Their share in
general government expenditure will rise from around 24 % before the reform to
31 % after the reform. The associated revision of the Special Finance Law gives
the regions additional tax autonomy through ‘enlarged regional surcharges’ on
federal personal income taxes, which will be offset by a tax reduction at
federal level. The increasingly decentralised structure of Belgium and the lack of a ‘hierarchy of norms’ between the different levels of government
call for effective budgetary coordination, including transparent expenditure
rules and the extension of effective medium-term fiscal planning to all levels
of government.
In the 2013
European Semester, Belgium was recommended to adopt explicit fiscal
coordination arrangements. At the end of 2013, Belgium submitted a report on the intended implementation of that recommendation, in accordance with
the Council Decision of 21 June 2013 on measures deemed necessary to remedy the
situation of excessive deficit in Belgium. In July 2013, the federal and
regional and community governments agreed on ad hoc burden‑sharing of the
consolidation effort for 2013 and 2014, in line with the 2013 stability
programme.
Since last
year’s recommendation, Belgium has made substantial progress in introducing
more structural coordination arrangements. A Cooperation
Agreement on fiscal coordination, concluded between the federal government and
the regional and community governments on 13 December 2013, aims to implement
the Fiscal Compact.[7]
As required, the agreement introduces a structural budget balance rule (defined
in line with the medium-term objective) at general government level.
Furthermore, it formalises established coordination practice by making (i) the
role of the inter-governmental ‘Consultative Committee’[8] in the
process official and (ii) the advisory role [9]
of the High Council of Finance more explicit. In addition, the Agreement
foresees in a strengthening of the monitoring role of the High Council through
the introduction of an explicit correction mechanism in case of significant
deviation from the agreed targets. While the agreement represents substantial
progress, much will depend on implementation and on the High Council of
Finance’s ability to reach a consensus on both medium-term fiscal targets for
general government and the distribution of these targets.[10]
Additional arrangements might be needed to make targets beyond 2014 binding and
coordinate strategies to minimise the negative impact of remaining
consolidation efforts.
Long-term sustainability
Belgium
appears to face high fiscal sustainability risks in the medium term. The
medium-term sustainability gap,[11]
showing the adjustment effort required up to 2020 to bring debt ratios to 60 %
of GDP in 2030, is 5.4 % of GDP, primarily related to the high level of
government debt (101.5 % of GDP in 2015) and projected ageing costs
contributing 2.2 pps. of GDP by 2030. The full implementation of the stability
programme would put the debt on a decreasing path, but it would remain above
the 60% of GDP reference value in 2030.
In the long
term, Belgium appears to face high fiscal sustainability risks, mainly
related to the structural primary balance in 2015, and projected ageing costs,
contributing 6.6 pps. of GDP over the very long term. The long-term
sustainability gap[12]
shows the adjustment effort needed to ensure that the debt-to-GDP ratio is not
on an ever-increasing path stands at 7.2 % of GDP. The risks would be
lower if the structural primary balance reverts to the higher values observed
in the past, such as the average for the period 2004–2013. It is therefore
appropriate for Belgium to continue to reduce government debt and to further
contain age-related expenditure[13]
growth to contribute to the sustainability of public finances in the medium and
long term.
Projected ageing
costs pose a challenge in Belgium, particularly those of pension and long-term
care expenditure. Updated pension projections, taking
into account the stricter early retirement rules introduced in 2012, show an
increase of 5.1 pp of GDP in public pension spending between 2010 and 2060 (as
compared with 1.4 pp in the EU as a whole). Public spending on long-term care
is expected to increase by 2.7 pp of GDP by 2060 (as compared with an EU figure
of 1.5 pp).
In 2013, Belgium
received a country-specific recommendation to step up efforts to close the gap
between the effective and the statutory retirement age, to underpin reforms of
old-age social security with measures conducive to active ageing, to align the
retirement age or pension benefits to changes in life expectancy and to
increase the cost-efficiency of long-term institutional care. Belgium made some progress in reducing widespread early-exit options. The
old‑age social security reform introduced at the end of 2011 is being phased in
as planned and the number of people leaving the labour market early has been on
a downward trend for several years. Expectations, however, are that this
downward trend might be interrupted in 2014 as a result of widespread corporate
restructuring, underlining the need for further reform in this area. Additional
measures conducive to active ageing were taken to underpin the reforms, notably
to align the pension bonus with the new early retirement age, to ensure fair
treatment of ‘mixed’ careers and to strengthen employment incentives in the
survivor’s pension. In addition, the rules on earnings after retirement have
been relaxed, making it more rewarding to continue working past the age of
early retirement or to stay in or re-enter the labour market after reaching the
legal retirement age. At the same time, dismissals using the pre-retirement
scheme ('unemployment with company supplement scheme') have been made more
expensive and companies have been asked to introduce ‘active ageing’ plans. On
the other hand, no progress has been achieved in aligning retirement age or
pension benefits to changes in life expectancy. An expert group has been set up
but has not yet delivered its reform proposals.
No progress has
been made in improving the cost-efficiency of public spending on long‑term
institutional care. As a share of GDP, public spending on
long-term care currently amounts to 2.5 % of GDP and is projected to increase
to over 5 % of GDP in 2060.[14]
A stronger focus on prevention and rehabilitation policies and on improved
conditions for independent living, leading to increased cost-effectiveness of
long-term care services, would prove useful as a means of containing future
needs for and the related costs of long‑term care. Whether the ongoing
devolution of responsibilities to the federated entities will lead to increased
cost-effectiveness depends on political choices that have yet to be made and
implemented.
Overall, Belgium made some progress with reforming its old-age social security system. However,
given the magnitude of the ageing challenge Belgium is facing, additional
measures remain necessary in order to achieve the employment target for older
people of 50 % by 2020 and to ensure sustainable public finances over the
long-term. In particular, the sizeable gap between the statutory and
effective retirement age could be tackled more swiftly by phasing out early
exit systems faster than currently planned. In addition, linking the retirement
age, pension benefits or career length requirements to increases in life
expectancy would contribute to the long-term sustainability of public finances.
Since a comparatively high proportion of the population over 65 is at risk of
income poverty, the need to achieve financial sustainability of pensions will
have to be carefully balanced with the need to maintain adequacy.
Tax system
At 45.4 % of GDP
in 2012, Belgium has the second highest tax level in the EU and
the tax burden on labour is particularly high.[15]
Because of the way the tax system interacts with the benefit system, this
creates unemployment and inactivity traps for most categories of workers.[16]
By
contrast, revenue from less growth-distorting taxes (on consumption,
environmental and property bases) is around or below the EU average.[17] In
particular, revenue from energy taxation is the second lowest in the EU,
despite the high overall tax-to-GDP ratio and the high energy intensity of the
Belgian economy. Finally, the Belgian tax system combines relatively
high nominal tax rates with a generally complex system including many tax
expenditures.[18]
The efficiency of the VAT system[19]
is undermined by the widespread application of reduced rates which have a huge
budgetary cost. The use of reduced VAT rates could be replaced by the use of
direct and more cost-effective redistribution measures.[20] This
would broaden the tax base of the standard VAT rate and allow a decrease of the
tax burden on labour.
Given the high
level of labour taxation and the complexity of the tax system, the Council
recommended Belgium to shift taxes from labour to less growth-distorting tax
bases and to simplify the tax system. While
revenue-increasing measures taken in the context of the 2013 budget review and
the 2014 budget avoided additional taxation of labour, Belgium has made only limited progress in shifting taxes from labour to less growth‑distorting
tax bases.[21]
Rather than shift taxes, the federal government has implemented successive
rounds of labour cost reductions,[22]
the majority of which are targeted at specific groups, types of companies or
sectors. Reductions of employer social security contributions focusing on the
young and low-skilled are appropriate given their employment creation
potential. However, sector-specific labour cost reductions (such as in the
construction and hospitality sector), while potentially contributing to the
fight against social fraud, might have detrimental substitution effects. More
substantial structural and targeted reductions of social contributions of
around 0.1 % of GDP have been agreed for 2015, 2017 and 2019. With a view to
wider tax reform, a special parliamentary committee was set up and reached
conclusions,[23]
but concrete reform proposals will have to be agreed upon by the next
government coalition.
Although it
could help to compensate for lower labour taxes, no progress has been made to
increase VAT efficiency and to make more use of environmental taxation as
recommended in the 2013 country-specific recommendations. As of
1 January 2014, the VAT exemption for lawyers’ services has been
abolished. On the other hand, the VAT rate on electricity consumption fell from
21 % to 6 % from April 2014, in order to temper inflation and alleviate the
upward pressure it exerts on wages through the practice of automatic
indexation. However, this measure goes against the objective of simplifying the
tax system and its high budgetary cost limits the room for direct reduction of
labour costs. It might also lead to disincentives for energy efficiency and
greenhouse gas emissions. Excise duties on diesel and fuel have been exempted
from the general increase in excise duties. Despite negative environmental and
mobility externalities, only very limited measures have been taken to adapt
taxation of the private use of company cars and to reduce environmentally
harmful subsidies. With a view to meeting the Europe 2020 environmental
targets, Belgium might also benefit from the potential of taxation (congestion
charges and kilometre charges) as an instrument to help reduce GHG emissions or
at least take externalities into account.[24]
While revenues
from housing taxation are relatively high compared with other Member States,
there is substantial scope for switching from transaction taxes to more
recurrent property taxes. In addition to being a stable
source of revenue, they have a less distortionary effect on the economy. For
this purpose, currently outdated cadastral values might need to be updated as
these estimates of imputed rent (the net annual revenue generated by renting
out a building or plot of land) form the basis for recurrent taxes on immovable
property in Belgium. The power to decide on the deductibility of mortgage
repayments against personal income taxation is to be devolved to the regions.
Belgium has
also made only limited progress in simplifying its tax system and making it
more efficient. Some limited measures have been taken with regard to
corporate income tax,[25]
but the allowance for corporate equity in corporate income taxation still contains
loopholes in its anti-abuse system that potentially allows corporations to
cascade their profits for tax planning purposes. It also carries high budgetary
costs because, unlike the Italian allowance for corporate equity, it is based
on the full stock of equity rather than on new additions to it. Cash registers
that help to counter tax fraud, and which were supposed to accompany the VAT
reduction in the hospitality sector, will not be fully introduced until 2015.
Streamlining and simplifying the tax system would not only further improve tax
administration and tax compliance but also leave space to pursue more ambitious
measures to reduce the tax burden on labour and to seek a reduction of direct
tax rates.
Overall, rather
than reforming its relatively growth-distorting tax system, Belgium has made only piecemeal changes, adding to the complexity of the system. A
fully-fledged tax reform could stimulate growth, improve the performance of the
labour market, boost competitiveness and serve environmental objectives by a
decrease in the tax burden on labour, thorough base broadening — in particular
for indirect taxes — and greater efficiency brought about through comprehensive
simplification of the system and the closing of tax loopholes.

3.2.                
Financial sector

The Belgian
financial sector has improved its capacity to withstand adverse shocks but
vulnerabilities remain and warrant close monitoring. The
capital ratios reported by most Belgian banks have already met the Basel III
requirements and they post healthy liquidity ratios. The credit to the private
sector continued to grow thanks to the banks’ easy access to the domestic
liquidity pool of private sector deposits. The feedback loop between the banks
and the sovereign is still strong, while the banks’ business model is
undergoing change and profitability is stuck at a low level.
In 2013, Belgium did not receive a country-specific recommendation related
to the financial sector. Belgium implemented a macro-prudential measure raising capital requirements
in order to address the banks’ exposure to the housing market. A new banking law paves the way for a
stronger supervisory and regulatory framework.
The Belgian banking sector has been through a restructuring phase
with simultaneous deleveraging and de-risking of banks’ balance sheets. The sector has taken significant steps since 2008 and total bank
assets fell to 271% of GDP in 2013 from 410 % GDP in 2008. In tandem with
deleveraging, the de-risking of banks’ balance sheets reduced the risks in the
financial sector, and regulatory capital and liquidity ratios improved. The
improvement in the regulatory liquidity ratios was made possible by easy access
to a large and stable domestic deposit base and most Belgian banks already
comply with the Basel III Liquidity Coverage Ratio. The availability of
liquidity to banks has also enabled banks to keep credit to the private sector
growing.
Credit conditions loosened somewhat in 2013 and access to credit slightly improved for non‑financial
corporations and for households. Corporate credit growth turned positive
again (+0.7 % year-on-year in December 2013) while household credit growth
slowed down to +1.98 % in December 2013. Belgian SMEs have better access to
finance, continue to have greater access to public financial support and
timeliness of payment has improved. The scope of the regions’ financial support
schemes was broadened, but the complexity of access to crowd-funding, mezzanine
financing, micro-credit and guarantees explains the lower take-up of external
financing by innovative companies. The early-stage investments of innovative
companies fell significantly and the interest rate differential for loans below
EUR 1 million remains a cause of concern, pointing to a deterioration of Belgium’s position in 2013.
The link between the sovereign and banks is still strong. Although contingent government liabilities related to financial
sector guarantees have been reduced[26],
they remain substantial. The biggest guarantee
scheme concerns Dexia (39.8 billion EUR at the end of 2013).
The group's consolidated results for the first half of 2013 indicate that, although it has managed to reduce
its balance sheet, to improve the liquidity position and to benefit from lower
funding costs, it remains fragile. Continuous efforts are needed to improve
solvency and implement group resolution in order to further reduce the systemic
risk represented by Dexia. In addition, domestic banks have increased their
holdings of Belgian government debt. Thus, any remaining issues on the banks’
balance sheets would reflect negatively on the sovereign: the still strong
sovereign–bank feedback loop reinforces the need to maintain the pace of reform
so as to preserve market confidence and ensure stable funding conditions for
banks.
The regulatory and supervisory framework improved in 2013. The banking law adopted on April 24, 2014 is an important step in
improving the supervisory and regulatory framework for the financial sector. It
essentially aims to transpose the European Capital Requirements Directive on
the financial sector and other important components of the structural banking
reform into Belgian law. The regulatory changes proposed in the banking law
refer to imposing a limit on trading activities and improving the recovery and
resolution framework, including depositor protection. In addition, the National
Bank of Belgium introduced a macro-prudential measure targeting the banks’
portfolios of mortgages with effect from 8 December 2013. This measure
increases capital requirements by asking for an extra 5 % in the risk weights
of the banks using the internal ratings when calculating exposure to the
housing market. The lending standards are sound and despite banks’ significant
exposure to the housing market, non-performing loans have increased only marginally
over the year and the local practices on loan impairments tend to be
conservative.
The Belgian
banking sector faces the challenge of improving its profitability while
adjusting its business model. The banks’ profitability has
been eroded by the recent changes in the financial sector. While financial
strength ratios point to an improvement in Belgian banks, profitability has
failed to take off as interest rates are still at low levels. Weak
profitability is affecting retained earnings and their contribution to capital
increases is thus much more limited than that of deleveraging and de-risking of
the balance sheets. Against the background of new regulatory capital
requirements, increasing banks' profitability also through the reduction of
operating costs seems like an area to be explored by Belgian banks. 

3.3.                
Labour market[27], education and social policies

Though the moderate
rise in the unemployment rate indicates that Belgium’s labour market has
withstood the crisis reasonably well, high barriers to entry and a high degree
of mismatch result in a stagnating employment rate which is far below that of some
neighbouring countries. These persistent weaknesses with regard
to the functioning and adjustment capacity of the labour market hinder
competitiveness and erode the economy’s growth potential. The employment and
the social consequences of the crisis remain relatively contained, but both youth
unemployment and the risk of poverty or social exclusion is rising, the share of
people in low-work-intensity households exceeds the EU average and
the early school leaving rate is high in Wallonia and reaches worrisome levels
in Brussels.
Throughout 2013,
labour market reforms focused on harmonising employment protection legislation
for blue-collar and white-collar workers,[28]
implementing the reform of unemployment benefits and increasing the efficiency
of activation policies, including jobseekers’ follow-up. In
2014, the further regionalisation of responsibility for employment policy in
the framework of the sixth state reform provides scope for further increasing
the efficiency of activation policies and better tailoring employment incentive
schemes for specific target groups to the needs of the regional labour markets.
In 2013, the
recommendation on the labour market highlighted the need for Belgium to further decrease disincentives to work by ensuring effective enforcement of
job-search requirements and personalised job-search assistance and to improve
inter-regional labour mobility.[29]
In
this respect, Belgium has made some progress. A new cooperation agreement on
active support for and follow-up of jobseekers was concluded at the end of 2013
between the federal State and the regions and communities. It provides for
first evaluation interviews (resulting in possible penalties) to take place
much earlier in a period of unemployment than is currently the case. In
addition, regional employment services are to offer individual action plans
more quickly and more frequently and active support and follow-up is to be
extended to cover older workers and young people in part-time employment but
seeking full-time work. Steps are thus being taken to broaden and intensify
personalised guidance and enforcement of job search requirements across the
country. However, as rising demand for personalised follow-up might exacerbate
existing capacity issues for the regional employment services, effective
implementation of the agreement may yet prove challenging.
To boost
inter-regional labour mobility, the public employment services have continued
to invest in bilateral and multilateral cooperation,
focusing on dissemination of job offers, harmonisation of job titles, training
of jobseekers, connection of databases and the deployment of inter-regional job
counselling teams. The most recent statistics show increased inter-regional
mobility. However, while geographical mobility is improving, overall
professional mobility between jobs and sectors remains low, and average job
tenure in years is amongst the highest in the EU. This is related to several factors
such as relatively low wage differentiation between sectors and professions,
salary scale practices rewarding sector-specific seniority and the widespread
use of temporary unemployment to avoid labour shedding in times of crises.
Furthermore, the long-term shift away from labour-intensive manufacturing and
the concomitant process of capital deepening in many sectors means lower
relative demand for unskilled labour. This, added to high labour costs and the
tendency to minimise risk when hiring, makes it very difficult for outsiders
such as young people, the low-skilled and people with a migrant background to
enter the labour market. This combination of low labour market fluidity and
high barriers to entry results in a situation where growth-hampering skill
shortages in certain sectors and areas coexist with persisting high
unemployment rates in other areas.
Some segments of
the population, in particular people with a migrant background, face greater
social and labour market exclusion risks in all Belgian regions than the EU
average.
The employment rate of persons of Belgian origin[30]
is about the 2020 national target whereas that of persons of another origin is
much lower.[31]
In addition, as a consequence of both lower education levels and labour market
barriers, people with a migrant background often work in sectors with a high
turnover rates, on part-time contracts and for lower salaries.[32]
In 2013, action in response to this component of the CSR mainly focused on the
issue of newcomer's integration.[33]
The former Federal Centre for Equal Opportunities has become ‘Inter-federal’,
making it competent also for matters pertaining to the regions and communities.
  Belgium also developed a statistical tool to describe and monitor the labour
market inclusion of people of migrant origin. However, comprehensive strategies
aimed at successful integration of people with a migrant background in society
have yet to be completed and fully implemented. In this regard, only limited
progress has been made.
The 2013 country-specific
recommendations also called upon the authorities to simplify and reinforce the
coherence between employment, education and training policies. To
this end, Flanders has adopted a roadmap for a major reform of its secondary
education system (2013 – 2025) with a view to reduce early school leaving, to
limit the impact of socio-economic status on educational outcomes and to
facilitate transitions between education pathways and levels. While a number of
measures have already entered into force,[34]
the more fundamental decisions regarding the overall structure of secondary
education were postponed to 2016. The French-speaking pursued the
implementation of a series of (pilot) measures to improve their vocational
education and training system, have reached agreement to set up ‘Qualifying
education- training employment living areas’, harmonised the existing
regulations for dual-education apprenticeships and took measures to stimulate
enrolment in such programmes by job seekers. Nevertheless, the scope, results
and pace of the ongoing initiatives appear to be insufficient in view of the
challenges. While all communities now have a qualification framework to
increase transparency on acquired skills and to facilitate the communication
between education and the labour market, Flanders has progressed further in its
implementation. With regard to lifelong learning, participation of adults still
lags far behind the EU average, and it is unclear at this stage whether
on-going reflections and the recommendations on how to reform the offer and
improve cooperation between private and public actors involved will lead to
decisive political action.
The issue of
skills mismatch needs to be tackled as of an early stage and throughout the
entire education and training system. In
this regard, the observed regional, socio-economic and cultural disparities
with regard to early school leavers (ESL) and with regard to basic skills
performance are worrying. While the nation-wide ESL-rate has been improving,
the levels observed in Wallonia and, especially, Brussels are still worrisomely
high. In addition, the Belgian education systems seem unable to significantly
reduce the educational inequalities due to socio-economic and/or migration
backgrounds. To reduce early school leaving, the Flemish government continues
to develop its ESL strategy. In 2013 it adopted a comprehensive action plan
which integrates prevention, intervention and compensation measures based on
improved data and coordination of policy actors. It is too soon to tell,
whether the implementation of the planned measures will allow to reach the ambitious
targets set. The French Community adopted decrees to improve the coordination
to fight ESL and recently reached agreement to reform its first grade of
secondary education in view of reducing school failure. Although there is
growing sense of urgency with regard to the issue in the French Community and
the Brussels Capital Region, a comprehensive approach to counter early school
leaving is still missing and hampered by a lack of data, evaluation and
coordination of efforts between regional, community and local actors and
related policies. 
With regard to
the overall social situation, the increasing risk of poverty or social
exclusion is below the EU average, but higher than in neighbouring countries. The
share of people living in households with very low work‑intensity has increased
continuously since 2008 and exceeds the EU average. Also, young children from
disadvantaged backgrounds are significantly less likely to attend early childhood
education and care, which is known to reduce early school leaving and may have
an effect on women’s labour market participation. Belgium has adopted a Child
Poverty plan in 2013 and all three regions have decided to increase investments
in child care.[35]
People with a migrant background face a wide range of mutually reinforcing
drivers of social exclusion, such as low educational achievement levels, discrimination
and increased risks of intergenerational transmission of poverty. In addition,
the rate of severe material deprivation of non-EU nationals is more than twice
the EU average, while the gap with nationals is nearly four times the average
EU gap.
As indicated
above, the sixth state reform will further devolve a number of employment
policy responsibilities to regional level as of mid-2014. This
brings new opportunities and risks with regard to the challenges highlighted
above. More specifically, the institutional reform could help increase the
efficiency of activation policies by aligning job search support and the power
to monitor and incentivise job search behaviour at regional level. In addition,
the regionalisation of employment incentives for specific categories of workers
provides an opportunity to rationalise existing incentive schemes and tailor
them to the needs of the regional labour markets. Nevertheless, to maximise
potential gains and reduce the risks of negative spillovers, double financing
and suboptimal allocation of resources, the regionalisation of these additional
employment levers will require effective policy coordination among regions and
between the regions and the federal level, which retains important labour
market policy responsibilities.   

3.4.                
Structural measures
promoting sustainable growth and competitiveness

The
growth potential of the Belgian economy is currently estimated at about half
its pre‑crisis level. While other components also weakened
over the past decade, the very low gains from total factor productivity are
particularly notable. This points to problems with the capacity to engender
innovation and efficiency gains. Particularly problematic is the fact that weak
productivity growth has gone hand in hand with rapid wage growth, eroding the
cost competitiveness in manufacturing. This was highlighted in the 2014
In-Depth Review for Belgium (see Box 3). External competitiveness, including
the role of the wage setting system, was addressed in last year’s
country-specific recommendations and is discussed next. Subsequent sections
look into market functioning issues and action on energy targets and greenhouse
gas emissions, which were also the subject of recommendations last year.
Box 3:
Conclusions from the March 2014 In-Depth Review on Belgium
The third In-Depth Review (IDR) on Belgium under the Macroeconomic Imbalance Procedure was published on 5 March 2014. Based on this review, the Commission
concluded that Belgium is still experiencing macroeconomic imbalances, which
require monitoring and policy action. Specifically, the IDR arrived at the
following findings:
·        
The
twofold trend of a deteriorating current account balance and export market
share losses points to a persistent loss of competitiveness. Product
specialisation geared towards products in the medium range of the value chain
has not been able to compensate for these losses. Expansion of the scope for
innovation, through more thoroughgoing use of technology in products, therefore
remains crucial. Policy-makers could further increase emphasis on support for
clusters and aim for a simplified subsidy structure to stimulate business
spending on research and development. Addressing persistent skills mismatches
would also help the transition towards a knowledge-based economy.
·        
Manufacturing
activities, especially, are feeling the impact of fast wage growth on their
ability to compete internationally, as reflected in shrinking profit margins
and job destruction. Preserving Belgium’s manufacturing basis will require more
ambitious and timelier action than that taken so far by the Belgian
authorities. Wage formation is one candidate for a more ambitious reform
agenda, to make the system more responsive to economic realities and
intersectoral differences, which are substantial but inadequately reflected in
the current wage setting mechanism. The current approach of repeated, small reductions
in the parafiscal pressure on labour could be replaced by a comprehensive tax
overhaul with a shift towards non-labour taxation.
·        
Belgium’s
high public debt remains a concern for the sustainability of public finances.
Nevertheless, government action has prevented a further rise since last year’s
IDR, while related macro-economic risks are mitigated by long average
maturities, reduced interlinkages with the domestic financial sector and the
healthy state of the private sector.
External competitiveness
Current
projections show unit labour costs rising more slowly in 2014-15 as compared with
preceding years, as a result of both lower inflationary pressures and
corrective government measures. On the one hand, abating
inflation – partly the result of government action in several key markets –
results in lower upward pressure on wages through the practice of automatic
indexation. On the other hand, the government’s wage moderation strategy also
helped to curb wage growth.[36]
Nevertheless, the effect will most likely be insufficient to achieve an
effective correction of the historic wage gap any time soon. If left unchecked,
this cumulative 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.
At the end of
2013, the federal and regional authorities adopted a ‘Competitiveness and
Employment Pact’. At federal level, this included a
reduced VAT rate on electricity consumption by households (see section 3.1) and
three additional structural reductions in social security contributions (in
2015, 2017 and 2019) of EUR 450mn each.[37]
These – prospective and unfunded – reductions are accompanied by some smaller
measures aimed for example at SMEs, shift work and young unemployed. As part of
the Pact, the regions also announced some initiatives, including EUR 125mn to
reduce wage costs for employees under 30 or over 55 in Flanders.
The outgoing
government has made no progress on reforming the wage setting system in order
to prevent future decoupling of wages and productivity.
Following repeated postponement, the reform of the collective wage bargaining
framework will be left to the next government. The current framework is
governed by the 1967 law on collective bargaining agreements and the 1996 law
on the promotion of employment and the preventive safeguarding of
competitiveness. The latter determines the margin for real wage growth but does
not interfere with the freedom of social partners to conclude wage indexation
agreements at industry level. As the practice of wage indexation is widespread,
an important part of the wage growth margin of individual companies is excluded
from wage negotiations at their level, limiting their ability to deal with
factors such as low productivity growth, decreasing demand or rising production
costs. This practice also ignores the economic environment, which helps to
explain the rapid growth of unit labour costs in recent years in spite of the
weak business cycle.
As to non-cost
aspects of competitiveness, one key challenge is to speed up the transition
towards a more knowledge-intensive economy. A broad
consensus on the critical importance of further fostering innovation-based
business competitiveness is reflected in the development of sophisticated and
comprehensive policy plans at different government levels. The Walloon Region’s
new ‘Marshall Plan 2022’ strengthens the focus on support to clusters.  In
addition to its 'challenge-driven' innovation policies around six hubs, Flanders has been moving towards a more cluster-driven approach as well in recent years
under impetus of its 'New Industrial Policy'. At federal level, the payroll
withholding tax exemption for researchers has been increased to 80%, as of July
2013. Enhanced public support for business R&D seems to have borne fruit as
R&D intensity has been increasing continuously since 2005.[38] The
continuation of this trend would allow Belgium to nearly reach its Europe 2020
target of 3% of GDP spending on R&D. However, Belgium lacks fast-growing
firms in innovative sectors. The sluggish renewal of its economic fabric is the
key bottleneck to address with a view to better translating the strengths of
its research and innovation system into economic performance. Furthermore,
access to subsidies is still considered complex and time-consuming, while
available support is highly fragmented and full
exploitation of trans-regional synergies is hindered by a lack of
coordination between federated entities. Finally,
R&D and the development of activities with a higher value added are
hampered by skills availabilities as the number of graduates in science,
mathematics, engineering and technology remains low.
Market functioning
Insufficient
steps have been taken to remove excessive restrictions for service providers.
Some professional services continue to be faced with competition-hampering
entry and conduct regulations.[39]
Obstacles identified under the Services Directive such as the existence of
different authorisation systems across regions or the obligation for SMEs to
furnish proof of their competence to exercise a regulated profession have only
been partially reduced. Such impediments hamper the economic potential. As an
illustration, it has been estimated that more ambitious implementation of the
Services Directive would yield gains of up to 1.7% of GDP.[40] The
on-going mutual evaluation exercise of regulated professions at European level
provides an opportunity for Belgian authorities to review restrictions. In
addition, the sixth state reform devolves establishment rules for certain
professions to the regional level, thus providing the opportunity to revisit
and simplify existing regulations. However, it is unclear at this stage whether
this opportunity will indeed be seized. On the other hand, such regionalisation
also entails the risk of market fragmentation if additional administrative
burdens are created for firms that operate in more than one region. If this
would happen, the principles of mutual recognition[41] and
nation-wide authorisation-scheme validity may be endangered.[42] With
regard to the postal sector, there are concerns about the compatibility of
certain regulatory barriers with EU directives aimed at opening up the postal
market to competition. No progress has been made with regard to the services
sector.
Retail
prices for both food and non-food products are substantially higher in Belgium than in neighbouring countries.[43] This
difference has risen further in recent years. According to analysis by the
Belgian FPB,[44]
among the various factors causing these higher retail prices, the most
important ones include market size, total labour costs and procurement
conditions. However, the sector also has a number of regulations and
operational restrictions which hinder its development and can have an important
effect on prices. These include for example a ban on sale below costs. While a
recent law changed its justification (from consumer protection to SME
protection) and calculation method, the principle of the ban has, as such, been
maintained. Retail establishment barriers remain a concern, with relatively low
market entry and exit in Belgium compared with other EU countries. The
forthcoming devolution
of retail establishment regulation provides an opportunity to
simplify existing rules and to move towards a single permit regime. However, it
remains to be seen to what extent the new measures, in their entirety, would
ease establishment and whether competition would be affected by potential
inconsistencies between regions. Only limited progress has been achieved over
the past year.
The integrated
Competition Authority was set up in September 2013 and the new structure is now
in the early stages of implementation. Despite a
budget increase, the authority is still smaller than competition authorities in
similar-sized countries. Moreover, the recruitment of new staff members has
stopped because it is unclear who is in charge of the process.
Belgium is
considered to have made substantial progress in improving conditions for the
provision of mobile broadband over the past year. Although use
of mobile broadband is picking up, Belgium still has one of the lowest
penetration rates in the EU. The frequency spectrum in the 800MHz band has been
allocated to mobile broadband services and strict radiation norms in the
Brussels Region are being revised. In line with similar initiatives in the
energy sector, the Belgian authorities have taken measures to increase price
awareness among telecom consumers. These follow the adoption of the
Telecommunications Law in 2012, which made it easier to switch providers.
Recent studies point to increased dynamism in the Belgian market for mobile
telephony. Consumers' assessment of the market has seen a considerable increase
between 2012 and 2013, and switching provider or tariff plan became the 4th
highest in the EU.[45]
Nevertheless, for certain bundles with (fast) broadband connections, prices
remain higher in Belgium.[46]
While consumers’ overall assessment of the market has improved since 2012, it
is still the second lowest across the EU when it comes to satisfaction with the
choice of internet service providers.[47]
Finally, the current legal framework does not fully guarantee the independence
of the telecom regulator.
The transport
sector is still suffering from inefficient market functioning. Firstly,
  Belgium has not yet opened up its domestic rail passenger market to
competition. A new dual structure has been set up, consisting of a formally
separate railway operator and infrastructure manager. It remains to be seen whether
this structure will more effectively address market access issues and rail
punctuality and reliability. Moreover, the introduction of the Brussels
Regional Express Network has been delayed. Secondly, the port labour
legislation prevents port service providers from freely choosing their
workforce and requires workers to register in a labour pool. Moreover, these
restrictions on the freedom of establishment are applied in a discriminatory
manner. Lastly, the airport regulator’s independence is incomplete, in relation
to the setting of airport charges for Brussels airport and the independence of
its members for Brussels South–Charleroi airport.
Peak hour
traffic congestion constitutes an important problem in Belgium, both inside urban agglomerations and on essential interurban links.[48] Air
pollution in Belgium is responsible for almost 10,000 premature deaths annually
and 2.5 million workdays lost due to illness.[49]
Despite the severity of the problem, several issues remain unaddressed, such
as: the potential of time-differentiated congestion charging to encourage
better use of the infrastructure, the favourable tax treatment for private use
of company cars and fuel cards, and inefficiencies in public transport.
Wholesale gas
and electricity markets are well integrated with neighbouring countries and
retail markets have become more dynamic in recent years as government measures
have made consumers more price-conscious and price setting more responsive.
Belgian consumers’ assessment of gas and electricity services has improved
considerably since 2012 and switching tariff plan or service provider is the
highest in the EU.[50] Yet,
distribution tariffs for electricity, charged by distribution network
operators and an important component of total energy prices,
remain among the highest in Europe and partly offset the effect of lower
commodity costs on end-user prices. Following legal disputes regarding
responsibility for determining the distribution tariff methodology and in
anticipation of the devolution of this responsibility, 2012 tariffs were
extended throughout 2013-14. Meanwhile, the costs incurred by network operators
have continued to rise, as a result of both increased public service
obligations and investment needs. This risks triggering a sharp rise in gross
electricity prices, once the current tariff freeze expires and the
regionalisation of distribution tariffs is fully accomplished and operational.[51] As
the costs incurred by distribution system operators vary significantly, it is
difficult at this stage to estimate which types of households and companies and
which areas would be most affected by future rising costs, but it is clear that
additional gross energy costs would further negatively affect the overall
competitiveness of the Belgian economy. A Constitutional Court ruling has
largely settled disputes on the independence and powers of the regulators.
However, further work is needed to fully align legislation with the third
Internal Energy Market Directives. Some progress has been achieved with regard
to the functioning of the energy sector.
The
decision to close the oldest two nuclear power plants in 2015 has raised
concerns about the security of the Belgian electricity supply over the medium
term, especially given the shutting‑down of several other (gas-fired) power
plants. The
repeated inactivity of two other nuclear reactors adds to the problem. Against
this background, the authorities decided on the further development of
offshore wind farms; a call for bids for the construction of new gas-fired
plants;[52]
and the creation of a strategic back-up capacity through an annual tender
procedure. The timely improvement of interconnection appears to be less
developed in the government plans. Further integration with the
physical grid and electricity markets of neighbouring countries would help to assure
both security of supply and the absorption of occasional excess domestic
production arising from higher production from renewables and a growing share
of intermittent generation capacity in the overall energy mix. In this context,
increased cooperation with neighbouring countries and
demand-side response could be encouraged. 
Box
 4: Potential impact of structural reforms
on growth – a benchmarking exercise
Structural reforms are crucial for
boosting growth. It is therefore important to know the potential benefits of
these reforms. Benefits of structural reforms can be assessed with the help of
economic models. The Commission uses its QUEST model to determine how
structural reforms in a given Member State would affect growth if the Member
State narrowed its gap vis-à-vis the average of the
three best EU performers on key indicators such as labour market participation
or the degree of competition in the economy. Improvements on these indicators
could raise Belgium's GDP by about 4½% in a 10-year period. Some reforms could
have an effect even within a relatively short time horizon. The model
simulations corroborate the analysis of this staff working document, according
to which the largest gains would likely stem reforms enhancing labour market
participation, in particular among low-skilled cohorts; enhancing market
competition; reducing benefit replacement rates (though the estimation is based
on data which do not yet account for the entitlement reform initiated in November
2012); and pursuing a tax shift towards consumption taxation. In
addition to considerable gains in potential output, there are also positive
effects on employment (+6% after 10 years) and on the fiscal position (an
improvement of 4% of GDP after 10 years). This highlights how structural
reforms help to safeguard long-term sustainability of public finances.
Table
1: Structural indicators, targets, and potential GDP effects[53] 
Source:
Commission services. Note: Simulations assume that all Member States undertake
reforms which close their structural gaps by half. The table shows the
contribution of each reform to total GDP after five and ten years. If the
country is above the benchmark for a given indicator, we do not simulate the
impact of reform measures in that area; however, the Member State in question can still benefit from measures taken by other Member States.[54] *
The long-run effect of increasing the share of high-skilled population would be
1.1% of GDP and of decreasing the share of low-skilled would be 5.1%. ** EU
average is set as the benchmark.
Greenhouse gas emissions, energy targets and
resource efficiency
Federal and
regional authorities have not been able to come to a clear and full division of
efforts regarding the target for reducing greenhouse gas emissions in the
sectors outside the EU emissions trading system by 15% in 2020 as compared with
2005. At
regional level, mitigation plans have been adopted or are in the process of
being adopted, but their impact on total emissions and the potential use of
flexible mechanisms to attain national targets remains unclear. Similarly, the
extent to which the federal level will take measures remains unknown. No
significant tax shift towards environmental taxation took place over the past
year. This situation is particularly pressing for measures related to road
transport, which in 2011 represented 21% of total emissions and is the only
large sector that has seen emissions increase since 2005. As a result, it is
very doubtful whether the 2020 target will be met without additional use of
flexible instruments. According to Belgium’s own latest projections (2013), the
target will be missed by 11pps.[55]
The Commission services therefore consider that Belgium has made only limited
progress with regard to the relevant recommendation.
Considerable
headway has been made towards the 2020 renewable energy target of 13% of final
energy consumption, despite the lack of a common strategy between the different
entities.
In 2012, renewable sources accounted for 6.8% of final energy consumption with
especially renewable electricity generation rising fast. The development of
renewable electricity is supported through green certificates, guaranteed price
schemes and an offshore wind deployment programme. Their cost, however,
transpires into high distribution tariffs, as discussed above. The
fragmentation of responsibilities adds to the complexity of Belgium’s renewable energy policies, considering that the regions are responsible for most
renewable energy, while offshore wind energy remains a federal responsibility.
Efficiency gains could be reached through increased fungibility between green
certificates in the different regions, though this would require harmonisation
of eligibility criteria.
Belgium has the second
highest energy intensity of all EU-15 countries[56]
and there is scope for energy use optimisation in all economic sectors.
Measures by the regions particularly target the residential sector
(renovation), transport, the public sector and information provision obligations.
A key challenge is the financing of energy efficiency programmes, which face
increasing budgetary constraints and uncertainties from year to year. The
imminent implementation of the Energy Efficiency Directive would provide
additional tools to promote efficiency. Further efforts to ensure proper
training and certification of the relevant experts also appear to be needed. Belgium could benefit from implementation of the Europe 2020 resource efficiency Flagship
Initiative and of a transition to a more ‘circular economy’.[57] There
is particular scope to improve the business environment by setting up support
programmes for SMEs to use fewer resources – including energy – in order to cut
costs and create or maintain jobs.[58]


3.5.                
Modernisation of public administration

Based on the latest World Bank’s governance
indicators for 2012, Belgium is among the
good performers in general government effectiveness. Nevertheless,
this overall indicator hides the low level of use of innovative practices and
the existence of administrative obstacles in certain areas. Regarding
administrative modernisation, Belgium tends to score a little above the EU
average in the take up of e-government services by citizens and enterprises. Despite
significant efforts to increase online access and electronic simplification,
the use of ICT and innovative tools in public administration is low compared to
private service sectors. According to the EU Justice Scoreboard,[59]
there are also significant gaps in Belgium's ability to collect data on the
quality and efficiency of the justice system.
With regard to
the business environment, the generally low level of bureaucracy masks the adverse
impact of red tape in key areas for competitiveness.
While the time needed to start up a new business is significantly below the EU
average, Commission data show that the cost proves to be higher. The World Bank
Doing Business indicators rank Belgium in the lowest part of the EU group for
dealing with construction permits and registering property. Some legislation on
tax and social security also remains complex and rigid, although improvement is
noticeable in the area of environmental legislation. Lastly, available
indicators[60]
suggest that the use of evidence-based instruments in the policy‑making process
(e.g. regulatory impact assessments) is especially low. However, complications and
delays following the gradual introduction of evidence-based tools are being
addressed.
Belgium
implemented measures aimed at simplifying tax administration by providing
simplified (pre-filled) tax forms for targeted groups and further encouraging
the use of online services (Tax-on-web, Zoomit). On the other
hand, the Belgian Point of Single Contact for services remains only an
information portal and is not linked to existing e‑government solutions. This
means that ‘enterprise counters’[61] do
not allow formalities to be completed online, which would contribute to a
simplified administrative environment, efficiency gains and possible savings in
the long run for the public administration as well as businesses. The lack of
availability and cross-border accessibility of e-procedures is a serious
shortcoming. No progress has been achieved in recent years besides the
availability of additional information.
Belgium has
a highly decentralised institutional structure with responsibilities often
scattered among different layers of government. Hence,
cooperation and coordination between different levels is key for efficient
public administration. The recent adoption of the sixth state reform
substantially changes the distribution of responsibilities and their financing.
While the implementation of the reform is an administrative challenge for the
next legislature, it also represents an opportunity to pursue further
efficiency gains.

4.        
Conclusions

The Belgian economy
faces many challenges, most of them in the areas covered by the Annual Growth
Survey and the Europe 2020 objectives. Medium-term
budgetary planning and long-term fiscal sustainability of public finances are still
pressing issues. The tax system remains complex and inefficient and the high
tax burden on labour contributes to the low employment rate and persistent unemployment
traps. Low labour market fluidity and barriers to entry result in low labour
market participation and a persistent level of mismatches, while some
indicators with regard to educational achievement point towards worrisome
evolutions. The loss of competitiveness is partly due to cost factors such as
high unit labour costs and non-cost factors such as untapped R&D potential
and market functioning issues. Environmental shortcomings remain unaddressed. Finally,
the low level of ICT use in public administration, the complexity of
legislation and government schemes is notable.
The analysis in
this staff working document concludes that Belgium has made some progress in
addressing the 2013 country-specific recommendations. The
deficit was reduced to 2.6% of GDP in 2013. The Treaty on Stability,
Coordination and Governance was implemented through a Cooperation Agreement
which introduces a structural budget balance rule for general government and
formalises fiscal policy coordination among different layers of government. The
2011 old-age social security reform is being phased in as planned and
additional measures conducive to active ageing have been taken. Job-search
requirements and personalised job‑search assistance for all unemployed people have
been stepped up. Past drivers of high price pressures have been addressed through
competition-reinforcing measures in several key markets such as energy and
telecommunication. However, most of the measures taken since the adoption of
the recommendations require further action, e.g. on competitiveness,
on restrictions and competition in retail and network industries, on taxation
and on reducing greenhouse gas emissions.
The policy plans
submitted by Belgium broadly address the relevant challenges and broad
coherence between the two programmes has
been ensured. The national reform programme presents
steps taken since the 2013 country-specific recommendations in addressing
shortcomings in the areas of long-term sustainability of public finances,
competitiveness, the labour market, competition and the environment. The
stability programme demonstrates Belgium’s commitment to improving the
budgetary position towards the medium-term objective in line with the Stability
and Growth Pact. However, the national reform programme
lacks forward-looking vision. Furthermore, the delay in some reform areas (tax
reform, wage bargaining) is to be noted. In order to ensure that national Europe
2020 targets and budgetary targets are reached, consistency between regional
and national targets and coordination among regional actors are essential.

Overview table
 
 2013 commitments || Summary assessment[62] 
 Country-specific recommendations (CSRs) 
 CSR 1: Adopt additional measures to achieve the structural adjustment effort specified in the Council Decision to give notice to correct the excessive deficit by 2013 and to enhance the sustainability and credibility of the consolidation. A durable correction of the fiscal imbalances requires the credible implementation of ambitious structural reforms which would increase the adjustment capacity and boost potential growth.   After the correction of the excessive deficit, pursue the structural adjustment at an appropriate pace so as to reach the medium-term objective by 2016 and ensure that the high debt ratio is put on a firm downward path. To this end, present growth-friendly structural measures for 2014 by 15 October 2013 which ensure a sustainable correction of the excessive deficit and sufficient progress towards its medium-term objective. Ensure that the adjustment path is balanced over time or even front-loaded.   Adopt explicit coordination arrangements to ensure that budgetary targets are binding at federal level and sub-federal levels within a medium-term planning perspective including through the prompt adoption of a rule on the general government budget balance/surplus that complies with the requirements of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union and to increase the transparency of burden sharing and accountability across government layers. || Belgium has made some progress in addressing CSR 1. ·         Substantial progress in reducing the deficit. The 2013 headline deficit came out at 2.6% of GDP, below the target of 2.7% of GDP set by the Council in June 2013. In 2014 and 2015, the deficit is projected to remain below the 3% of GDP deficit threshold. ·         Limited progress in making progress towards the medium-term objective. The 2014 budget contains consolidation measures of a structural nature, ensuring the sustainable correction of the excessive deficit. However, the Commission's spring forecast shows no further structural improvement in 2014 and, under the usual no-policy-change assumption, a structural deterioration in 2015. This puts the achievement of the targets at risk and could lead to a significant deviation from the adjustment towards the MTO over 2014-2015. ·         Substantial progress in improving the fiscal framework. The ongoing sixth state reform provides for a contribution by regions and communities to the fiscal consolidation effort and to the cost of population ageing. The Fiscal Compact, part of the Treaty on Stability, Coordination and Governance, has been implemented through a Cooperation Agreement concluded between the federal government and regional/community governments on 13 December 2013, which introduces a structural budget balance rule for general government and formalises fiscal policy coordination among different layers of government. 
 CSR 2: Step up efforts to close the gap between the effective and statutory retirement age, including by pursuing the on-going reforms to reduce the early-exit possibilities. Underpin reforms of the old-age social security systems with employment-support measures and labour-market reforms conducive to active ageing.   Increase the effective retirement age by aligning retirement age or pension benefits to changes in life expectancy.   Continue to improve the cost-efficiency of public spending on long term institutional care. || Belgium has made some progress in addressing CSR 2. ·         Some progress in reducing early-exit possibilities. The ongoing old-age social security reform started by the end of 2011. Additional measures conducive to active ageing were taken to underpin the reforms of the old-age social security system, notably to align the pension bonus with the new early retirement age, to ensure fair treatment of mixed careers and to strengthen the reactivation incentives of the survivor’s pension. Also, the rules on earnings after retirement have been relaxed, rewarding people who continue working past the age of early retirement or stay in or re-enter the labour market after reaching the legal retirement age. In tandem, dismissals through the pre‑retirement scheme have been made more expensive and companies have been asked to implement ‘active ageing’ plans. ·         No progress in aligning retirement age or pension benefits to changes in life expectancy. An expert group has been set up but has not yet delivered its reform proposals. ·         No progress in cost-effectiveness of long-term institutional care. The sixth state reform transfers a number of responsibilities for long-term care (and for healthcare) to community level, hence somewhat alleviating the ageing burden borne by the federal government. Whether the devolution of responsibilities will lead to increased cost-effectiveness depends on political choices that have yet to be made and implemented. 
 CSR 3: To restore competitiveness, pursue the on-going efforts to reform the wage setting system, including wage indexation; in particular, by taking structural measures, in consultation with the social partners and in accordance with national practice, to ensure that wage setting is responsive to productivity developments,   reflects sub-regional and local differences in productivity and labour market conditions,   and provides automatic corrections when wage evolution undermines cost-competitiveness. || Belgium has made limited progress in addressing CSR 3. ·         Some progress in restoring competitiveness: Several measures to curb rising wage costs have been enacted and past drivers of high price pressures have been addressed by competition-reinforcing measures in several key markets. A second set of revisions of the health index calculation formula came into force as of 1 January 2014, with the aim of better reflecting consumption patterns and the method of determining prices of several commodities and services has been revised. These various revisions are expected to increase downward pressure on measured inflation, thereby contributing to wage moderation. ·         No progress on reforming the wage setting system, linking it to productivity developments, better reflecting local differences in productivity and labour market conditions. ·         No progress on introducing automatic corrections. According to the government declaration to parliament, the reform of the 1996 law on competitiveness would introduce a new, more stringent method of determining the wage norm by reducing the risk of overestimating wage developments in neighbouring countries, by reinforcing the discretionary authority of the government to intervene in the wage setting process and by reinforcing the mechanism for ex post corrections. However, this reform has stalled and will most likely not be enacted during the current legislature. 
 CSR 4: Present concrete and time-specific structural measures to improve competition in the services sector, by removing barriers in retail and   excessive restrictions in professional services and   improve the provision of mobile broadband.   Continue to improve the functioning of the energy sector by reducing distribution costs and monitoring retail prices,   strengthen the independence of the regulators in the energy, telecoms and the transport sectors (railway, airport).   Remove remaining regulatory barriers in the postal sector. || Belgium has made limited progress in addressing CSR 4. ·         Limited progress in removing barriers in the retail sector. Belgium has made limited progress on retail establishment. The transfer of relevant competences to the regions that will occur in July 2014 provides the opportunity for a reform of the current rules but no concrete measures have been taken so far. The effectiveness of the new rules in simplifying retail establishment remains to be seen. ·         No progress on removing excessive restrictions in professional services. Some professions still face obstacles when entering the market and offering additional services in the sector as a whole. ·         Substantial progress in improving the conditions for the provision of mobile broadband. The frequency spectrum in the 800 MHz band has been finally awarded for the provision of mobile broadband services and EMF issues are being resolved in the Brussels Region. ·         Some progress on improving the functioning of the energy sector. Wholesale gas and electricity markets are well integrated with neighbouring countries. Retail markets have become more dynamic; information campaigns have made consumers more price-conscious. Electricity distribution tariffs, however, are the second highest in Europe (after Spain) and further work is outstanding to fully align legislation with the third Internal Energy Market Directives. ·         Some progress in strengthening the independence of the regulators. In the energy sector, the independence of the regulators is not ensured and their tasks are not conform to the internal market Directives (third package). In the telecom sector, the rules under which the Belgian Council of Ministers can intervene in the decisions or plans of the BIPT are in breach with the independence of the Belgian Institute for Post and Telecommunications (BIPT). In the transport sector, the 2012 adopted legislation on the regulatory body for railway transport and for Brussels Airport operations, reinforcing the independence of the regulator, has been implemented. No further major issues exist with regard to the regulatory function for railway transport. However, in the case of Brussels Airport, the main issue concerns the excessive power exerted by the Minister in arbitrating airport charges-related disputes. In the case of Brussels-South Charleroi Airport, the independence of the Walloon supervisory authority should also be guaranteed. ·         No progress on removing remaining regulatory barriers in the postal sector. Persisting regulatory barriers (i.e. excessive licensing requirements, notably mandatory geographical and daily coverage and a uniform tariff for licensed services) reduce consumer choice and hinder the development of licensed postal markets. 
 CSR 5: Establish concrete and time-specific proposals for shifting taxes from labour to less growth-distorting 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.   Simplify the tax system by reducing tax expenditures in income taxation, increasing VAT efficiency and improving tax compliance by closing existing loopholes. || Belgium has made limited progress in addressing CSR 5. ·         Limited progress in shifting taxes from labour to less growth-distorting tax bases. Though a number of small measures have been taken in the context of a ‘competitiveness pact’, no substantial tax shift from labour to less growth-distorting tax bases has taken place. No concrete proposals have been made to make more use of environmental taxes, and diesel and fuel were excluded from the general increase in excise duties as of 1 August 2013. ·         Limited progress in simplifying the tax system. A number of simplification measures have been legislated. With regard to increasing VAT efficiency, the VAT exemption for lawyers’ services has been abolished but the reduction from 21 % to 6 % of the VAT rate for electricity (effective in April 2014) goes against both objectives of simplifying the tax system and moving towards a less growth‑distorting tax base. Tax compliance has been improved by a stepping‑up of the fight against fraud. The 'fairness tax' for large companies can be seen as an indirect reaction to the use of tax planning in corporate income taxation linked in particular to loopholes in the allowance for corporate equity (ACE) that potentially allow corporations to cascade ACE benefits out of the same initial equity funding. These loopholes have not been addressed. 
 CSR 6: Further reduce disincentives to work by ensuring effective enforcement of job-search requirements and personalised job search assistance for all unemployed.   Take measures to increase interregional labour mobility.   Simplify and reinforce coherence between employment incentives, activation policies, labour matching, education, lifelong learning and vocational training policies for older people and youth.   Develop comprehensive social-inclusion and labour market strategies for people with a migrant background.   || Belgium has made some progress in addressing CSR 6 . ·         Some progress on reducing disincentives. A new cooperation agreement between the federal government and the regions on follow‑up of and guidance for jobseekers entered into effect on 1 January 2014, providing for enhanced activation, conditionality, quicker follow-up and sanctions. Disincentives to work are set to fall at the bottom of the pay scale, as a result of the reform of the unemployment benefit system and the reinforcement of the work bonus, though unemployment traps in Belgium remain both sizeable and pervasive. ·         Some progress on inter-regional labour mobility. The regional employment services have continued to invest in bilateral and multilateral cooperation. Recent statistics show increasing commuter flows from high- to low‑unemployment areas across regional borders. ·         Limited progress on simplifying and reinforcing coherence. Labour market and education and public training institutions in the three regions/communities have intensified cooperation to make initial vocational training more relevant to market needs and to cope with the increasing need for continuous vocational training as well as adult training. There is no coherence among the different policies/actors to address the early school leaver issue country-wide, Statistics show persisting and increasing regional/community differences. ·         Limited progress on comprehensive strategies for people with a migrant background. The federated entities have taken action mostly affecting newcomers, without developing a coherent strategy to address the issues affecting second- and third-generation migrants, many of whom have Belgian nationality with the notable exception of an increased offer of language courses. Yet the creation of a statistical tool allowing describing and monitoring the labour market inclusion of people of migrant origin is notable. 
 CSR 7: Take concrete measures and agree a clear division of efforts between the federal and regional authorities to ensure progress towards reaching the targets for reducing greenhouse gas emissions from non-ETS activities, in particular from transport and buildings. || Belgium has made limited progress in addressing CSR 7. ·         Limited progress in taking concrete measures towards reducing greenhouse gas emissions. ·         Limited progress on a clear division of efforts between the regional and federal authorities. The Walloon Region has adopted its ‘Décret Climat’, and the Brussels Region has adopted the Brussels code of air, climate and energy legislation (COBRACE) but their respective first five-yearly ‘air, climate and energy plan’ presenting concrete measures has yet to be adopted and implemented. The Flemish Region has adopted the ‘Flemish Climate Policy Plan 2013-20’, but full implementation has not yet been achieved. 
 Europe 2020 (national targets and progress) 
 Policy field target || Progress achieved 
 Employment rate target set in the 2012 NRP: 73.2 % || The employment rate stood at: 67.6 % in 2010 67.3 % in 2011 67.2 % in 2012 and 67.3 % in the first three quarters of 2013   In view of past performance, the Europe 2020 employment rate target of 73.2 % appears ambitious. Achieving it would require the creation of around 50 000 jobs a year, many more than the average since 2008 and even more than before the 2008 crisis. 
 R&D target set in the 2012 NRP: 3 % || Belgium’s R&D intensity has been increasing steadily since 2005 (2005: 1.8 %, 2012: 2.2 %), thanks to increases in both business (from 1.24 % to 1.52 %) and public R&D expenditure (from 0.56 % to 0.70 %). The continuation of such a trend would allow Belgium to nearly reach its 2020 target. In 2013, the public R&D budgets of all entities were protected (or even significantly increased in the cases of the federal and Walloon budgets), in line with the principle of ‘growth-friendly consolidation’. 
 National greenhouse gas (GHG) emissions target: -15 % in 2020 compared to 2005 emissions (in non-ETS sectors). || Change in non-ETS greenhouse gas emissions between 2005 and 2012: -6 %. According to the latest national projections submitted to the Commission and taking into account existing measures, it is expected that the target will be missed: -4 % in 2020 compared to 2005 (projected shortfall of 11 percentage points). 
 2020 renewable energy target: 13 % Share of renewable energy in all modes of transport: 10 % || Belgium made good progress in renewable energy development: renewables’ share of final energy consumption reached 6.8 % in 2012, thus Belgium had already exceeded its 2011/12 and 2013/14 interim targets as set out in the Renewable Energy Directive.[63] Renewables’ share in transport reached 4.5 %[64] in 2012. 
 Energy efficiency target: 6.911 Mtoe in final energy consumption   By 2020: level of 43.7 Mtoe primary consumption and 32.5 Mtoe final energy consumption || Belgium notified the Commission of the policy measures it plans to adopt to implement Article 7 of the Energy Efficiency Directive. 
 Early school leaving target: 9.5 % || The early school leaving rate was: 11.9 % in 2010 12.3 % in 2011 12.0 % in 2012 and 11.0 % in 2013.   Although Belgium’s early school leaving (ESL) rate remains below the EU-28 average (11.9 % as compared with 12.9 % in 2012), it remains above the 10 % benchmark. In line with the average EU trend, the ESL rate decreased in 2013 compared to 2012. However, this hides large disparities between population sub-groups and high and persisting discrepancies between regions. The rate of early school leaving amongst young people with a migrant background is twice that of nationals. Against the EU general trend, ESL rates have even been rising again in Wallonia and in the Brussels Region since 2009, reaching worrisome levels in Brussels (15.6 % in 2009, 17.7 % in 2013).   As a result of its 2012 agreement between the Flemish government and the social partners on Professional Careers, Flanders adopted a new action plan to fight ESL. Despite some measures and new decrees to improve the coordination, there is no strategy to fight ESL in the Brussels and Walloon Regions in cooperation with the communities and there is a lack of evidence-based policy. In particular, the specific situation in Brussels (involvement of the region and different language communities) points to specific challenges regarding cooperation between the many authorities involved. 
 Tertiary education target: 47 % || The tertiary education attainment rate stood at: 44.4 % in 2010 42.6 % in 2011 43.9 % in 2012 and 42.7 % in 2013.   Whilst Belgium's tertiary education attainment rate significantly exceeds the EU average (42,7% against 36,8% in 2013), Belgium is one of the three EU countries where the participation rate decreased in 2013. Reaching the national target might become challenging. 
 Target on the reduction of population at risk of poverty or social exclusion in number of persons: -380 000 || The number (in 1 000 persons) of people at risk of poverty or social exclusion stood at: 2.235 in 2010 2.271 in 2011 2.353 in 2012   As a result of an upward trend, Belgium is moving away from its 2020 target. Moreover, some population sub-groups are disproportionally at risk, with, in 2012, the proportion of non-EU nationals at risk of poverty at 50.5 %, by far the highest rate and biggest gap with nationals across all Member States. The rate of severe material deprivation of non-EU nationals is amongst the worst and more than double the EU average, while the gap with nationals is nearly four times the average EU gap. 

Annex  

Standard tables
Table I.
Macro-economic indicators
Table II. Comparison
of macroeconomic developments and forecasts
Table III.
Composition of the budgetary adjustment
Table IV. Debt
dynamics
Table
V. Sustainability indicators
Table
VI. Taxation indicators
Table VII. Financial
market indicators
Table VIII. Labour
market and social indicators
Table IX. Product
market performance and policy indicators
Table X. Green
growth
List of indicators used in Box 4 on the potential impact on growth of structural reforms. 
Final goods sector mark-ups: Price-cost
margin, i.e. the difference between the selling price of a good or service and
its cost. Final goods mark-ups are proxied by the mark-ups in selected services
sectors (transport and storage, post and telecommunications, electricity, gas
and water supply, hotels and restaurants and financial intermediation but
excluding real estate and renting of machinery and equipment and other business
activities[65]).

Source: Commission services estimation
using the methodology of Roeger, W. (1995). "Can imperfect
Competition explain the Difference between primal and dual Productivity?" Journal
of Political Economy Vol. 103(2) pp. 316-30, based on
EUKLEMS 1996-2007 data. 
Entry costs: Cost of
starting a business in the intermediate sector as a share of income per capita.
The intermediate sector is proxied by the manufacturing sector in the model. 
Source: World Bank, Doing Business
Database. www.doingbusiness.org.
2012 data.
Implicit consumption tax rate:
Defined as total taxes on consumption over the value of private consumption. In
the simulations it is used as a proxy for shifting taxation away from labour to
indirect taxes. The implicit consumption tax-rates are increased (halving the
gap vis-à-vis the best performers) while labour tax-rates are reduced so that
the combined impact is ex-ante budgetary neutral.
Source: European Commission, Taxation trends
in the European Union, 2013 edition, Luxembourg, 2013. 2011 data.
Shares of high-skilled and low-skilled: The
share of high skilled workers is increased, the share of low-skilled workers is
reduced (halving the gap vis-à-vis the best performers). Low-skilled correspond
to ISCED 0-2 categories; high-skilled correspond to scientists (in mathematics
and computing, engineering, manufacturing and construction). The remainder is
medium-skilled. 
Source: EUROSTAT. 2012 data or latest
available. 
Female non-participation rate: Share
of women of working age not in paid work and not looking for paid work in total
female working-age population
Source: EUROSTAT. 2012 data or latest
available.
Low-skilled male non-participation
rates: Share
of low-skilled men of working age not in paid work and not looking for paid
work in total male working-age population
Source: EUROSTAT. 2012 data or latest
available.
Elderly non-participation rates (55‑64
years): Share
of the population aged 55‑64 years not in paid work and not looking for paid
work in total population aged 55‑64 years.
Source: EUROSTAT. 2012 data or latest
available.
ALMP: Active Labour
Market Policy expenditures as a share of GDP over the share of unemployed in
the population. 
Source: EUROSTAT. 2011 data or latest
available.
Benefit replacement rate: Share
of a worker's pre-unemployment income that is paid out by the unemployment
insurance scheme. Average of net replacement rates over 60 months of
unemployment. 
Source:
OECD, Benefits and Wages Statistics. www.oecd.org/els/benefitsandwagesstatistics.htm.
2012 data.
[1] COM(2013) 800 final.
[2] COM(2013) 790 final.
[3] In addition to the 16 Member States identified in the AMR, Ireland was also covered by an in-depth review, following the Council's conclusion that it
should be fully integrated into the normal surveillance framework after the
successful completion of its financial assistance programme.
[4] The NRP was approved by the federal government, while the regional
NRPs annexed to the NRP were approved at an earlier stage by the relevant
regional governments. The federal government held consultations with social
partners on Europe 2020 matters prior to adoption of the NRP.
[5] This group includes both newcomers and so-called "second and third
generation"-migrants, many of whom have Belgian nationality.
[6] Cyclically adjusted balance net of one-off and temporary measures,
recalculated by the Commission services on the basis of the information provided
in the programme, using the commonly agreed methodology.
[7] The Treaty on Stability, Coordination and Governance in the EMU,
which includes the Fiscal Compact, was approved by all Belgian parliaments at
the end of 2013.
[8] This body (the Comité de concertation/Overlegcomité),
in which all Belgian governments are represented, was set up in 1980 in order
to prevent conflicts of competences and solve conflicts of interests between
different governments.
[9] Under the Cooperation Agreement, the Consultative Committee
negotiates a general government target, whereupon the HCF advises on the
breakdown of the general budget balance between the different layers of
government. Based on this recommendation, the Consultative Committee must agree
individual targets.
[10] The latter, especially, proved difficult in recent years. In its March
2013 opinion, the High Council of Finance was unable to reach a consensus on one
single distribution of the fiscal consolidation effort across different levels
of government but proposed instead two alternative distribution keys. In
contrast, the 2014 opinion does contain an unambiguous distribution of the
targets, yet the High Council of Finance was unable to adopt it unanimously.
[11] See Table V. The medium-term sustainability gap (S1) indicator
shows the upfront adjustment effort required, in terms of a steady improvement
in the structural primary balance to be introduced until 2020, and then
sustained for a decade, to bring debt ratios back to 60 % of GDP in 2030,
including financing for any additional expenditure until the target date,
arising from an ageing population.
[12] See Table V. The long-term sustainability gap (S2) indicator shows
the immediate and permanent adjustment required to satisfy an inter-temporal
budgetary constraint, including the costs of ageing. The S2 indicator has two
components: (i) the initial budgetary position which gives the gap with the
debt-stabilising primary balance; and (ii) the additional adjustment required
due to the costs of ageing. The main assumption used in the derivation of S2 is
that in an infinite horizon, the growth in the debt ratio is bounded by the
interest rate differential (i.e. the difference between the nominal interest
and the real growth rates); thereby not necessarily implying that the debt
ratio will fall below the EU Treaty 60 % debt threshold.
[13] Ageing costs comprise long-term projections of public age-related
expenditure on pensions, healthcare, long‑term care, education and unemployment
benefits. See the 2012 Ageing Report for details.
[14] European Commission and Economic Policy Committee (AWG), 2012, 2012
Ageing Report:
Economic and budgetary projections
for the 27 EU Member States, European Economy, No
2/2012, EC,
Brussels. Available at:
http://ec.europa.eu/economy_finance/publications/european_economy/2012/2012-ageing-report_en.htm.
[15] The implicit tax rate on labour is one of the highest in the EU, at
42.8 % in 2012, and the labour tax wedge as defined in the OECD methodology is
also one of the highest in the EU, except for the category of very low-wage
workers (at 50 % of the average wage).
[16] For an analysis of unemployment traps, see chapter 3.1.4 of the In-depth
review on Belgium, European Commission, 2014. 
[17] Consumption taxes made up only 23.7 % of total tax revenue, the
lowest in the EU-28. VAT and excise duties accounted for 7.2 % and 2.1 % of GDP
respectively, the latter being the lowest in the EU both relative to GDP and
relative to total tax revenue. 
[18] Revenue losses due to tax expenditures are estimated at 6.6 % of GDP
in 2011, mainly from personal income taxation and VAT.
[19] VAT efficiency is defined as the ratio of actual VAT revenue to the
revenue that would be raised if VAT were levied at the standard rate on all
consumption with perfect enforcement.
[20] In terms of redistribution, reduced VAT rates are a poor instrument
as they do not allow targeting identical consumption by lower and higher income
groups. See for instance, Valenduc, 2013, "Réformes Fiscales,
Soutenabilité budgétaire et croissance equitable", Contribution au Congrès
des Economistes Belges de Langue Française.
[21] On the scope for a revenue-neutral tax shift, see ‘The Belgian tax
system in the context of macro-economic imbalances’ in In-depth review on Belgium, European Commission, 2014.
[22] The existing reductions in employers’ social contributions for the
first three hires have been extended to the first five hires. The ‘work bonus’
for the low‑paid introduced in 2012 has increased, as both the existing social
security reduction and the existing tax credit for the low paid have been
raised, resulting in an additional annual net salary increase of between EUR 68
and EUR 202.
[23] See:
http://www.senate.be/www/webdriver?MItabObj=pdf&MIcolObj=pdf&MInamObj=pdfid&MItypeObj=application/pdf&MIvalObj=83891072.
[24] See for example Eunomia research & consulting with Aarhus University (2014), "Study on environmental tax reform potential in 12 EU Member
States"
[25] e.g. the ’fairness tax’: a minimum level of taxation introduced for
companies that take advantage of otherwise generous tax provisions under the
notional interest deduction system (the Allowance for Corporate Equity) and/or
carry-forward of losses.
[26] From EUR 59.6 billion in 2012 to EUR 44.1 billion (11.3% of GDP) in
February 2014. 
[27] For further details, see the 2014 Joint
Employment Report, COM(2013)801, which includes a scoreboard of key employment
and social indicators.
[28] The main elements of this EPL-reform and its anticipated impact are
summarised in box 3.3 of the In-depth review on Belgium, European
Commission, 2014.
[29] The recommendations with regard to the redesign of the tax system
(CSR5) and with regard to collective wage bargaining and wage and productivity
evolutions (CSR3) also have a major potential impact on employment performance.
They are dealt with in sections 3.1. and 3.4. respectively.
[30] Persons whose both parents are Belgians. Source: Monitoring
socio-économique, 2013.
[31] According to OECD estimates (2013), the net budgetary impact of
closing the employment gap between immigrants and native-born citizens has been
estimated at nearly one per cent of GDP.
[32] Monitoring socio-économique, 2013. 
[33] See, for instance, the newly adopted Decree on Integration policy
of the Flemish Government and the decision to create the Flemish Agency for
Integration as well as the decree/ordinance adopted by the Walloon and Brussels regional governments respectively on integration pathways for new immigrants.
Regions and communities also increased their offer of language courses,
accessible to migrants.
[34] Thus, for example, steps are taken to reinforce both Dutch- and
foreign-language learning, to rationalise the study orientations in view of
their labour-market relevance and to better integrate scientific and technical
education in the educational curriculum. In addition, mandatory internships are
gradually being integrated in technical and vocational secondary education
programmes, higher vocational training is being reinforced and an action plan
to encourage careers in science, mathematics and engineering is being rolled
out.
[35] See notably the Child Poverty Fund and decree on the organisation
of childcare services in Flanders, the nursery plan of Brussels Region and the
Cigogne 3 plan in Wallonia. 
[36] The government actions referred to were discussed in more detail in
last year’s SWD.
[37] One third of this would be allocated to linear reductions, one
third to low wages and one third to sectors exposed to international
competition, whose growth potential is at risk because of the relative rise of
labour costs compared with productivity.
[38] See Dumont, M., The impact of subsidies and fiscal incentives on
corporate R&D expenditures in Belgium (2001-2009), Working Paper 1-13
Federal Planning Bureau, 2013.
[39] OECD, Product market regulation, data for 2013. This report
identifies obstacles for legal, accounting and architecture professions.
However, a general assessment of all professional services would be required to
identify potential unjustified restrictions in other professions than those
analysed by the OECD.
[40] Monteagudo, J., Rutkowski, A. & Lorenzani, D., The economic
impact of the Services Directive: A first assessment following implementation,
2012, European Commission. Difference between ‘what if – 5 best scenario’ and
‘central scenario’.
[41] While the Special Act on the State Reform explicitly invokes
"mutual recognition" as a key implication of the principle of free
movement, the possibility for one region to impose stricter regulation than the
others on the grounds of "legitimate objectives" remains. As a
result, the possibility of distortion of competition between regions cannot be
excluded. 
[42] See Article 10 (3) and (4) of the Services Directive.
[43] Analyse van de prijzen – Jaarverslag 2013
van het Instituut voor de Nationale Rekeningen,
Prijzenobservatorium, 2014. Belgian retail prices (2012
data) were 11.7%, 8.6% and 6.5% higher than those of the Netherlands, Germany and France, respectively.
[44] Van der Linden, J., Consumptieprijzen in België en de buurlanden,
Working Paper 13-12, Federal Planning Bureau, 2012.
[45] 10th Consumer Markets Scoreboard,  http://ec.europa.eu/consumers/consumer_research.
[46] Vergelijkende studie Prijsniveau
Telecomproducten in België, Nederland, Frankrijk, Duitsland en het Verenigd
Koninkrijk, BIPT, February 2014. The study is based on prices in August 2013.
[47] 10th Consumer Markets Scoreboard.
[48] http://www.inrix.com/scorecard/summary.asp
and Commission estimate on congestion in urban and interurban areas, http://ec.europa.eu/europe2020/pdf/themes/14_transport.pdf.
[49] Impact assessment of Clean Air Policy Package, 2014.
[50] 10th Consumer Markets Scoreboard,
[51] Such a risk is all the more real given the existence of an excess,
underfunded stock of certificates to support alternative energy which sooner or
later will transpire in end-user prices or burden public finances.
[52] The federal regulator (CREG) has delivered a (very) negative
opinion on this procedure. See Advies over ‘de
modaliteiten voor de procedure van offerteaanvraag voorzien in artikel 5 van de
wet van 29 april 1999 betreffende de organisatie van de elektriciteitsmarkt’,
CREG, May 2013.
[53] Final goods sector mark-ups is the difference between the selling
price of a good/service and its cost. Entry cost refers to the cost of starting
a business in the intermediate sector. The implicit consumption tax rate is a
proxy for shifting taxation away from labour to indirect taxes. The benefit
replacement rate is the % of a
worker's pre-unemployment income that is paid out by the unemployment scheme.
For a detailed explanation of indicators see Annex.
[54] For a detailed explanation
of the transmission mechanisms of the reform scenarios see: European Commission
(2013), "The growth impact of structural reforms", Chapter 2 in QREA No.
4. December 2013. Brussels; http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[55] The Commission’s projections, assuming full implementation of
existing and agreed policies, are more optimistic, with a reduction in non-ETS
emissions of 12.5% compared with 2005 by 2020, though it assumes the renewable
energy target will be met and the Energy Efficiency Directive implemented.
[56] This is largely driven by the energy intensity of Belgian industry,
which is 50 % above the EU average. Because of its geographical location, Belgium has a relatively large number of oil refineries and hence a large petro-chemical
industry, which uses oil not only for energy generation but also as a basis for
production.
[57] 7th Environmental Action Programme, Official Journal L
354, 28.12.2013, p. 171–200.
[58] RPA (2014) 'Study on Economic and Social Benefits of Environmental
Protection and Resource Efficiency related to the European Semester'.
[59] Communication from the Commission to the European Parliament, the
Council, the European Central Bank, the European Economic and Social Committee
and the Committee of the Regions, The 2014 EU Justice Scoreboard, COM(2014) 155
final, available at: http://ec.europa.eu/justice/effective-justice/scoreboard/index_en.htm
[60] Sustainable Government Indices (2011), Bertelsmann Stiftung.
[61] The goal of enterprise counters (ondernemingsloketten/guichet
d’entreprises) is to provide a single point of contact for enterprises by
centralising access to different services.
[62] The following categories are used to assess progress in
implementing the 2013 country-specific recommendations:                
No progress: The Member State has neither announced nor adopted any
measures to address the CSR. This category also applies if a Member State has commissioned a study group to evaluate possible measures.   
Limited progress: The Member State has announced some measures to
address the CSR, but these measures appear insufficient and/or their
adoption/implementation is at risk.        
Some progress: The Member State has announced or adopted measures to
address the CSR. These measures are promising, but not all of them have been
implemented yet and implementation is not certain in all cases. 
Substantial progress: The Member State has adopted measures, most of
which have been implemented. These measures go a long way in addressing the
CSR.            
Fully addressed: The Member State has adopted and implemented measures
that address the CSR appropriately.
[63] 2012 EUROSTAT.
[64] Idem.
[65] The real estate sector is excluded because of statistical difficulties
of estimating a mark-up in this sector. The sector renting of machinery and equipment
and other business activities is conceptually part of intermediate goods
sector.