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Contents | Executive Summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise Chapter 2 of the Economic survey of Belgium published on 13 March 2007.
Contents
How could fiscal policy be put on a sustainable path?
Since 2000, the general government budget has been kept in strict balance, helping to reduce the level of gross debt from about 110% to below 90% of GDP in 2006. However, it will be more difficult to reduce the debt ratio from now on. This is because the primary surplus has been lowered considerably (from 6½ per cent of GDP in 2000 to about 4% in 2006) as the government used some of the savings in interest charges to increase spending. While this expansionary fiscal policy stance has helped the recovery, the dissipating of windfall gains in interest payments has made it more difficult to keep public finances on a sustainable basis in the longer term. The balancing of the budget has been achieved with the help of one-off fiscal measures (such as sale of real estate, special dividends from public companies and securitisation of tax arrears) equivalent to an average of 0.5% of GDP every year, which have helped to postpone the necessary consolidation.
Gross public debt in the OECD, 2005
In % of GDP
Source: OECD, Economic Outlook Database.
The objective for fiscal policy is once again becoming more ambitious. As part of the government’s strategy for pre-funding the cost of ageing, the government’s long-term plan is to generate a budgetary surplus of 0.3% of GDP in 2007 and then have it growing by 0.2 percentage point of GDP every year until the surplus reaches nearly 1½ per cent of GDP in 2013. The surplus is maintained at this level until 2018, after which surpluses will be gradually reduced to zero by 2030. The surpluses are earmarked to the Ageing Fund – the main pre-funding vehicle – which will be used to finance additional ageing-related spending. The implementation of this plan requires important fiscal consolidation efforts, not only because of the more ambitious targets for fiscal policy, but also because interest charges will decline less rapidly in the future. An additional concern is whether the time horizon of the fiscal strategy is sufficiently long to deal with the bulk of the consequences arising from population ageing. The government’s pre-funding strategy aims at financing additional ageing-related costs only until 2030; yet important fiscal burdens of ageing will also materialise in the following decades. Hence, the government’s fiscal targets need to be made even more ambitious through a combination of further pre-funding, tax base broadening, expenditure restraint and labour market reform. The necessary amount of additional efforts could be reduced by tightening the pension replacement rates – but they are already internationally low. A more realistic prospect would be to increase the effective retirement age, for example, by linking over time the statutory age of full pension eligibility to developments in life expectancy. Meeting the fiscal challenges of ageing will require enhanced accountability and close coordination across levels of government, in particular because, under current arrangements, most of the additional ageing-related spending growth falls onto the federal level, without appropriately offsetting revenue prospects.
The amount of needed fiscal consolidation suggests that action is required both on the spending and the revenue side. Fiscal consolidation through expenditure restraint cannot be achieved by the federal government alone, as its discretionary spending power is relatively limited. Thus, all government levels need to participate in the consolidation process by reining in spending. Indeed, the significant extent of fiscal decentralisation means that all levels of government need to generate surpluses in order to participate in the pre-funding effort. To this end, all levels of government might consider working together to establish an expenditure rule that would cap the growth of general government spending. Moreover, attention needs to be paid to surpluses in structural terms, so as to avoid pro-cyclical spending patterns, and defined to exclude the use of one-off measures, which are not sustainable indefinitely. On the revenue side, if the beneficial effects of the government’s recent efforts to lower marginal tax rates are to be preserved and extended, the revenues needed to sustain fiscal consolidation can only be realised by directly and indirectly broadening the tax base, such as by phasing out a range of tax expenditures and by expanding labour market participation.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Belgium 2007 is available from:
- SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
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Additional information
For further information please contact the Belgium Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Jens Hoj, Ekkehard Ernst and Stefaan Ide under the supervision of Patrick Lenain.
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