The dominant challenge for Belgium in the years to come is to prepare for population ageing. This entails putting in place policies to attenuate its effects on economic growth and public finances. The few years left before large numbers of baby boomers retire provide a window of opportunity to push ahead with such policies and so preserve the essential elements of the system of social protection. First, further budget consolidation is required to put public finances on a sustainable path. Second, reforms are needed to increase employment rates, especially for the older working age-population, school leavers and ethnic minorities, and to slow the decline in working time. Finally, reforms are required to raise productivity growth.
Putting public finances on a sustainable path
The government should implement consolidation measures to improve the structural budget balance by about 1% of GDP by 2007, with the focus being on expenditure restraint. Healthcare reforms will be needed to contain expenditure growth in the medium term. Should efficiency reforms fail to constrain adequately the growth in public health expenditure, it will also be necessary for the authorities to re-consider the public share of healthcare expenditures. Savings on government expenditure to make room for reducing the high tax rates on labour income should be sought by increasing the efficiency of government and reducing subsidies. In particular, high public transport subsidies should be reduced when it becomes feasible to introduce road pricing, also reducing the economic cost of climate change policies.
Increasing labour utilisation
Belgium has considerable scope to attenuate the effects of population ageing by raising the currently low employment rate of school leavers, older workers and ethnic minorities and slowing the decline in working time. This should be mainly achieved by progressively phasing out subsidies for early retirement (abolishing the older unemployed scheme and making retirement decisions actuarially neutral) and using budgetary room to reduce the taxes on labour income. Furthermore, job-search requirements should be more rigorously enforced and active labour market policies redirected from job creation to job placement. The government should also ease EPL on temporary employment contracts, lower barriers to student work and seek ways to improve education outcomes to enable more young people to find a first job. Better education outcomes would also help to improve labour market integration of ethnic minorities, and more effective anti-discrimination measures are required. Successful programmes to improve the language competence of migrant children should be offered more widely.
Increasing productivity growth
Increasing productivity growth would also attenuate the costs of population ageing. This could be facilitated by removing barriers to productivity growth in ICT-using sectors (in particular retail trade and, at the European level, in retail banking), strengthening product market competition and refocusing innovation policy. Reaping the benefits from applying more ICT in the distribution sector will require easing zoning restrictions, simplifying rules on overtime, making shop opening hours more flexible and widening the scope for temporary work contracts. In retail banking, the Belgian authorities and their European counterparts should fully implement the Financial Services Action Plan and apply the four-level "Lamfulussy framework". The high administrative burden on entrepreneurship should be reduced. Competition should be increased in the electricity sector by a series of measures limiting the incumbent’s capacity to abuse its market power. Tertiary education and research institutions could be made more efficient by increasing inter-university competition and the share of private contributions. Innovation policy should provide more support for organisational change, enhance collaboration between business and researchers and foster a broader and more rapid diffusion of knowledge. This should be complemented by improving the ICT-using competencies of persons with lower intermediate skills and low education attainment.
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