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The next Economic Survey of Belgium will be prepared for 2011.
An Economic Survey is published every 1½-2 years for each OECD country. Read more about how Surveys are prepared.
The OECD assessment and recommendations on the main economic challenges faced by Belgium are available by clicking on each chapter heading below.
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Chapter 1 Coping with the crisis while pursuing structural reforms
The Belgian economy has plunged into a historically deep recession, driven by the crisis in the financial sector and a sharp contraction in world trade. The government has reacted swiftly to restore confidence in the financial sector. Monetary easing by the European Central Bank has been coupled with a fiscal stimulus to support economic activity. Nevertheless, the economy is unlikely to recover strongly within the next couple of years. While the preceding period of high growth benefited from structural reforms, it also revealed weaknesses. Thus, bad times should not be used as an excuse to postpone structural reforms necessary to foster potential growth. Structural reforms should aim at making the labour market more flexible and raising productivity growth through improving the tax system and the competition policy framework. The other main challenge is to put public finances on a sustainable path as soon as the economy picks up in order to cope with costs of ageing.
Chapter 2 Securing fiscal sustainability during the economic downturn and beyond
The current crisis is undermining the fiscal position while the increase of costs of ageing is expected to start accelerating substantially in the coming years. Thus, the room for discretionary fiscal policy to support the economy is limited and the effectiveness of unilateral stimulus measures beyond those already adopted is constrained. However, such short-term measures provide an opportunity for introducing long-term structural reforms as part of the package. The fiscal consolidation efforts, supported by relatively high GDP growth and low interest rates on public debt during the past years, have recently faltered and the objective of generating increasing surpluses has become unrealistic in the medium run. Looking forward, the main challenge for fiscal policy is to devise a realistic and credible path towards fiscal sustainability. With a weaker than earlier expected role for prefunding, renewed efforts to control the growth in ageing related costs should include a pension reform. Significant institutional reforms can help improve the credibility of future commitments.
Chapter 3 Improving fiscal federalism
The current system of fiscal federalism is creating imbalances between the federal and the sub-federal governments (vertical imbalance), and between sub-federal governments (horizontal imbalance). Without reform, the vertical imbalance will widen as the fiscal burden from the ageing of the population falls mainly on the federal level. Reform should therefore strengthen the fiscal capacity of the federal government by improving its revenue sources and by shifting some spending obligations to sub-federal governments. The imbalance between regions arises because of the lack of coherence between taxation and spending. Shared revenues from the personal income tax are allocated to the region of residence, while the region of the workplace does not benefit, which particularly affects Brussels’ revenue level. This imbalance could be eliminated by allocating more of the shared personal income tax to the region of the workplace. Furthermore, the system of equalisation grants should be re-designed to provide incentives to the recipient regions to develop their own revenue base. The performance of the fiscal system could further be improved by raising the efficiency of spending in areas of national interest which have been assigned to sub-federal governments or where there are overlapping responsibilities, such as in employment, R&D, training, education, energy and environmental policies.
Chapter 4 How to reform the tax system to enhance economic growth
Individual elements in tax systems affect the growth process through different channels and to a varying degree. Consumption taxes are among the least distortive for growth, and there is considerable scope to increase the reliance on this tax source in Belgium. Differential taxation of saving vehicles distorts investment decisions, hampering the reallocation of capital towards its most productive use. However, the most distortive taxes are on labour through their effects on workers’ labour market decisions. Recognising the latter, the Belgian authorities have aimed at reducing taxation on labour. However, its level remains internationally high, reflecting numerous exemptions, which reduce tax bases and thus require higher tax rates than otherwise. To promote labour market prospects for individual groups on the labour market, wage subsidies and social security contribution reductions have been used extensively, leading to a complex system, often poorly targeted and at times subject to conflicting objectives. The end result is that the interaction between the personal income tax, the social security contributions, and the generous benefit systems has created a multitude of labour market traps which hold back employment. New tax reforms are constrained by the large and growing fiscal sustainability problem, implying that, unless substantial expenditure cuts are implemented, new tax reforms must be self-financed. This can be achieved by shifting the reliance of the tax system towards the least distortive sources and by broadening tax bases to allow lower tax rates.
Chapter 5 Promoting competition to strengthen economic growth
Prices for many goods and services are higher than in other countries, reflecting generally weak competitive pressures. The government has recently introduced several reforms to strengthen the competition policy framework. Nevertheless, to reap the full benefits of competitive markets, past reforms should be complemented with a number of further measures. The powers of the Competition Authority can still be enhanced. Its effective degree of independence, substantially improved in the recent reform, and its accountability should be monitored in order to assess whether further measures in this direction are needed. In the retail sector competition-restricting regulations still protect existing companies against new entry and inhibit the diffusion of new business models and technologies. The reform efforts in the network sectors remain patchy. In the energy and telecommunication sectors the main issues are the dominant positions of the incumbents and the failure of network sector regulators to introduce a level playing field in order to allow new entry and expansion of competitors. In other sectors, such as postal services and rail transport, major steps towards liberalisation are still to come. Overall, sectoral regulators will need more independence and powers in order to tackle uncompetitive behaviour of the incumbents, while better communication between the regulatory authorities is necessary. These steps should help to secure the necessary basis for bringing productivity growth in line with best performance.
How to obtain this publication
The complete edition of the Economic Survey of Belgium is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Belgium Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat's report was prepared by Jens Hoj and Tomasz Kozluk under the supervision of Pierre Beynet. Research assistance was provided by Sylvie Foucher.