Budget consolidation is needed to put public finances on a sustainable path
Public finances should be put on a sustainable path so as to avoid large increases in taxes – and hence in the excess burden of taxation – or brutal cuts in social programmes when ageing related budget pressures rise. The HFC estimates that public finances would be on a sustainable path if the structural budget balance were increased to a surplus of 0.3% of GDP in 2007 rising to 1½ per cent of GDP over 2011-18 before slowly falling back to zero by 2030 as the budget costs of ageing rise. Public debt would fall from 97% of GDP in 2004 to 30% by 2030. Effectively, lower interest payments make room for higher ageing-related budget costs on this trajectory. There is still some way to go to put public finances onto this path – taking into account announced measures and abstracting from non-recurring transactions, the structural budget balance is projected by the OECD to be a deficit of around ½ per cent of GDP in 2007, similar to the estimated current level. The government should take consolidation measures to increase the structural budget balance (abstracting from non-recurring items) by about 1% of GDP by 2007 so as to put public finances on a sustainable path. In view of Belgium’s already high tax burden and the adverse effects that this has on economic activity, the priority should be given to expenditure restraint in budget consolidation.
Some savings on government expenditure could be made by increasing the efficiency of government administration
Room for cuts in tax on labour income could also be created by increasing government efficiency. The federal government has launched the Copernicus reforms to increase public sector efficiency. The main objective is to improve the quality of service provision within a given budget rather than to induce cost savings. In view of the adverse effects on economic performance of high taxation, the government should also use these reforms to reduce administrative expenditure. The Copernicus reforms consist of a greater use of ICT and change in work methods, the creation of a new management culture, a new approach to Human Resources Management (HRM) and the adoption of analytical accounting. So far, the gains from ICT have been limited and management reforms have been impeded by a lack of autonomy. Outcome indicators (needed to measure performance in a more autonomous system) should be further developed to reinforce the analytical underpinning of the reforms. Moreover, managers need to be given more autonomy so that they can in fact be held accountable for outcomes. HRM practices should also be reformed to emphasise the development of competencies, make high quality management training compulsory, increase labour mobility and reduce early retirement through the creation of a job placement office within the public sector, and otherwise to make the public sector more attractive to high-skilled workers. Such reforms should also be implemented by other levels of government insofar as this has not already been done.
Transport policies should target externalities more efficiently
Another area where budget savings could be made is public transport subsidies, which are high by international comparison. They are intended to encourage commuters to switch from private motor vehicles and thereby ease severe congestion problems as well as to reduce environmental externalities. Such subsidies are even set to increase from January 2005, when the government will pay 20% of rail commuter train ticket prices for private sector employees provided that their employers pay the other 80%; such train tickets are already free for public sector employees. This is a second-best solution to the main problem – road congestion – for which there are currently no suitable policy instruments in place; excise taxes on motor vehicle fuels and taxes on motor vehicle purchase and ownership are poorly targeted on congestion externalities. These arrangements are not only costly, they also encourage excessive mobility. Recent measures shifting taxation from vehicle ownership to fuel consumption go in the right direction. Nevertheless, governments should consider introducing a road pricing system as soon as it becomes technically feasible and reliable, targeting fuel taxation on pollution externalities alone and reducing public transport subsidies accordingly.
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