Economic surveys and country surveillance

Launch of the Economic Survey of Belgium: The Three challenges for policy making in Belgium

 

Remarks by Angel Gurría, Secretary-General of the OECD

Brussels, 12 July 2011

(As prepared for delivery)
 
Prime Minister, Your Excellency, Ladies and gentlemen,


It is a great pleasure to present our latest Economic Survey of Belgium, particularly in the presence of Prime Minister Leterme.


I should first congratulate you for what has been achieved by Belgium since the last Economic Survey two years ago. Clearly, Belgium has weathered the crisis relatively well with a smaller rise in unemployment than the OECD average, and an economic recovery that is stronger than in the euro area. Besides, the caretaker government was able to take important decisions, such as a prudent 2011 budget.


The road ahead will not be easy, though: financial market concerns about sovereign debt are extending to a growing number of countries and now they threaten to include Belgium. Thus fiscal sustainability and higher growth are the backbone of our main recommendations in this Survey. With a public debt at 97% of GDP, a renewed and sustained effort to prefund ageing costs is needed, including revisiting intergovernmental prefunding agreements. To boost subdued potential growth – the other side of the coin to achieve fiscal sustainability – measures to substantially increase employment, notably by making the labour market more inclusive, are required. Finally, greener growth should be secured through more extensive use of environmental taxation.


Let us focus first on Belgium’s most pressing issue, fiscal consolidation. The crisis had a moderate effect on your public deficit, which has fallen rapidly in 2010. But public debt is back to 97 percent of GDP, requiring decisive action to achieve fiscal sustainability and bring down interest rate spreads. The 2011 budget will lower the deficit by ½ per cent of GDP. This is a welcome step, but one that will need to be reinforced in the coming years. 


A credible approach would require an annual fiscal consolidation of at least ¾ %, securing a small surplus by 2015, and then securing surpluses. This is what is planned in the Stability Program and should be considered as a minimum requirement in the context of financial market volatility.


To succeed, we recommend preparing a full multi-year consolidation programme that would focus on spending at all levels of government. It will also need to focus on curbing the growth of ageing-related costs. It is important to make the tax system less growth distortive, by moving away from the high taxation of labour and thus move further towards financing social security through general taxation rather than social security contributions. A first candidate could be health care.


But to achieve fiscal consolidation, it is also necessary to reform the fiscal framework itself. Multi-annual budgets with binding expenditure ceilings at the different levels of government would be instrumental in this regard. And a greater role could be given to institutions such as the High Council of Finance or the Federal Planning Bureau. They could become involved in evaluating short-term fiscal developments and new policy proposals. They could also assess the cost-efficiency of public spending, monitor the adherence to fiscal rules and evaluate the burden sharing.


Indeed, the federal government alone cannot secure fiscal sustainability, as it is responsible for the bulk of ageing-related costs and the financing of public debt. The regions and communities will need to participate to a larger extent. A new and sustainable burden sharing of fiscal consolidation across governments is thus necessary. It has to be defined in an internal stability pact including consolidation paths for all levels of government and defining the consequences of non-compliance, particularly in case of EU sanctions.


The second but crucial challenge is to make the labour market more inclusive. Your labour market performed relatively well during the crisis. The large scale use of reduced working time schemes prevented a higher increase in unemployement and helped firms to retain strong ties with their workers during the downturn. But it is now time to scale down these measures to allow the normal functioning of the labour market.


This could be done by restricting access to these support measures only to firms in significant trouble and restricting re-entry to reduce prolonged or recurrent use. Increasing employer financing and, in case of eventual firing of staff, requiring the repayment of the related subsidies could also be useful options. Last but not least, making participants known to other potential employers and increasing job-search incentives would certainly help.


Moreover, structural problems remain. Increasing the inclusiveness of the labour market and ensuring better access for youth and immigrants should be priorities. Indeed, youth unemployment is high and their employment rate is low compared to international levels. The labour market performance of immigrants in Belgium is among the worst in Europe. This is partially due to relatively low educational attainment, particularly in terms of language.


To facilitate the entry of young people to the labour market, it would be instrumental to abolish hourly restrictions on small hours jobs and to ensure a more gradual phase-in of the youth minimum wage, or alternatively to introduce entry wages. There is also a need to improve vocational training to better reflect labour market demands.


In order to give immigrants a foothold on the labour market, it would be critical to extend language teaching to immigrants of all age groups. Postponing “streaming” and focusing educational resources to correct for socio-economic backgrounds could also help. Another important measure would be to make pre-school public child care mandatory. 


Another key issue in Belgium is that the relatively fast wage growth has eroded competitiveness. Hourly wages have increased faster in Belgium than in its main competitors and faster than Belgian productivity.


Addressing this problem would require reforming automatic wage indexation. A first step would be to redefine the health index to exclude all energy components. In parallel, there is a need for improving price and tariff mechanisms in the energy market, including stronger competition enforcement, as emphazised in the previous survey. In the medium term, it would be advisable that social partners consider phasing out the wage indexation system, so as to allow greater real wage flexibility.


Finally, it is critical to increase the effective retirement age, which is low by international standards. This can be done by limiting access to early retirement programmes and replacing sectoral exemptions with individual assessments of work capacity.


As in many other countries, pension reforms could include an increase in the legal retirement age to reflect past gains in life expectancy and linking it to further longevity gains. We are perfectly aware of the difficulty to implement such reforms. They are politically costly.  But I am afraid there is no alternative.


The last crucial and long term challenge is to green the economy. This is a strategic and fundamental endeavour. Environmental outcomes have improved over the past decade. Belgium is likely to meet its Kyoto objectives and progress in water quality is visible. Nevertheless, this economy is indeed energy and emissions intensive. Belgian industry is among the most energy emissions intensive in the OECD, and residential emissions are among the highest – significantly higher than in neighbouring countries. Meanwhile, farmers are among the highest pesticide and synthetic fertiliser users, and air and water pollution among the highest in the EU.


We have just launched an OECD Green Growth Strategy. It is full of policy options on how to achieve greener growth, which inspired our recommendations to Belgium.


Something has indeed to be done, sooner than later. And first on environmental taxation, which is quite low here. This has to change. It is critical that polluters face marginal external costs. This could be achieved by imposing a uniform CO2 tax across regions. Fuel taxation also needs to reflect externalities, by increasing further in particular the taxation of diesel. And the same principle should apply for pesticide taxation.


Scrapping implicit subsidies to car purchase and use would also be useful, as well as introducing a road-pricing scheme with charges linked to externalities and a congestion charge. The regional agreement to introduce road pricing for freight is a first step. But reforms will notably require making public transport more demand-responsive. Finally, the present fiscal incentives for households to increase energy efficiency could be streamlined and targeted to low-income households.


More generally, the overall environmental policies in Belgium are marred by co-ordination failure. It is visible… and quite costly. The consequences include foregone economies of scale and scope and the use of sub-optimal tools.  In order to make environmental policies less costly, for a start they should be better co-ordinated. There is no economic benefit in a relatively small country like Belgium to have 3 regional CO2 objectives or 5 Green Certificate markets for renewable energy!


The regions are responsible for most environment related policies, but have limited tools as taxation is federal. This should change – policy tools and responsibilities must be better aligned. Finally, pollution does not respect regional borders! Thus, environmental policies should be coordinated according to where the problems are - as an example, water policies should be done by water-basin authorities and not regions.

 

This is quite a difficult program to implement. It is challenging technically, and even more politically. But these are necessary reforms that will ensure a stronger, fairer and cleaner growth for the Belgium economy. The OECD remains at your disposal, Prime Minister, to provide you with the whole experience of our member countries to help you design and implement these necessary reforms.

 

 

 

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