Belgium must focus on tax reform and sound public finances, says economy professor

Belgium must focus on tax reform and sound public finances, says economy professor
© Belga

As all other countries, Belgium was severely hit by the COVID-19 outbreak in 2020. According to the European Commission’s Spring 2021 economic forecast, which was published in mid-May, Belgium’s GDP fell dramatically by 6.3 %, a figure which corresponds to the average in the EU and the euro zone. The most affected sectors were leisure, restaurants, hotels and transport.

The Commission wrote about light in the tunnel already in its Winter forecast in February because of the rollout of the vaccination programme that would enable the economies to reopen. However, in the beginning, vaccine deliveries did not keep pace with the vaccination goals and only a fraction of the adult population was vaccinated with the required two doses.

“We have lost economic growth but that also means that there are pent-up needs and money that hasn’t been spent because of the lockdowns,” commented budget state secretary Eva de Bleeker in an interview in March.

Since then, the roll-out has taken up speed and there is now more room for optimism. Growth rates are expected to continue to vary across the EU, but all member states should see their economies return to pre-crisis levels by the end of 2022, according to the latest forecast.

“Economic developments in 2021 and 2022 will be largely determined by how successfully vaccination programmes will tame the pandemic and how quickly governments will lift restrictions.” For Belgium, the Commission predicted that annual GDP growth will reach 4,5 % in 2021 and 3.7 % in 2022, reflecting Belgium’s position as a trade hub.

All in all, the EU economy is forecast to grow by 4.2% in 2021 and to strengthen to around 4.4% in 2022 (4.3% and 4.4%, respectively, in the euro zone). A stronger-than-previously expected rebound in global activity and trade, and the growth impulse provided by the EU recovery package, help to explain the brighter outlook for all countries.

During the coronavirus crisis, the social security budget amounted to €115 billion, of which only €64 billion was covered by social contributions and most of the rest by the federal budget. To stimulate economic growth and increase public revenues, the Belgian government aims at raising the employment rate from 70% to 80%, something which will require a reform of the labour market.

Reform priorities

Macroeconomics professor emeritus Willem Moesen at the Catholic University of Leuven (KUL) follows the economic development closely and is worried about the structural problems in the Belgium economy. Asked about the most urgent issues on Belgium’s economic agenda, he underlined two priorities.

“First, we need to restore sound public finances. There was a structural deficit in Belgium before the crisis,” he says.

Belgium has a higher general government budget deficit than the average and was hit a little more in 2020 than the average in the euro zone in 2020 (-9.4 % compared to -7.2 %). Although the average figures are similar in the EU and the euro zone, Belgium’s performance should be compared with the 19 countries in the euro zone which share the same currency.

“The deficit will decline if the excessive spending and emergency support measures during the coronavirus crisis will phase out and things will return to normal.” But there are golden financial rules, he underlines.

“Secondly, we need to finalise the tax reform. Regular current expenditure should be covered by tax revenues and in balance,” he says. “The tax reform initiated by previous governments was poorly designed and implemented, resulting in a substantial deficit. Tax payers didn’t see any difference and improvement.”

Belgium has (or had in the past) one of the highest tax burdens in the OECD with high marginal taxes and a focus on labour taxes and social charges. Is this going to be changed in the future with the shifts in taxation on consumption and green taxes to reduce greenhouse gas emissions?

Professor Moesen is inspired by Sweden, another country with a high tax burden which has reformed its tax system. “What is needed is a reform of personal income tax and capital transaction taxes and a shift to green taxes, which are below the average in the EU. In property taxation, the theoretical assessment of property values dates back to the 1960ies and should be updated.”

More to health care

Belgium made a strong effort to support the health care sector during the corona crisis with new budget reinforcements, such as more funding to the health care personnel fund (€402 million) and to mental health care (€200 million). The new government aims at increasing the total health care budget by 2.5 % (besides indexation) each year, compared to 1.5 % in the past.

Many countries underfinanced their health care systems before the crisis and today there are demands to fill the gaps. Do you foresee any significant increases to the health sector as a result of the crisis?

Professor Moesen estimates that the extra expenses because of the coronavirus crisis amounted to €8 billion in the health care sector (for example free vaccinations, medical equipment, more ICU beds). Some of this will be reduced already this year. He says that the only structural change was an increase in the salaries of staff in care and retirement homes.

Return to old or new jobs

According to the Commission’s assessment, the widespread use of job retention schemes kept many employees attached to their jobs and helped contain the deterioration of labour markets in 2020, which was nonetheless substantial. In this regard, Belgium weathered the crisis better than most other countries.

During the peak of the crisis in 2020, the unemployment rate in Belgium was 5.6% compared to 7.8% in the euro zone. Unemployment in Belgium is forecast to rise to 6.7% in 2021 and to decline slightly to 6.5% in 2022, well below the average unemployment rate in the euro zone (8.4% in 2021 and 7.8% in 2022).

According to the Commission, the labour market outlook hinges not only on the speed of the economic recovery, but also on the timing of policy support withdrawal and the pace at which workers are reallocated across sectors and firms.

One of the best-known EU measures to help the member states to weather the economic crisis during the pandemic was the so-called “SURE” instrument for loans to fund national short-term work schemes. How did it work out in Belgium?

“The unemployment system worked relatively well and average disposal income was maintained,” Professor Moesen commented. “We had a functioning system from the very start, as proven in previous economic crises, and SURE become embedded in the existing system.” However, it is difficult to say how many workers will return to their previous jobs.

He warns against the mismanagement in the past when austerity policies were imposed on indebted countries resulting in extremely low economic growth. Luckily, this will not happen this time with EU’s recovery package which aims at strengthening the economy and create new jobs in the digital and green economy.

M. Apelblat

The Brussels Times

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