OECD Economic Surveys: Belgium 2020

Executive Summary

Belgium performs well in many economic and well-being dimensions, but some risks are building up

Moderate and steady economic growth, and an effective tax and transfer system help to support good well-being outcomes. Maintaining the reform momentum and addressing rising external and domestic risks will boost the resilience of the Belgian economy.

Over the past five years, economic growth averaged around 1.7% and was accompanied by strong employment growth (Figure A). GDP growth has slowed since 2018, reflecting weaker exports as world trade decelerated. Nevertheless, robust job creation has led to a fall in the unemployment rate to record low rates, also helping the inclusion of low-skilled workers.

Figure A. The recovery has been rich in employment creation

Year-on-year % changes

Source: OECD (2019), OECD Economic Outlook (database).

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GDP growth is projected to moderate (Table A), driven by lower business investment and a slowdown in exports. Private consumption will be an important driver of growth, supported by past reductions in labour taxation and robust wage growth. Underlying price inflation will pick up gradually, due to wage pressures resulting from a tight labour market.

Tighter macroprudential regulation would curtail financial system risks. Low interest rates have led to strong mortgage credit growth and easing of lending standards. Lending with high debt-to-income and loan-to-value ratios can increase vulnerabilities and lower the resilience of the financial system.

Table A. The moderation in growth will continue

	2019	2020	2021
Gross domestic product (GDP)	1.4	1.1	1.1
Private consumption	1.1	1.4	1.3
Government consumption	1.9	1.4	1.1
Gross fixed capital formation	3.8	1.7	1.4
Exports of goods and services	1.2	0.9	1.2
Imports of goods and services	1.3	1.3	1.5
Unemployment rate	5.5	5.5	5.5
Consumer price index	1.2	1.1	1.5

Source: OECD, Economic Outlook (database).

The resilience of public finances should be increased

Rebuilding fiscal buffers should be a priority. The high level of public debt and pressures from population ageing create vulnerabilities.

The public debt-to-GDP ratio has declined, but remains high at 100%. Recent adjustments have been partly driven by supportive macroeconomic conditions and the temporary effect of the advance payment of corporate taxes, and partly by structural efforts.

The composition and efficiency of public spending can be improved to create space for higher public investment. There is room to improve the efficiency of public spending in areas such as health and education. Despite the need to reprioritise expenditures, the use of spending reviews is limited. Using spending reviews and policy evaluation at each level of government would allow a shift in expenditures to more productive uses.

Shifting the tax mix towards more growth friendly sources would boost employment. Taxation remains tilted towards labour income, which penalises growth and employment. Tax bases of value-added taxes are narrow with exemptions and reduced rates, lowering the efficiency of tax collection. In sectors other than transport, taxation of fossil fuel use is low, which can lower environmental outcomes.

The pressures on fiscal sustainability will rise due to population ageing. Public spending on pensions is projected to rise to 15% in 2070 (Figure B). Recent reforms have improved the financial sustainability of the pension system. While the statutory retirement age will increase to 67 by 2030, the effective retirement age remains low. Linking the retirement age to life expectancy could further lower the growth of pension spending, and should be accompanied by measures to re-skill older workers since boosting employment rates will also be key.

Figure B. Public spending on pensions is projected to rise

Per cent of GDP, 2070

Source: European Commission (2018).

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The pension system remains complicated, with varying schemes for different workers. The pension schemes for private and public sector workers are separate, with a large difference in replacement rates. The rising number of self-employed workers could further complicate the system. These workers could have difficulty meeting the number of career years required to qualify for minimum pensions, which may lead to old-age poverty. Continuing the integration of pension schemes covering different types of workers, for example through a points based system, should be a priority.

Improving labour market outcomes is key

Changes in the nature of work can exacerbate existing gaps in labour market outcomes. Differences in labour market and education outcomes according to socio-economic status and regions persist. Rising skill shortages, especially in information and communication technology, signals a need to better align skills with labour market needs and re-skilling.

Despite recent increases, the employment rate remains low (Figure C). Labour market participation is especially low for low-skilled, migrant and older workers. The long-term unemployed and inactive population face a number of employment barriers, which require tailored policies.

Figure C. Employment rates are low

Per cent of population, 15-64 year-olds, 2019-Q3

Source: OECD (2019), OECD Labour Force Statistics (database).

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The targeting of activation measures could be improved further. Existing labour activation policies are less effective for second-generation jobseekers with a non-EU background and the long-term unemployed. Extending the use of tools for the profiling of individualised risks can be a good way to identify job-seekers who are more at risk of becoming long-term unemployed and boost their employment.

Increasing equity of opportunities in education and training would help improve labour market outcomes. Participation in lifelong learning is low (Figure D), especially for some disadvantaged groups. Training requirements, which are at the firm level, do not guarantee that workers that need it the most benefit from it. Individual training allowances, with guidance support on training programmes, could help. High performance gaps of disadvantaged students suggest the need to target individualised support to students at the risk of failing.

Figure D. Participation in lifelong learning is low

25-64 year-olds¹, % of the population, 2018

1. Adults participating in education and training in the 4 weeks preceding the survey.

Source: Eurostat (2019), Adult learning statistics, Eurostat Database.

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The current design of the unemployment benefit system provides good income support, but may discourage job search. Work incentives for low-wage workers, without reducing the level of income support for the unemployed, can be increased via benefits to top up wages or lower social security contributions. The system currently provides flat benefits to the long-term unemployed who potentially have different financial needs. To ensure that the long-term level of support for the unemployed reflects household needs more closely, benefits for the long-term unemployed could be means-tested.

Boosting potential growth requires higher productivity growth

There is ample room for policy to boost productivity growth, which remains subdued (Figure E). Weak business dynamism, reflected in low entry and exit rates, and slow technological diffusion are main challenges.

Weak competition is a barrier to productivity growth. Despite recent reforms, a complex permits and licence system continues to create administrative burdens on start-ups. Stringent regulations in several professional services, such as lawyers, architects and real estate agents, and retail services weigh on productivity. Important barriers remain in the telecommunication sector.

Figure E. Productivity growth needs a boost

Multifactor productivity, index 2000 = 100

Source: OECD (2020), OECD Productivity Statistics (database).

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Public support to R&D investment is high, but better diffusion of innovation is needed. The share of expenditure-based tax incentives in public innovation has increased, but direct support can better support long-term research in areas with high potential for spillovers. The existing R&D tax credit is not immediately refundable, which could lower its effectiveness in targeting young and innovative firms.

High congestion can limit the benefits of agglomeration economies and lower environmental outcomes. One potential correction mechanism would be the introduction of road congestion charges. Multimodal transport solutions could also be introduced. Given high congestion in larger cities, such as Brussels and Antwerp, these could be pilots for initial implementation. Abolishing the favourable tax treatment of company cars could also contribute to lower congestion. Alternatively, other options, such as greener vehicles, could be extended.

The efficiency of insolvency and judicial systems is relatively low. The 2018 insolvency reform and the steps to digitise the justice system are welcome initial steps, but gaps remain. There are no special procedures for small and medium-sized enterprises, which could lack resources to deal with complex insolvency proceedings. There is room to improve data collection on judicial efficiency. Monitoring and evaluation of court activities are not as widespread as in peer economies.

 

MAIN FINDINGS		KEY RECOMMENDATIONS
Macroeconomic and financial policies
Despite a steady reduction, public debt remains high and elevated public spending requires high taxes.	Stick to medium-term fiscal consolidation targets to ensure a gradual durable reduction of public debt and use any fiscal windfall to reduce the debt faster.
The public spending mix fosters inclusive growth, but there is room to improve the efficiency of spending.	Make regular spending reviews at each level of government an integral part of the fiscal framework.
Taxation remains tilted towards labour, while a number of reduced regressive rates erode the value-added tax base, and environmental taxes are underutilised.	Align those reduced value-added tax rates that are regressive with the standard rates. Introduce a carbon tax for sectors not subject to the EU Emission Trading Scheme, and develop flanking measures over the short term for the most affected poor households. Further lower social security contributions for low wages, financed by increases in less distortive taxes.
Population ageing will continue to put pressure on the pension system. The success of pension reforms will depend on keeping older workers attached to the labour market.	Develop policies to reskill older workers to facilitate their employment and link the statutory retirement age to life expectancy at retirement.
The pension system remains complicated, with varying schemes for different workers.	Continue to align the pension treatment of public and private sector workers, for example by introducing a points based system. Harmonise contribution rates and pension calculations between the self-employed and employees.
The high contribution periods for minimum pensions are hard to meet for self-employed workers and workers without a full career.	Lower required number of career years for receiving minimum pensions.
Excessive credit growth and increasing share of mortgage loans can create risks for financial stability.	In case the current measures prove ineffective, introduce additional borrower-based macroprudential instruments, such as binding caps on loan-to-value or debt-service-to-income ratios.
Improving labour market and education outcomes for inclusiveness
The impact of socioeconomic background on education outcomes is high.	Target individualised support to students at risk of failing.
Participation in lifelong learning is low by older and low-skilled adults. Training requirements are at the firm level rather than the worker.	Introduce individual training allowances and for disadvantaged workers, provide targeted support, such as higher training time and/or funding requirements.
The long-term unemployment rate is high and different groups face multiple employment barriers.	Extend the use of statistical tools to identify job-seekers at risk of becoming long-term unemployed to develop tailor-made active labour market programmes.
The design of the unemployment benefit system provides good income support, but may discourage job search. The system provides flat benefits to the long-term unemployed with potentially different household needs.	Increase work incentives for low-wage workers by introducing in-work benefits. For the long-term unemployed, use means-tested benefits rather than flat benefits.
Boosting productivity growth
Despite some progress, barriers to entry and competition in services and telecommunications remain high.	Streamline the licence and permits system, and reduce the number of restrictions in some professional services. Ease barriers to entry in the telecommunications sector.
The design of public innovation support does not facilitate diffusion of innovation.	Improve the efficiency of public support for business R&D by achieving an appropriate mix of direct and indirect measures. Introduce immediate refundability of R&D tax credits.
High congestion can lower productivity and increase pollution.	Introduce road congestion charges, for example around Brussels and Antwerp, with sufficient time differentiation within the peak period. Consider abolishing the favourable tax treatment of company cars or alternatively extend other options, such as greener vehicles.
Complex and costly insolvency procedures can fail to adequately meet the needs of SMEs.	Introduce special insolvency procedures for small and medium-sized enterprises.
Insufficient data availability and evaluation lower the efficiency of the judicial system.	Continue to digitise the judicial system to improve data collection and evaluation.