The recovery from the COVID-19 pandemic has been robust thanks to extensive policy support. However, the new shock from the war in Ukraine is exacerbating inflation, and supply and labour market shortages, highlighting the importance of boosting the resilience of the Belgian economy. Medium-term fiscal sustainability challenges should be addressed by limiting early exit possibilities from the labour market, improving the efficiency of public spending, in particular through spending reviews, and boosting the coordination of fiscal policies by all levels of government to create room for public investment. Enhanced links between wages and productivity at the firm and worker level, higher competition in services and well-targeted investments in green and digital infrastructure, by addressing bottlenecks and providing the right price signals, are needed to raise productivity growth and contribute to more sustainable growth.
OECD Economic Surveys: Belgium 2022
1. Key Policy Insights
Abstract
Until the onset of the COVID-19 pandemic, Belgium was experiencing a robust job-rich growth, with historically low rates of unemployment. However, it had long-standing fiscal and structural challenges, such as low labour market activity rates and weak productivity growth and business dynamism. Improving medium-term fiscal sustainability is needed to improve the resilience of the Belgian economy and enable productivity-enhancing investment. Boosting productivity growth will require product and labour market reforms that facilitate reallocation. Raising skills and work opportunities for disadvantaged groups to promote social mobility and enhance economic opportunities is also key.
Belgium was hit hard by the pandemic, but swift and extensive income and liquidity support measures mitigated the overall economic and social impact (Marchal et al., 2021[1]; Almeida et al., 2020[2]). Thanks to high rates of vaccination, measures that protected households and firms and good performance of the pharmaceutical sector, the rebound was relatively swift, with GDP reaching pre-pandemic levels in the third quarter of 2021 (Figure 1.1, Panel A). Labour markets proved to be resilient, with a limited effect on unemployment rates and labour shortages have reached record levels. However, the heterogeneous impact of the pandemic across sectors affected some groups disproportionally, including low-skilled, young workers and those with a migrant background, contributing to an uneven recovery. The war in Ukraine has heightened uncertainty and risks surrounding the recovery.
Figure 1.1. A robust recovery followed the sharp contraction
Source: OECD Economic outlook: Statistics and Projections database; National Bank of Belgium; and Statistics Belgium.
Belgium’s long-standing challenges have become more pressing with the pandemic and adapting the Belgian economy to the changes triggered by the pandemic, the digital transformation and green transition requires an ambitious structural reform agenda. The priority in Belgium has been to manage the pandemic, support the recovery and coordinate the vaccination programme. Belgium should now focus on ensuring a resilient recovery and addressing longer-term structural challenges.
While income inequality is low in Belgium, with a Gini coefficient of 0.26 after taxes and transfers, poverty risks display regional disparities, ranging from 12% to 38%, and are high for the unemployed (who tend to be single parent households, those with disabilities and migrant background) and the low educated (Figure 1.2, Panel A). Such differences can reflect inequality of opportunities (Chapter 2) and have long-lasting effects as parental background is strongly correlated with risks of poverty in Belgium. Belgium has an ambitious objective of raising the employment rate (those aged 20-64) from 70% to 80% by 2030. The current employment rate displays regional disparities ranging from 75.3% in Flanders to 62.2% in the Brussels-Capital Region. Furthermore, the employment rates of vulnerable groups are relatively low (Figure 1.2, Panel B). Reforms to address high long-term unemployment and inactivity rates despite high vacancies, and low transitions from unemployment and inactivity to employment are needed (OECD, 2020[3]).
Figure 1.2. Socio-economic background is highly correlated with economic outcomes
Note: Panel B: The black bar shows a scenario calculated by the High Council of Employment for employment levels in each group to reach the Belgian target for 2030 on aggregate.
Source: Eurostat; Statistics Belgium; and High Council of Employment.
Belgium also faces long-term fiscal sustainability challenges, and investment and regulatory barriers to ensure the low-carbon transition. The public debt to GDP ratio (Maastricht definition) is high at 108.4% in 2021. Fiscal challenges will be exacerbated by population ageing, with total ageing costs rising by 5.7% to 25.8% of GDP by 2070, in the absence of policy reform (Figure 1.3). Ambitious reforms and investments are needed to lower emissions in housing, energy, industry and transport sectors to contribute to the EU target of climate neutrality by 2050. Overcoming these challenges will require effective coordination between different levels of government, given the decentralised nature of competences (Figure 1.4), and transparency regarding burden sharing and deviations from agreed fiscal and green targets and objectives.
Weak productivity growth, with a low contribution of total factor productivity growth, and low public investment also need to be tackled (Figure 1.5). Lack of sufficient skilled workers, regulatory restrictions, weak technological diffusion and labour market rigidities lower investment and business dynamism (OECD, 2019[4]; NPB, 2021[5]). Planned investments in recovery plans and the Budget 2022 (EUR 300 million in 2022 to reach EUR 1 billion by 2024) will help address investment needs in education, sustainable transport, energy and digital infrastructure, but more will be needed to reach the government’s 4% public investment target by 2030.
Figure 1.3. Population ageing will add to fiscal challenges, which have been exacerbated by the pandemic
Source: OECD Economic Outlook: Statistics and Projections (database) and European Commission (2021), The 2021 Ageing Report.
Figure 1.4. Decentralised competencies make coordination key
Source: Subnational governments in OECD countries: Key data 2021 edition.
Against this background, the main messages of the Survey are:
There is a need to restore fiscal sustainability to prepare for future shocks, especially in the context of an ageing population. Strengthening the fiscal framework and implementing a medium-term fiscal consolidation plan by increasing public spending efficiency, accompanied by a revenue-neutral tax reform to improve work incentives and broaden tax bases would help achieve this objective.
Increasing equality of opportunities for disadvantaged groups in terms of education, labour and housing markets, boosting reallocation through more flexible product markets, and raising skills will raise growth.
While the recovery plans provide a good starting point, further reforms are needed to boost productivity growth and adapt to the digital transformation and green transition.
Figure 1.5. Productivity growth and public investment are relatively low
Note: Panel A: Labour productivity is measured as GDP per hour worked in constant prices, USD 2010 purchasing power parities. The France-Germany-Netherlands number is the unweighted average.
Source: OECD (2021), OECD Productivity Database; and OECD Economic Outlook: Statistics and Projections (database).
Policies have enabled a robust recovery from the pandemic, but risks have intensified
Belgium was hit hard by the pandemic, experiencing several waves, tackled with strict containment policies, several lockdowns and closing of non-essential businesses and curfews, leading to a sharp GDP contraction of 5.7% in 2020. Most of the restrictions, including mandatory teleworking and the use of the health pass, were relaxed in late March, followed by the removal of remaining restrictions at the end of May. 63.5% of the total population received a booster dose by May 2022, higher than the OECD average (Figure 1.6). Belgium should continue to keep its success of high vaccination rates in line with international guidelines.
The authorities introduced timely and extensive direct policy support and liquidity measures to address the impact of the pandemic that contributed to a speedy economic rebound, protected jobs and prevented a rise in insolvencies (Table 1.1; Table 1.2; Figure 1.7, Panels A-C). The main policies to support workers and the self-employed against the pandemic ended on 31 March 2022. The recovery and risks remain uneven across workers (Figure 1.7, Panel D), and firms, with a disproportionate impact on SMEs (Dhyne and Duprez, 2021[6]). Scarring so far seems modest, although the extent of scarring will only become clearer when support measures are fully phased out.
Figure 1.6. The vaccination campaign has been effective
Note: EU and OECD aggregates are calculated as unweighted averages in both panels using those countries for which data was available.
Source: Calculations based on Our World in Data. (30 May update).
Table 1.1. Main pandemic support measures
Source: Several reports of the Monitoring Committee; FPS Strategy and Support website and national sources.
Figure 1.7. Policy support protected households and firms
Note: Panel A: AEs refer to advanced economies. The data reflect government discretionary measures that supplement existing automatic stabilisers and covers the period between January 2020 and September 2021.
Source: IMF; Eurostat; Statistics Belgium; and National Bank of Belgium.
Table 1.2. Fiscal cost of support measures during the pandemic
Source: National authorities.
Growth was robust in 2021, driven by resilient business investment and a surge in private consumption enabled by effective vaccine rollout, bringing GDP back to pre-pandemic levels in the third quarter of 2021. Labour markets proved to be resilient and vacancy rates increased significantly to 4.7% at the end of 2021, much higher than the EU average (Figure 1.8, Panel A). From the end of 2021, restrictions on activity from the latest wave of the pandemic, high inflation and supply side constraints started to weigh on the recovery. The war in Ukraine leading to further spikes in energy prices, commodity prices and heightened uncertainty is counterbalancing the positive impact from the improvement in the health situation and relaxed restrictions, Consumer confidence collapsed in March and had only partially recovered by May (Figure 1.8, Panel B). GDP growth was 0.5% in the first quarter of 2022. Easier access to the temporary unemployment scheme was extended to June 2022 due to the impact of the Ukrainian war on the Belgian economy.
The indirect effects via financial markets, uncertainty or disruptions in manufacturing supply chains and spillovers from neighbouring countries could be larger than direct effects for Belgium. Russia accounts for 0.9% of Belgian exports and 1.8% of imports. Only 1.5% of Belgian FDI is in Russia, while the direct exposure of the Belgian financial sector is limited. The share of direct imports of total value added from Russia at 60% was lower than the OECD average of 90% in 2018 (Figure 1.9, Panel A), with the share rising to 65% (OECD: 97%) for energy imports. Oil and gas imports from Russia were 26% and 3%, respectively (Figure 1.9, Panel B). According to the backward global value chain participation index, Russia’s value added as a share of gross exports of Belgium is 1.2% (0.9% in the OECD).
Figure 1.8. Risks to the recovery are rising
Note: Panel A: Job vacancy rate is the number of job vacancies divided by the total number of occupied posts and number of job vacancies.
Source: National Bank of Belgium; and Eurostat.
The energy crisis and the war could have a disproportionate impact across sectors. The share of imported energy products is around 60% in the refined petroleum products sector and 10-20% in the electricity and gas supply, air and water transport, mining support activities and the chemical and basic metal industries. Furthermore, the share of Russian valued added in gross exports in Belgium is the highest in coke and refined petroleum products (3.7%) and basic metals and fabricated metal products (3.3%) (Figure 1.9, Panel C). Looking at a more disaggregated level, the share of the Russian mining and quarrying of energy producing products (including natural gas) in Belgian gross exports is the highest in the coke and refined petroleum sector (1.8%). In general, mining and quarrying of energy producing products (such as natural gas) is a source of Russian value added in gross exports in Belgium for many sectors.
Belgium received 45 000 Ukrainian refugees as of late May, compared to annual 25 000 in normal times. According to a statement by the Secretary of State for Asylum and Migration to the media, based on an estimated projection of a total of 4-7 million refugees and their potential distribution across the EU, Belgium could expect up to 200 000 refugees.
Figure 1.9. Exposure to Russia is relatively low, but heterogeneous across sectors
Note: Panel B: *Country imports include transit trade figures ** Figures include amounts that went to stocks. Total energy supply (TES) includes energy in total final consumption, transformation processes, distribution losses and energy own-use. In the specific case of Oil, crude oil and oil products are computed together. Some countries import crude oil, refine it, and export oil products, which can lead to figures of imports higher than TES, as a significant part is exported, or especially large reliance figures (e.g. Finland uses Russian crude oil imports to feed refineries for export purposes). Panel C: Total backward participation index of relevant Belgian sectors, with specific contribution of selected Russian sectors. Industries based on ISIC Rev.4 classification (Mining and quarrying: Divisions 5-9; Basic and fabricated metals: Divisions 24-25; Chemicals: Divisions 20-21).
Source: IEA World Energy Balances database and OECD calculations; and OECD (2021), Trade in Value Added (TiVA).
Headline inflation remains high at 9.9% in May, driven mainly by high energy prices, higher than the EU average (Figure 1.10, Panels A-B). Natural gas and electricity prices are the main drivers, but oil prices are also fuelling inflation. Core inflation has also picked up, especially due to services inflation. Inflation in Belgium tends to be affected relatively more by higher energy prices than that in the euro area, given the high share of variable contracts for electricity and gas. Moreover, the very low excise duties on heating oil lead to a more substantial pass-through of crude oil prices to consumer prices. To mitigate the impact of the increase in energy prices on vulnerable households, a number of measures have been taken (described below). The automatic indexation mechanism is expected to increase public and private wages and social benefits by around 6% in 2022 (FPB, 2022[7]), and will also support purchasing power. However, this could weigh on competitiveness in the near term, given Belgium’s high share of exports, and increase fiscal costs.
The effect of the inflation-wage increases on international competitiveness should be monitored closely (Figure 1.10, Panels C-D). This could call for a reassessment of the wage formation mechanism, which has two main elements: wage indexation and a ceiling based on wage growth in the neighbouring countries (Box 1.1). Applying correctly and strictly the wage ceiling mechanism should lower the risk of wage-price spirals, by correcting for the more rapid pass-through of high inflation to wages in Belgium than in neighbouring countries in 2022. Wage growth in the neighbouring countries should be higher in 2023-24 as wages are negotiated, while real wage increases in Belgium should be limited by the wage ceiling.
Box 1.1. Wage setting mechanism in Belgium
The wage formation process is defined by the Competitiveness Law of 1996, which prescribes a ceiling for wage growth (“the maximal available margin/wage norm”) and wage indexation based on the “health index” (the national index of consumer prices excluding alcoholic beverages, tobacco, and motor fuels). The wage indexation mechanism was suspended from April 2015 to April 2016 (“index jump”) to close the wage gap accumulated with neighbouring countries since 1996. It helped enhance cost competitiveness and contributed to employment growth (Bijnens, Karimov and Konings, 2019[8]; IMF, 2019[9]). To prevent wage gaps from re-emerging, the framework for determining the maximum real wage increase was amended in 2017. The main elements of the system are: i) projected wage growth in Belgium’s main trading partners (France, Germany and the Netherlands) for the next two years; ii) projected inflation in Belgium as the basis of the expected wage indexation; iii) an ex-post correction term to correct for divergence in wage evolution with trading partners; and iv) a safety margin to account for forecasting errors.
The effectiveness of the 2017 reform of the wage setting mechanism in safeguarding competitiveness, and its effects on employment and inflation, should be evaluated, as recommended in the 2017 Economic Survey, and reformed, in cooperation with social partners, if the indexation rule is shown to fail to take into account the business cycle. This reform should be considered in the medium-term, once the spike in energy prices subsides. It would also be an opportunity to address difficulties related to the current set-up, including the calculation of the margin and accounting changes in neighbouring countries that make it difficult to interpret developments (Bogaert and Kegels, 2019[10]). Another weakness is that deviations in labour productivity growth between Belgium and its key trading partners are not taken into account. In the medium-term, once the spike in energy prices subsides, the “health index” could be redefined to exclude all energy components, as increases in energy prices lead to inflation inequality that could be better addressed through measures targeted to vulnerable households (Germain and Hindricks, 2022[11]).
Reforms should consider whether the most efficient way to compensate for inflation is via the automatic indexation mechanism or other mechanisms offering more flexibility and boosting the adjustment potential of the economy. On one hand, the indexation mechanism allows for a quick adjustment to inflation to preserve purchasing power. On the other hand, experience in neighbouring countries shows that purchasing power is not necessarily eroded in the long term if there is no formal indexation, since inflation is taken into account in wage negotiations, but the absence of indexation makes it easier to cope with some of the shocks (NBB, 2012[12]). Hence, the two counterbalancing aspects of the wage formation mechanism (indexation and wage ceiling) could be reconsidered to allow wages to evolve in line with economic fundamentals. Linking wage developments to productivity at the firm-level and promoting greater competition in the services sector, as discussed below, would also help.
Figure 1.10. High inflation could lower cost competitiveness in the near term
Note: Panel C: Labour cost gap based on compensation of employees and wage subsidies that firms receive. A ratio of more than 100 implies a competitiveness gain for the relevant country compared with Belgium. 2020 may be biased due to the impact of temporary unemployment and may not correctly reflect Belgium's position compared to the reference countries.
Source: National Bank of Belgium; Eurostat; Conseil central de l'économie and OECD (2022), Main Economic Indicators database.
Growth is slowing due to the war in Ukraine, with GDP growth projected to remain robust at 2.4% in 2022, before falling to 1% in 2023, as the consequences of the EU embargo on Russian oil materialise (Table 1.3). High energy and commodity prices, disruptions in supply chains and heightened uncertainty are lowering confidence and will drag on private consumption, investment and exports. Nevertheless, growth is projected to be driven by domestic demand, as high household savings and pent-up demand from the pandemic, automatic wage indexation and energy support measures partially mitigate the adverse effects. Potential output has only been slightly affected by the pandemic thanks to measures protecting the productive potential of the economy and accelerated digitalisation of firms during the pandemic. However, supply chain disruptions and uncertainty, including regarding energy supply, could impede the implementation of the recovery plans.
Goods and services exports account for 80% of Belgian GDP, with the EU as the main trading partner (Figure 1.11). While export and imports recovered their pre-pandemic levels in mid-2021, export expectations declined since February, and could further be affected due to the war in Ukraine and the effects of sanctions on trade flows and supply chains. Belgium’s participation in global value chains, measured as the combination of backward and forward integration of its exports, at 57%, is among the highest in the OECD. The United Kingdom remains Belgium’s fourth largest trading partner accounting for 6% and 9% of Belgium's exports of goods and services, respectively. Earlier studies had included a median economic loss of 0.9 percentage point of GDP from Brexit from a no deal scenario (Bisciari, 2019[13]; Schmitz, 2019[14]). While it is too early to assess the impact of Brexit, calculations by the central bank suggest a 0.4 percentage point increase in the level of economic activity by the year 2025 from the current agreement, compared to a no deal scenario (NBB, 2021[15]).
Table 1.3. Macroeconomic indicators and projections
Annual percentage change, volume (2015 prices)
1. Contribution to changes in real GDP.
2. As a percentage of potential GDP.
3. As a percentage of household disposable income.
4. As a percentage of GDP.
Source: OECD Economic Outlook: Statistics and Projections (database).
The short-term outlook is subject to particularly high uncertainty, given the war in Ukraine and the on-going pandemic. The main downside risks are geopolitical and continued energy price pressures that could create the risk of persistently high inflation and a wage-price spiral. Additional risks are related to supply bottlenecks and labour shortages, which could disrupt production and exports. The emergence of a new coronavirus variant more resistant to the current vaccines that brings back stricter restrictions in Belgium and its main trading partners also remains a downside risk. In addition, a number of other shocks could dent growth prospects (Table 1.4). For example, floods in July 2021 caused significant damage, particularly in Wallonia, and further climate-related risks are expected to materialise, creating social and economic costs.
Figure 1.11. EU countries remain Belgium’s main trading partner
Source: OECD (2022), OECD International Trade Statistics database.
Table 1.4. Events that could lead to major changes in the outlook
The financial sector should be monitored closely
The Belgian banking sector appears resilient and banks seem to have adequate buffers, including under stress (EBA, 2021[16]). The Tier1 capital ratio at 18.8% is above the OECD average, while the leverage ratio at 6%, is below the OECD average, in the second quarter of 2021 (Figure 1.12, Panels A-B). It will also be important to ensure that there are adequate buffers at subsidiaries of foreign banks, given their high presence in Belgium. As banks remain the main source of finance, they should play a key role by using their buffers to absorb losses and grant forbearance to viable borrowers in temporary distress and ensure credit provision for the recovery.
Figure 1.12. Banks remain resilient
Note: Panel C: Stage 2 means that a loan’s credit risk has increased significantly since initial recognition and NPL refers to non-performing loans.
Source: IMF (2022), IMF Financial Soundness Indicators Database and EBA, Risk Dashboard.
Support measures (loan deferrals, moratoria and guarantees) mitigated the impact of the pandemic on households and firms, but some pockets of vulnerabilities have emerged. Non-performing loans (NPLs) remained low at 1.5% in the last quarter of 2021, but credit quality of some of the loans under guarantee or moratorium declined, and NPLs are higher in sectors disproportionately affected by the pandemic (Figure 1.12, Panels C-D). The share of firms expecting to go bankrupt declined to 1.6% in October 2021 from 3.2% in June, but solvency gaps remain, especially in SMEs in hardest hit sectors (IMF, 2021[17]; Tielens, Piette and De Jonghe, 2021[18]) (Figure 1.13, Panel A). While policies, including insolvency moratoria and voluntary stays on government claims, have so far prevented a wave of insolvencies, the remaining needs could increase the risks of debt overhang. Hence, continuing to assess NPLs and making adequate provisions remains important.
Belgium made progress in improving its insolvency framework, which should be further strengthened to foster reallocation and mitigate scarring. In March 2021, insolvency laws were amended to introduce pre-pack procedures and easier access to judicial reorganisation proceedings, especially for SMEs, as recommended in the 2020 Economic Survey. Their effectiveness in preventing court congestion will depend on the expertise of judicial administrators, the complexity of cases and the capacity of courts to meet shortened timelines. The amendments will be valid until July 2022, when the transposition of the EU Restructuring and Insolvency Directive will allow further improvements. For example, allowing creditors to initiate restructuring proceedings, introducing special out-of-court procedures for SMEs, and lowering the number of steps courts are involved in during insolvency should be introduced as soon as feasible (OECD, 2020[3]).
Early intervention to identify and aid viable businesses facing temporary solvency problems can speed up the recovery and prevent the subsequent accumulation of NPLs. Solvency support measures, including subordinated loans and capital injections, are in place (Table 1.1, above). The early recapitalisation programmes focused on SMEs through subordinated loans, but the latter ones are designed for all firms to use quasi-equity instruments. The existing programmes amount to 0.3% of GDP, which is in the middle of the range of similar programmes in peer countries, and cover around 16% of the estimated equity needed to restore pre-pandemic solvent firms (IMF, 2021[17]).
Solvency support should be closely monitored for cost effectiveness and include credible exit strategies. Belgian firm-level analysis suggests that banks’ expertise and screening abilities can help identify viable firms (De Jonghe, Mulier and Samarin, 2021[19]). Hence, bank expertise should be utilised to help facilitate targeting, selection and monitoring of public funds. Furthermore, private sector resources can be leveraged to complement public funds. There are some fiscal incentives for private investors to provide subordinated loans, such as tax reductions and investment allowances, but could be extended further. For example, France introduced a program that provides banks and private investors guarantees for subordinated loans.
Increased vulnerabilities in the real state sector call for close monitoring and continued use of macroprudential policies to mitigate risks. House prices have increased significantly and prices are estimated to have been overvalued by 20% in mid-2021 (Figure 1.13). The real estate sector (residential and commercial) accounts for 31% of bank portfolios. A macroprudential capital buffer for real estate risks was introduced in 2013. New limits have been set in January 2020 on riskier mortgage lending. The prudential expectations regarding new mortgage loans lowered the ratio of loans with high loan-to-value ratios (LTVs) for first-time buyers and owner-occupied loans (NBB, 2021[20]). However, additional measures might be needed for loans for buy-to-let properties, whose LTVs remain above the tolerance margins set by the NBB. Vigilant monitoring of housing price misalignments should be continued and further macroprudential measures should be taken, if needed. Special attention should be paid to the commercial real estate market as survey evidence suggests large expectations of reductions in office space per employee in the next five years (9% in Belgium and 22% in Brussels) (Coppens et al., 2021[21]).
Beyond addressing near-term risks, there is a need to increase the resilience of the financial sector to other challenges, as in other OECD countries. These include low bank profitability in a prolonged low interest environment, competition, digitisation (including management of IT and cyber risks) and cost-efficiency, which are more pronounced for medium- and small-sized banks with a retail-oriented business model (NBB, 2021[20]). Banks need to integrate climate-related (physical and/or transition) risks and opportunities into their management practices. In December 2020, the NBB published its expectations and data-collection requirements regarding the energy efficiency of real estate exposures in banks’ risk management (NBB, 2020[22]), as recommended in the 2020 Economic Survey. A recent analysis of the impact of Fintech and digitisation on the Belgian banking sector highlighted that the adoption and the periodic update of a digital strategy and business model should continue to be a key priority for banks (NBB, 2021[23]). These are welcome measures to address long-term challenges and should be incorporated into systematic assessments of all types of financial institutions.
Figure 1.13. Key risks arise from firm insolvency and housing markets
Note: Panel C: Residuals of an econometric regression of real house prices on real disposable income per household, real mortgage interest rates, the number of households and dummies to capture structural changes over time. See Warisse, C. (2017), “Analysis of the developments in residential property prices: Is the Belgian market overvalued ?”, NBB Economic Review, for details.
Source: OECD (2021), OECD Analytical House Prices Indicators (database) and National Bank of Belgium.
The recovery plans are an opportunity to promote investment and reforms
Belgium’s recovery plan and the additional expenditures in the federal and regional recovery plans financed outside the EU funds provide an opportunity to boost investment, productivity and growth. The national recovery plan will increase public investment (Figure 1.14), with 88% of the funds allocated to gross fixed capital formation (FPB, 2021[24]). The largest components are energy efficient renovation of buildings and infrastructure to facilitate a modal shift in transport and mobility (Box 1.2). The national recovery plan has six strategic axes, with green and digital accounting for the majority of the total planned expenditures, in line with Recovery and Resilience Facility guidelines. Social and living together axis aims at increasing equality of opportunities through addressing gaps in digital skills, low employment rates of vulnerable groups and housing affordability challenges (Chapter 2). It will be important to ensure that unequal digitalisation and green measures that do not reach the most vulnerable do not exacerbate the social and digital divide (FPB, 2021[25]).
The plan will lift real GDP by 0.14% per year on average over the period 2021-26 according to national estimates, which do not account for spillover effects from other European countries’ plans, structural reforms, the additional investments in the regional recovery plans, and complementary private investment (FPB, 2021[24]). Although not directly comparable, the assessment of the plan by the European Commission takes in to account spillovers from other European countries’ plans (around 0.5% on average) and funds beyond the resilience funds (e.g. REACT-EU), for a total effect of 0.5%-0.9% per year between 2021 and 2026, and 16 000 additional jobs (EC, 2021[26]). A cross-country comparison finds that employment gains per billion of funds are lower at 1 800 in Belgium than 4 300 in Germany (Bisciari, Gelade and Melyn, 2021[27]).
Implementation challenges include recent rises in commodity prices, administrative hurdles, supply constraints and competencies divided among the federal and regional governments. The federal government will only receive 12% of the recovery funds (Figure 1.14), therefore effective implementation will depend on cooperation and coordination across different levels of government. The inter-federal monitoring committee foreseen in the plan should aim to ensure swift implementation and exploitation of synergies across reforms of federated entities. If reforms and investments are not uniformly implemented across regions, this can exacerbate already significant regional differences. The Recovery and Resilience Facility website with tenders of all countries’ recovery plans at the EU level will help ensure transparency.
Figure 1.14. The recovery plan’s investments are uneven across levels of government
Source: FPB (2021), Macroeconomic and fiscal effects of the draft National Recovery and Resilience Plan - Report to the Secretary of State for Recovery and Strategic Investments; and National Bank of Belgium.
Highly regulated construction permits and environmental procedures can be a barrier to the implementation of major digital and green investments in the national recovery plan (5G, housing renovation). The timely delivery of municipal permits for the deployment of mobile sites governed by the regions and high taxation of antennae by municipalities have been factors delaying broadband network and 5G deployment. In recent years, the reform of the Territorial Planning Code, the gradual digitalisation of building permits and simplified demands for telecommunication antennas in the Brussels-Capital Region, the digitalisation of building permits in Flanders and the reform of the land use code in Wallonia aimed at reducing the delays in obtaining building permits. Within the context of the national recovery plan, all regions have committed to streamline these procedures further, which is welcome, but implementation horizons are long (full completion in mid-2026 in Wallonia). This part of the reform agenda should be frontloaded to ensure the successful implementation of the planned investments.
Box 1.2. Ongoing and planned reforms and investments
This box only outlines the main themes in terms of reforms and investments, while the details are discussed throughout the survey in the relevant parts.
The national recovery and resilience plan:
Climate, sustainability and innovation: The measures include improving the energy efficiency of existing buildings, promoting technologies to support the energy transition (promotion of hydrogen technologies, construction of an offshore energy hub) and conserving and restoring biodiversity.
Digital transformation: There are plans to increase resilience to cyber-attacks, promote the use of digital technologies in the public sector (digital platform for interaction of citizens and social security, digitalisation of the justice system) and improving digital connectivity (further deployment of fibre, development of 5G corridors for universal and affordable connectivity).
Mobility: The aim is to improve mobility, better connect regions and ensure a modal shift in transport to more environment- and climate-friendly modes through the development of cycling and walking infrastructures, improvement of public transport services (rail, tram, metro), development of waterborne transport infrastructure, and increasing electric buses and charging infrastructure.
Social and living together: Digital skills will be developed to make education systems more inclusive and in line with labour market needs. The labour market participation of vulnerable groups (low-skilled, people with an immigrant background, people with disabilities, women, young) will be boosted through stronger activation policies and extended training systems. Social cohesion will be supported by new social housing and childcare capacity.
Economy of the future and productivity: Digital education will be boosted to align skills with labour market needs. R&D will be increased with a focus on digitalisation, sustainability and health. Circular economy will be promoted by new recycling infrastructure and innovation partnerships. Permit and appeal processes will be sped up.
Public finances: Spending reviews will be integrated into the budget process at all levels of government.
Regional recovery plans:
The Brussels-Capital Region’s Recovery and Redeployment Plan aims to address the COVID-19 pandemic, and enable a gradual and sustainable recovery in the short, medium and long term. With a budget of almost EUR 500 million, it is based on three pillars: socio-economic transition and employment, welfare and health policy, and territorial development and the environment. This plan is complemented by regional investment and reforms included in the national recovery plan. The relevant projects were integrated in the overarching GO4Brussels Strategy, which includes formal procedures for consultation of social partners. There are also additional investments in four priority areas: mobility (Multiannual Investment Plan for Public Transport (around EUR 5 billion), social housing, employment policy and implementation of the climate plan.
With an amount of EUR 4.3 billion, The Flemish Recovery plan: Flemish Resilience rests on seven pillars: making the economy and society more sustainable, investing in infrastructure, digitally transforming Flanders, investing in people and talents, strengthening the Flemish care and welfare system, managing the COVID-19 crisis and Brexit, and making the government more efficient. A number of projects from the Flemish Resilience plan will be financed with funds from the Recovery and Resilience Facility.
With a budget of EUR 7.644 billion, the Wallonia Recovery Plan provides a set of investment and reform measures aimed at meeting the challenges of recovery and reconstruction in Wallonia, by addressing the needs related to the triple economic, social and environmental transition. The Recovery Plan for Wallonia is structured around 5 axes: building on Wallonia's youth and talent, ensuring environmental sustainability, amplifying economic development, supporting well-being, solidarity and social inclusion, ensuring innovative and participatory governance, and supporting the reconstruction and resilience of affected areas by flooding.
Broader federal reform agenda, including policies in Budget 2022:
Tax reforms aimed at removing disincentives to work, broaden the tax base, shift towards consumption, production and environment taxes and simplify the complex tax system are planned. As a first step, a tax on securities accounts has been introduced, and an annual plan to combat tax and social fraud has been announced. A EUR 300 million tax shift away from social security contributions and partly funded through consumption and environmental taxes was agreed upon in February 2022.
A pension reform, which aims to improve adequacy, social acceptability and financial sustainability, is under discussion. It will incentivise older workers to stay in the labour market, and improve the gender balance and the second pillar of pensions.
Labour market reforms in Budget 2022 aim at increasing labour market participation through measures to: i) lower discrimination, ii) facilitate a return to work for workers on disability benefits (e.g. incentives to combine partial work and benefits, tighten sanctions for employers and employees, simplify and speed up the process of integration), and iii) increase labour mobility (using one third of the employer social security contribution paid in case of layoff for training the dismissed employee, using part of the severance pay to subsidise the wage at a new employer, letting the long-term unemployed who accept a job across the linguistic border keep parts of their employment benefit for three months). A new agreement was reached in February 2022 to allow more flexibility on working hours (possibility of a 4 day week), increase protection of platform workers, ease conditions for night work for e-commerce operators and introduce individual training allowances.
To facilitate productivity growth and digitalisation, the insolvency framework has been eased during the pandemic. The Budget 2022 relaxes rules governing e-commerce and extends a number of policies to boost investment in start-ups.
To mitigate the impact of the increase in energy prices, the extension of the social energy tariff until September, targeted lump-sum payments to vulnerable households, one-off rebate on electricity and heating oil bills to all households, a reduction of excise duties on gasoline, and a temporary reduction of VAT on electricity and natural gas from 21% to 6% until September, were introduced. A reform of the federal taxes on energy consumption, which would replace VAT with excise duties, making adjustments following price variations easier while shifting the burden on households that consume more, is planned.
Skill shortages in key sectors, such as construction and ICT, could make it difficult to execute the investments in the recovery plans (building renovation, digitalisation), and reconstruction of flood-affected areas. 87% of firms cite the availability of skilled staff as the main barrier to investment in 2021, compared to 79% in the EU (EIB, 2021[30]). Reskilling will not only be an important tool to address these shortages, and to enhance the employability of displaced workers, but also to reach the government’s employment targets. Hence, the federal and regional policies in the recovery plans and Budget 2022 to improve the efficiency of active labour market policies and lifelong learning are welcome (Chapter 2).
The reforms outlined in the plan could be more ambitious and need to be further elaborated in some areas. While some reforms, such as the simplification of administrative procedures, the introduction of an individual learning account and increased support for job seekers, as recommended in past surveys, are more concrete, details on the design and implementation of some reforms (taxes and pensions) are lacking and will be crucial. The tax reform was not included in the national recovery plan due to a lack of clear timeline and commitment for adoption. A reinforced coherence of the plan between investments and reforms (e.g. tax measures to lower work disincentives) could lead to a greater impact. Aiming at political and social consensus on reforms can help ensure that they are long-lasting, but it should not unduly delay necessary reforms.
The crisis accentuated medium-term fiscal sustainability challenges
The war in Ukraine has changed near-term fiscal prospects and needs in OECD countries and Belgium. The Budget 2022, which did not take into account the latest pandemic wave, energy inflation-related support measures or the war in Ukraine, had planned a fiscal consolidation of 0.4% of GDP. In the current context of a supply shock, the effective automatic stabilisers in Belgium can help ease households’ financial stress. Furthermore, there is some room to provide temporary, well-targeted and means-tested support to cushion the immediate effects of the commodity and food price shocks on vulnerable households and companies, and assist refugees in the near term (OECD, 2022[31]).
Recent events have also highlighted the importance of having fiscal space to address future shocks. Large pandemic-related spending increased the Maastricht public debt to 108.4% of GDP in 2021. According to OECD projections, significant efforts will be required to stabilise public debt at close to 99% of GDP in 2060 (Figure 1.15). OECD projections assume that in order to stabilise debt by 2060 additional government measures will need to be taken to enable a gradual improvement in the primary deficit reaching balance by 2031. In addition, pension, health care and long-term care reforms are assumed to address the net total ageing costs (Figure 1.15, blue line). A more pessimistic scenario of higher interest rates would push the debt to GDP ratio up to 129% (Figure 1.15, orange line). A more optimistic scenario, which assumes the implementation of some growth-enhancing structural reforms outlined in Box 1.3 would imply a debt-to-GDP ratio of 78% (Figure 1.15, green line). Finally, the debt to GDP ratio would increase to 169% in a scenario of no reforms to address ageing costs (Figure 1.15, red line).
Despite the need for significant efforts to stabilise debt, government projections assume that the primary balance will decline from -4.4% of GDP in 2022 only to -2.5% by 2027 (FPB, 2022[32]), and no improvement plans are outlined thereafter. This would imply that debt would not be stabilised and rise to 150% by 2050, even if pension reforms are taken to address ageing costs. Hence, a credible and transparent fiscal consolidation strategy to lower the budget deficit and to ensure a steady reduction of the debt-to-GDP ratio, including every level of government, is needed. The strategy can include, besides a path for agreed objectives, clear rules for windfall gains. The fiscal adjustment plan needs to be expenditure-led, given the already high tax burden, and address population ageing. This section discusses the main reforms needed to improve medium-term fiscal sustainability: increasing public spending efficiency through spending reviews, improving the fiscal framework and rules, and implementing major tax and pension reforms. The fiscal framework reforms will have to be considered in the context of the general forthcoming revisions of European fiscal rules.
Figure 1.15. The impact of the crisis on fiscal sustainability is projected to be large
Public debt, % of GDP
Note: The scenario including ageing-related reforms consists of the Economic Outlook No. 111 projections up to 2023, and the long-term projections of the Economic Outlook No. 111 database afterwards, except for the primary balance, which is projected to improve gradually until 2030 and kept constant after. Structural reforms scenario assumes higher real GDP growth by 1 percentage point each year compared to the baseline due to additional structural reforms. The “higher interest rate” scenario assumes higher interest rate by 1 percentage point from 2022. The scenario without ageing-related reforms includes European Commission projections for net total aging costs (net public pensions, long-term care and health costs, adding 3.8 percentage points of GDP to annual government spending in 2050).
Source: Adapted from OECD (2022) Economic Outlook: Statistics and Projections (database); and Long-term baseline projections; European Commission (2021), The 2021 Ageing Report.
Box 1.3. Potential impact of reforms on growth and the fiscal balance
Table 1.5 presents the growth impact of some key structural reforms proposed in this Survey. The fiscal impacts presented in Table 1.6 do not take into account indirect effects, such as those induced by the positive impact of the reforms on growth and public revenue, and some recommendations (e.g. efficiency gains in public spending) are not quantifiable.
Table 1.5. Potential impact of selected proposed reforms on GDP per capita
Note: These estimates are illustrative. The impact on GDP per capita is estimated using historical relationships between reforms and growth in OECD countries. The model does not capture policy-induced changes in deep-rooted preferences like risk aversion and their subsequent effects on economic variables.
Source: OECD calculations based on (Guillemette and Turner, 2021[33]).
Table 1.6. Illustrative direct fiscal impact of selected recommended reforms
Note: Belgium’s spending on primary and secondary education at 4.1% is higher than the OECD average of 3.4%, while ALMP spending per unemployed as a % of GDP per capita at 38% is higher than the OECD average of 26.2% (the share of ALMP allocated to training at 18% is lower than the OECD average of 23%). Hence, while this table provides illustrative increases in fiscal spending in these areas, the policy recommendations implicitly assume using existing expenditures more efficiently (i.e. fiscally neutral). Belgium's social protection expenditure on housing at 1% is lower than the EU average of 1.8%, so expanding housing support for low-income households refers to closing one third of the gap. The tax reform includes an increase in VAT as a share of GDP to the close half the gap to the average of the top half of OECD countries (from 6.8% to 7.4% of GDP); and an increase in environmental taxation as a share of GDP to close half the gap to the average of the top third of OECD countries (from 2% to 2.3% of GDP), with flanking measures to support poor households most affected costing about one quarter of the increase in revenues.
Source: OECD calculations and European Commission (2021), The 2021 Ageing Report.
Improving the fiscal framework and public spending efficiency
Reconsidering the budget coordination framework across levels of government to provide binding targets for all government levels will be important to ensure fiscal sustainability. The 2013 cooperation agreement between the federal government and the federated entities to improve budgetary coordination mandated the High Council of Finance (HCF) to provide: i) ex-ante recommendations for the budget targets of the general government and its distribution across different levels of government; and ii) assuming that targets are agreed upon, ex-post monitoring of compliance of targets and activation of correction mechanisms in case of significant deviation (Figure 1.16). However, since 2013, except for an approval of the overall general government target in 2018, the Concertation Committee (members from different levels of government) only takes note of the overall target recommended by the HCF and there is no agreement on individual targets. This can undermine the viability of the fiscal trajectory towards the medium-term objective, and prevents the HCF from carrying out its monitoring mandate. The 2013 cooperation agreement should be fully implemented as a first best solution, but other options might be explored given Belgium’s institutional framework, where the federal state, the regions and the communities are on an equal footing, so that no authority has precedence over another.
One way to strengthen the influence of HCF is to strengthen its mandate to provide in-depth analysis and monitoring of public finances at different levels of government, even if it can’t impose binding targets or recommendations. Publishing scenarios of debt sustainability in the case of no policy action for all levels of government, based on a uniform methodology, would increase transparency. Obliging the government to justify deviations between the budget path and the recommendations to the parliament via a “comply or explain” mechanism or improving communication of the HCF with the media can also increase transparency and visibility of its recommendations. For example, the Spanish Fiscal Council regularly publishes and presents in different forums such regional analysis. Furthermore, the calendar of publication of the HCF’s recommended trajectory could be adjusted to allow more room for discussions at the Concertation Committee. Alternatively, regional independent fiscal councils, with common minimum conditions and requirements, could be formed to strengthen the fiscal framework, while respecting Belgium’s institutional framework. This is the case for Victoria in Australia and Scotland and Northern Ireland in the United Kingdom. Regional councils could also contribute to capacity building to conduct spending reviews (see below).
Figure 1.16. The budgetary coordination mechanism should be improved
Note: The responsibility refers to the Public Sector Requirement Section of the High Council of Finance.
Source: National authorities.
Multiannual budgetary planning, for all levels of government, can improve the transparency and achievement of medium-term fiscal objectives. Belgium’s medium-term fiscal framework is rather inefficient. Belgium is the only euro area country without a fully-developed multiannual fiscal planning at the national level apart from the stability programme (Bisciari et al., 2020[34]). While the stability programme contains multiyear budget targets, they lack detail, are not stable and often not met. More recently, multiannual planning is gradually being introduced in regions. The introduction of a medium-term budgetary planning for all federated entities and at the national level can increase transparency and consistency of fiscal policy. In the Netherlands, multiannual budgetary planning is accompanied by expenditure rules, which should also be considered in Belgium.
Expenditure rules setting multi-year ceilings on broad spending aggregates at each level of government would support spending-based consolidation and medium-term expenditure reforms. There are no expenditure rules in the Belgian budgetary framework, except for health care spending. Flanders is currently working on the introduction of an expenditure target. This contrasts with the growing adoption of such rules in Europe. The uncertainty created by the forthcoming revision of EU fiscal rules and the technical difficulties of translating national expenditure rules to subnational government levels, which the OECD is in the process of supporting Belgium with, create challenges. Nevertheless, expenditure rules should be introduced, as soon as feasible. While each level of government can have substantial autonomy in setting its spending ceilings, the HCF can be mandated to monitor the spending ceilings.
There is a need to increase spending efficiency and improve targeting of benefits to create room for productivity-enhancing public investment, as highlighted in the 2020 Economic Survey. Public expenditure in Belgium is among the highest in the EU (Figure 1.17, Panel A), and some structural increases in non-pandemic expenditures (health, minimum pensions) are planned. Wage subsidies, which are often used to offset high labour costs and the heavy tax burden on labour, and compensation of public employees (Figure 1.17, Panel B) account for the bulk of the spending gap between Belgium and EU peers (Godefroid, Stinglhamber and Van Parys, 2021[35]). Social public expenditures have also increased over time and are higher than the OECD average (Figure 1.17, Panel C).
There is room to improve the efficiency of spending on education to make fiscal space for some policy recommendations made in this survey to lower disparities in education (Chapter 2). Public spending on primary to post-secondary non-tertiary education as a share of GDP at 4.1% is higher than the OECD average of 3.1%. A comparison of PISA scores and the expenditure ratio per pupil with neighbouring countries shows that education outcomes in Belgium are not higher than in the Netherlands and Germany, despite higher spending (Figure 1.17, Panel D). PISA scores are higher in the Netherlands than the French community, despite similar resources. The Flemish community spends more than neighbouring countries (France, Germany and the Netherlands) on education, but also achieves higher scores.
Figure 1.17. Public expenditures are high
Note: Panel D: Average scores in reading, mathematics and sciences in 2018. The OECD average for these three dimensions was 488 in 2018. 2019 expenditure ratio in pre-primary, primary and secondary education to the number of children aged between 3 and 18.
Source: OECD (2021), National Accounts database; OECD (2021), Social Protection and Well-being database, Bisciari et al. (2020).
Federal and regional spending reviews are starting to be used (Table 1.8), but should be better integrated into the annual budget process, as is planned in the national recovery plan, and be more coherent across government levels. Some of the pilots (service vouchers in Flanders and telework and wage subsidies at the federal level) have resulted in policy change in 2021-22, which is welcome. Given the institutional set-up, it is normal to have spending reviews conducted at different levels of government. However, better coherence and consistency in methodology and objectives should be ensured to link spending reviews and cost-benefit analyses to medium-term expenditure frameworks and the annual budget process to gradually bring down public expenditures. This would also prevent reforms in one area (early retirement or unemployment benefits) from triggering increases in others (disability). These spending reviews should be incorporated into the medium-term fiscal consolidation strategy to stabilise and gradually lower the debt-to-GDP ratio.
Better performance data and in-year monitoring arrangements could also contribute to higher fiscal sustainability. Across the OECD, the main challenges in implementing spending reviews are the absence of performance data and its poor quality, including access to micro data for a more accurate assessment (OECD, 2019[36]). This can also be a barrier to adopting performance budgeting, which is the use of performance information to guide budget decisions (OECD, 2019[37]). A performance budgeting framework, which have been used effectively elsewhere (e.g., Australia), could be considered.
Implementing a comprehensive and revenue-neutral tax reform
Belgian tax revenues at 43% of GDP are higher than the OECD average of 33.5% (Figure 1.18, Panel A). Taxation remains tilted to labour which penalises growth and employment, with a relatively high tax wedge for low-wage workers, despite recent reforms (Figure 1.18, Panels B-C). Given fiscal sustainability challenges, less distortionary taxes should be increased to finance lower labour taxation for low-wage workers for a revenue-neutral reform. The Budget 2022 takes a first step by a small budget-neutral reduction in special social security contributions (0.05% of GDP). An anti-fraud plan, including plans to reduce the VAT compliance gap, adopted in June is welcome.
A tax reform with the aim of shifting the burden from labour to consumption, property and environmentally harmful activities, as is planned by the government, has the potential to reduce distortions to economic growth (Akgun, Cournède and Fournier, 2017[38]). The reform should reduce disincentives for labour market participation, especially for low/middle income workers and second earners, and reform housing and environment taxation, in line with recommendations made in previous surveys and identified by the Fiscal Council (HCF, 2020[39]; HCF, 2021[40]). Proper and detailed impact assessments analysing the effect of possible changes in taxation on different important socio-economic indicators is important to have a long-lasting and efficient tax reform. Currently, a number of background papers on different aspects of taxation are in preparation to establish the guidelines and direction of the reform. At the same time, having a clear timeline and commitment for adoption will be key, as there is not a concrete plan yet.
Figure 1.18. A revenue-neutral tax reform should shift taxes away from labour
Note: Panel C: The height of the bar corresponds to the countries' tax wedge for a single worker without children, at 50% of the average wage and excluding cash benefits. Panel D: The VRR is an indicator of the loss of VAT revenue as a consequence of exemptions and reduced rates, fraud, evasion and tax planning. It measures the difference between the VAT revenue actually collected and what would theoretically be raised if VAT was applied at the standard rate to the entire potential tax base in a “pure” VAT regime and all revenue was collected.
Source: OECD (2022), OECD Global revenue Statistics; OECD, Consumption Tax Trends 2020; OECD, Taxing Wages 2021.
A number of tax exemptions reduce the efficiency of the tax system (Table 1.7). Some of these create distortions, tend to benefit higher-income households, can lead to bad environmental outcomes and lower productivity growth (see below). An inventory of the foregone revenues from federal tax expenditures is published annually. However, while there exist some ad-hoc ex-post evaluations, tax expenditures are not subject to systematic impact assessment (EC, 2020[41]). The newly introduced spending reviews could include an assessment of tax expenditures at different levels of government.
Table 1.7. Main tax expenditures
Tax expenditures, 2019
Source: Ministry of Finance.
Tax expenditures that tend to disproportionately benefit higher-income households can be gradually streamlined to improve the effectiveness of the tax system and its redistributive effects. VAT bases are eroded by various exemptions and reduced rates, leading to substantial VAT revenue shortfalls (Figure 1.18, Panel D). The forthcoming tax reform should broaden the VAT base, thereby enhancing the overall coherence of the VAT and reducing its complexity. This should be combined with targeted measures to protect lower income households against any adverse effects of VAT base broadening measures through direct transfers. The favourable tax treatment of company cars, which has a high budgetary cost and is very regressive, remains high, despite a recent reform to make it environmentally-friendly (restriction to zero emission vehicles bought or leased as of 2026) (Traversa and Valenduc, 2020[42]). Tax exemptions for second and third pillar pensions have high budgetary costs and are skewed heavily towards higher income households (Janssens and Valenduc, 2020[43]; Court of Auditors, 2020[44]; Peeters and Schols, 2021[45]).
There is scope to strengthen the taxation of personal capital income by introducing a progressive tax rate schedule and a capital gains tax. Non-neutrality of taxation with respect to different forms of investment, income, or savings, and the lack of a tax on capital gains, create tax arbitrage opportunities, which can increase capital misallocation by locking in capital into existing firms (OECD, 2018[46]). The current set-up creates incentives for professional-services employees and the self-employed to organise themselves as legal entities to be taxed at lower effective tax rates, and shareholders working in their own companies to retain corporate income within the firm rather than distribute dividends. For example, applying similar schedules for taxable business income and salary income would eliminate differences in average tax burdens between entrepreneurship and salaried employment, and tax planning opportunities. Progressive taxation of labour income already exists in Belgium. A dual progressive taxation system, which adds a slightly progressive taxation applied to all forms of capital income (different tax rate schedule than that the existing one applied to the labour income) and a capital gains tax should be considered, as part of the broad tax reform. To avoid distortions and unintended consequences, such a tax should be forward-looking to tax future gains and not have a lag between announcement and implementation.
Containing aging costs
Pension expenditures are projected to increase by 3 percentage points to 15.2% of GDP by 2070 (Figure 1.19). In December 2020, an agreement was reached to increase minimum pensions for a single person to EUR 1500 net for a full career between 2021 and 2024, which will improve equity. A pension reform is part of the federal government agreement and the national recovery plan with a commitment for adoption in parliament by June 2024, but the details are still being discussed (Governments of Belgium, 2021[28]). The main focus of the coalition agreement is to improve equity of the pension system (e.g. focus on career length rather than age), while relying on a mix of pension and labour market policies to delay retirement decisions (e.g. pension bonus) and improve working conditions for and employability of older workers through policies aimed at employers and employees.
A number of measures were taken in 2015 to increase the average age of retirement. These include gradually increasing the legal retirement age to 67 by 2030, making the terms of pre-pension benefits (unemployment benefits with employer top-up payments) more stringent and removing limits on combining pension benefits with earnings for those aged 65 or with a 45-year career. Furthermore, access to early retirement was made more difficult and only possible at the age of 60 after 44 career years, 61 after 43 careers years and 63 after 42 career years. One of the new reform proposals is to change the early retirement age to 60 after 42 years with an aim to improve equity for workers in “arduous” jobs and those who start working at an early age by focusing on career length. The previous pension reform had failed to reach an agreement on the definition of arduous jobs. Nevertheless, such a move would bring Belgium away from international standards. If implemented, it should be considered as part of a package of reforms to compensate the higher costs.
Figure 1.19. Pension reform is needed
Note: Panel B: The average effective age of retirement is defined as the average age of exit from the labour force during a 5-year period, while the statutory age is defined as the age of eligibility of all schemes combined, based on a full career after labour market entry at age 22. Panel C: Theoretical pensions of a self-employed worker relative to an employee having both a taxable income (net income or net wage before taxes) equal to the average net wage before taxes, for individuals with a full career from age 22 in 2018 and contributing only the amount that is (quasi) mandatory to pensions.
Source: European Commission (2021), Ageing Report; and OECD (2021), Pensions at a Glance.
Despite recent reforms and the increase in the average labour market exit age from 59 in 2015 to 60.5 in 2020, the gap between the statutory retirement age and average labour market exit age remains among the highest in the OECD (Figure 1.19), and the potential gains to pension sustainability from higher employment rates of senior workers (0.9 percentage points of GDP by 2070 according to (EC, 2021[47])) are high. According to the OECD long-term model, gradually closing the gap between effective and statutory retirement ages and keeping average effective retirement ages rising in the future at a rate equal to two thirds of projected gains in life expectancy could increase GDP per capita by 6% in 2060 (OECD average: 3%) (Guillemette and Turner, 2021[33]). Hence, the focus of reforms to incentivise older workers to stay in the labour market is welcome.
The links between working careers and pensions in the early retirement system can be strengthened. Pension systems generally provide flexibility on when to claim benefits. To avoid that claiming benefits early (late) results in receiving more (less) in pension benefits over life, an “actuarial adjustment” that modifies benefits depending on the age at which they are claimed (that is, lowering benefits when claimed earlier to account for the additional number of years over which they would be received or conversely providing bonuses when delaying claiming) can be applied. Evidence indicates that individuals claim benefits early in absence of such adjustments (Martinez and Soto, 2021[48]). Introducing such an actuarial adjustment mechanism, which currently does not exist in Belgium, should be considered.
The introduction of part-time pensions and a pension bonus (working longer will accrue more pension rights after 42 career years: a bonus per year for each day worked in addition) is currently under discussion. Such measures to extend working lives are welcome and should be implemented. Other OECD countries use a combination of bonuses and penalties based on the statutory retirement age, rather than the early retirement age, which could be considered as an alternative. For example, in Finland, for the part of the old-age pension taken early, a 0.4% reduction is applied for each month that the part of the pension is taken out before the lowest pensionable age of each cohort and in the case of deferral of claiming the pension beyond that age, the pension is increased by 0.4% for each month by which retirement is postponed (OECD, 2021[49]).
A more ambitious reform is needed to make reforms long-lasting, without a need for constant political negotiations for short-term solutions. Adopting an automatic adjustment mechanism, as most EU countries have, would help lower uncertainties affecting financial sustainability. Tightening of early retirement conditions and the increase in the statutory retirement age to 67 by 2030 are projected to increase the effective age of labour market exit, but life expectancy is projected to increase faster. The introduction of an automatic link between the retirement age and life expectancy would lower pension spending by 1.3 percentage points of GDP in 2070 (EC, 2021[47]). The statutory retirement age should eventually be linked to changes in remaining life expectancy (phasing in after 2030), which is the case in Denmark, Finland and the Netherlands, accompanied by lifelong learning opportunities.
Other complementary reforms, beyond pension policies, are also needed to extend working lives. The tightening of early retirement schemes partially contributed to the increase in real spending on sickness and disability, which makes it crucial to improve the effectiveness of assessment and re-integration of people on these schemes (Chapter 2). The unemployment insurance scheme is another pathway for labour market exit. Unemployment benefit replacement rates are high compared to peers, with unlimited duration and low phase-out (decrease of unemployment benefits with time according to the duration of unemployment and the career of the wage earner), and should be reformed, as recommended in the 2020 Economic Survey. According to the OECD Council Recommendation on Ageing and Employment, encouraging hiring and retention by employers, for example through tackling age discrimination, will also be key to delaying labour market exit. This could be achieved through obliging firms to have diversity plans and provide an answer for each applicant, including a motivation for rejection.
The employment rate of senior workers (aged 55 to 64) at 54.4% is lower than the OECD average of 61.1%. Upskilling is needed to maintain the employability of older workers, but their lifelong learning participation is low (Figure 1.20; (Delhez et al., 2022[50])). As part of the February Jobdeal package, older workers can convert one third of their notice period into outplacement or training, which is welcome. Main barriers to participation in training among older workers include health or age, but they also cite distance or training schedules as barriers (HCE, 2021[51]), which can be remedied by further use of online training and training in modules. An analysis of lifelong training in Flanders suggests that incomplete access to information and guidance regarding training and weak support from employers are barriers to participation among older workers (WSE, 2020[52]). To facilitate an effective use of the new individual training allowances introduced in 2022 for older workers, a single site that collects information on the available training options and provides guidance for training selection, as in Flanders (Flemish Training Database), could be expanded in Belgium.
Figure 1.20. Lifelong learning by older workers remains low
Note: Panel B: The following data was missing: distance for 35-44 year olds, costs, no adequate offer and lack of support for 55-64 year olds.
Source: High Council of Employment (2021), La formation continue des salariés; Eurostat (AES).
Some potential structural changes due to COVID-19 could also help delay retirement decisions. The pandemic accelerated the use of teleworking in Belgium, which was already high at 25% in 2019. Belgium is currently redesigning its teleworking law, following some temporary amendments during the pandemic. Special attention could be paid to accommodating older workers’ needs for flexibility. Evidence based on US data suggests that older workers with access to flexible working hours and telecommuting tend to delay retirement (Hudomiet et al., 2019[53]).
The complex structure of the pension system and different schemes for different types of workers create barriers to job mobility and contribute to the inequity of the pension system. The pension contribution rates for the self-employed are low, compared to standard employees, which reduces their entitlement to adequate benefits (Figure 1.19Figure 1.19, Panel C). The 2020 Economic Survey had recommended harmonising contribution rates and pension calculations between the self-employed and employees. Recently, the correction coefficient for the calculation of the pension entitlements of self-employed (set at 69% of dependent employees) was abolished, but there has been no adjustment to contributions, which will increase financing pressures and might unduly discourage dependent employment (OECD, 2021[54]). Hence, contribution rates should be adjusted to ensure the recent reform does not increase sustainability challenges.
There is also room to consolidate and increase mobility between private and public sector pension schemes and improve links between pension contributions and benefits. Belgium has completely separate schemes for public and private sector workers and displays a large replacement rate difference of about 30 percentage points (Boulhol, 2019[55]). The gap is due to different reference periods for calculations of pensions (last 10 years for public employees) and the preferential public sector system of bonuses, despite some minor reforms in recent years. The gradual alignment of the pension treatment of private and public sector workers should be continued, as recommended in the 2020 Economic Survey. Reconsidering the mechanism governing real increases in pensions through a price uprating of past wages to compute pension entitlements dependent on real wage growth, while pension revenues contributions evolve roughly in line with wages, can strengthen links between contributions and benefits (OECD, 2019[56]).
Table 1.8. Past OECD recommendations on fiscal and pension policies
Boosting reallocation and productivity growth
More dynamic labour and flexible product markets are needed to sustain the recovery, facilitate capital and labour reallocation and the digital transformation. Business entry and exit rates are low (Figure 1.21), especially in services. The share of high growth firms (firms with at least 10 employees that experience annual employment growth of more than 10% over three years), at 7.4%, was lower than the EU average of 11.9% in 2018 (Dillen, Crijns and Standaert, 2020[57]). Belgium also exhibits weak dynamism in people’s careers, with low transitions from inactivity and unemployment to employment and job-to-job transitions (Causa, Luu and Abendschein, 2021[58]).
Figure 1.21. There is a need to boost reallocation of resources
Source: Eurostat; and OECD (2021), Causa, O., N. Luu and M. Abendschein (2021), “Labour market transitions across OECD countries: Stylised facts”, OECD Economics Department Working Papers, No. 1692.
Enhancing links between wages and productivity at the firm and worker level
The responsiveness of wages to firm productivity differences within the same sector is low, with Belgian firms that are 10% more productive than other firms in the sector only paying on average 2.7% higher wages, lower than the OECD average (Figure 1.22, Panel A). Hourly productivity is higher in Belgian firms that have a firm-level agreement which complements the sector-level agreement (Garnero, Rycx and Terraz, 2020[59]). OECD empirical analysis suggests that the upside of low wage dispersion in Belgium comes at a cost of higher productivity dispersion and less productivity-enhancing labour reallocation (OECD, 2019[4]). Put differently, high-productivity firms pay lower wages than what their high level of productivity would justify and low-productivity firms pay higher wages than what they can normally afford.
Belgium’s high degree of sector-level centralisation in wage bargaining is likely to be a contributing factor. Sector-level centralisation constrains the scope for firms to set wages and is therefore plausibly linked with a stronger misalignment of wages and productivity across firms. Higher wages would be one way for higher-productivity firms to attract workers, increase their market share and grow. At the other end, lower wages would make it easier for lower productivity firms to overcome a temporary blip in demand and reduce their risk of being turned into a “zombie firm”. Furthermore, it pushes productive firms to look for ways around the system by rewarding workers with free company cars and other fringe benefits that are not specified in collective bargaining agreements.
Greater flexibility could be achieved by moving to a so-called “organised decentralised” system, based on sectoral framework agreements that explicitly leave space for further adaptation at the firm level or allow for opt-outs under certain conditions, while keeping high levels of wage coordination (Figure 1.22, Panel B; (OECD, 2018[60])). One option would be wider corridor agreements at the sector level that allow for more room to set wages at the firm level. Another option would be to allow for more frequent exceptions to the favourability principle via opt-out clauses, as in Austria and Germany (OECD, 2019[4]). This principle says that a firm-level agreement can only improve the terms for workers set in the sector-level agreement. In organised decentralised systems, the social partners decide when it does not apply. The social partners have this possibility also in Belgium, but they very rarely make use of it. Making more use of firm opt-outs from collective agreements could be considered, in discussion with social partners.
Figure 1.22. Wage setting flexibility should be increased
Note: Panel A: Results are based on OLS regressions of the log hourly wage on log hourly labour productivity across sectors, which include country-year dummies. See OECD (2019), In-depth Productivity Review for details. Panel B: the figure depicts five categories of collective bargaining systems based on OECD (2018), OECD Employment Outlook.
Source: OECD (2019), In-depth Productivity Review.
Improving the business environment
Competition could be enhanced by reforming complex regulatory, license and permit procedures, and the extensive regulations in professional services (Figure 1.23, Panels A-B). Past measures, including the 2019 company law and regional initiatives to ease the acquisition of permits, have lowered administrative burdens. Improved e-government practices in the recovery plans should also help. Nevertheless, recommendations from the 2020 Economic Survey, such as the use of a “silent is consent” rule for issuing permits and licenses, and further relaxing restrictions in the retail sector, which is characterised by a restrictive regulatory set-up with rigid rules on opening hours and seasonal sales, remain relevant.
Professional and craft services remain highly regulated, with real estate agents and architects among the most regulated in the OECD according to the OECD PMR indicators. The regulation of accountants and bookkeepers has been relaxed since 2020. Restrictions in inter-professional cooperation, marketing of services and ownership and holding of voting rights for firms lower competition in other professional services. The Budget 2022 proposes to lower notary fees for real estate transactions, which are among the highest in the EU (EC, 2020[41]; Price Observatory, 2021[61]). A more general liberalisation of professional services is in the federal coalition agreement and should be followed up. Mandatory training chamber membership and insurance requirements for professional services should be further liberalised. Despite labour shortages, most notably in the construction sector which are expected to rise, entry requirements for craft and construction services remain rigid in some regions. The professional qualification requirements for regulated craft professions were eliminated in Flanders in 2018, for five professions in Wallonia and are being evaluated for 26 professions in the Brussels-Capital Region. Reforms to ease access restrictions for craft and construction services should be continued.
Figure 1.23. Regulatory barriers constrain competition.
Note: Panel B: An indicator value of 0 indicates the absence of regulations, 6 reflects a fully regulated market. Panel C: The more regulatory practices as advocated in the OECD Recommendation on Regulatory Policy and Governance a country has implemented, the higher its iREG score. The indicators on stakeholder engagement and RIA for primary laws only cover those initiated by the executive (61% of all primary laws in Belgium).
Source: OECD 2018, PMR (database); Von Rueden, C. and I. Bambalaite (2020), “Measuring occupational entry regulations: A new OECD approach”, OECD Economics Department Working Papers, No. 1606; and OECD (2021), Government at a Glance (database).
There is room to integrate impact assessments and ex-post evaluation in the policy-making process and improve their transparency, where Belgium lags the EU average (Figure 1.23, Panel C). Systemising the use of consultation for both primary and subordinate regulations across all ministries and developing a central platform on which all consultations are published would enhance the transparency of the regulatory system. In addition, the regulatory impact assessments do not systematically require an identification and assessment of alternatives to the preferred policy option, which can lower their effectiveness (OECD, 2021[62]). Recent measures increased the resources of the Competition Authority, which could be involved in impact assessment and evaluation of new laws and regulations.
Getting the most out of digitalisation reforms
Reaping the productivity benefits of digital adoption requires good digital skills (Gal et al., 2019[63]). Belgium is a leader in firms’ adoption of digital technologies, with the share of firms using cloud computing and big data at 43% and 23%, higher than the EU averages of 26% and 14%, respectively. Policies to boost digital skills (59% of firms report hard to fill vacancies for ICT specialists) and the share of university graduates in STEM courses (15% compared to the OECD average of 23%) can significantly improve the productivity benefits of digitalisation (Chapter 2). A 10 percentage point increase in the share of STEM workers is linked with a 2.5-4% increase in the firm’s productivity in Belgium (Bijnens and Dhyne, 2021[64]).
Policies to boost digitalisation should have a specific focus on SMEs, which make up 69% of employment and 63% of value added. While small firms’ adoption of digital technologies tends to be higher in Belgium than in the EU, the gap between small and large firms in Belgium is larger (Figure 1.24Figure 1.24, Panel A). Overall, COVID-19 had a positive impact on ICT investment in Belgium, but with differences across firm size, which might exacerbate existing gaps (Figure 1.24Figure 1.24, Panel B). The existing tax deduction for growing firms will only apply to digital or green investment from 2023, which can help innovative SMEs.
Digital security is one area where SMEs lack resources and expertise. In 2019, 20% of Belgian firms experienced digital security incidents, higher than the OECD average of 14.8% (OECD, 2021[65]). Belgian digital security risk management practices are above the OECD average, but as in other OECD countries, there is a gap between small and large firms for more sophisticated tools (Figure 1.24Figure 1.24, Panel C). Federal and regional governments have cybersecurity plans in place, and the national recovery plan allocates EUR 79 million to develop protection tools and a cybersecurity competence hub. It will help finance a global cybersecurity governance framework, which is welcome, since the Global Cybersecurity Index, where overall Belgium ranks relatively well (19th out of 175 in 2020), identifies gaps in organisational measures. Special focus should be on increasing the capabilities of SMEs. The plan also aims to increase capabilities of Ministry of Defence, the administration’s hub of cybersecurity specialists. A more general training agenda, for example through the VET track, could be considered to increase the pool of digital security talent available to firms, as is planned in Spain.
Access to fixed and mobile high quality broadband at competitive prices is key for the digital transformation. Teleworking increased from 25% in 2019 to 33% in 2020 (EU average: 18.6%), and is expected to increase further (Acerta, 2020[66]). The development of digital technologies will also increase data traffic, which will require policies and regulatory measures to promote investment and reduce obstacles to infrastructure deployment.
While fixed broadband subscriptions per 100 inhabitants, including in the higher speed tier of more than 100 Mps, is high, the share of fibre on overall fixed broadband subscriptions is relatively low and the uptake of mobile broadband is lower than the OECD average. While the low share of fibre is driven partly by the use of high-performing cable networks, future technology needs (upload speeds) make a switch to fibre more urgent (OECD, 2021[67]). The rollout of 5G has been delayed in most OECD countries due to the pandemic, but is particularly lagging in Belgium (Figure 1.25). The National Plan for Fixed and Mobile Broadband aims for high-quality broadband connectivity with a contract speed of 100 Mbps by 2025 and 1 Gbps by 2030 for all households, by mapping remaining zones (2% of the territory) to facilitate deployment of high speed services and stimulate investment. The planned investments into optic fibre and 5G (EUR 100 million in the national recovery plan and EUR 66 million from federal funds over 2022-24) are welcome, but further public funding will be needed to achieve the broadband plan’s objectives.
Figure 1.24. Adoption of digital technologies and security management tools are lower for SMEs
Note: Panel C: VPN is Virtual Private Network that extends a private network across a public network to enable secure exchange of data over public network. Small firms include firms with [10-49]; medium-sized firms [50-249] and large firms [250 and more] employees without financial sector.
Source: OECD (2021), ICT Access and Usage by Businesses; Round 20 of ERMG survey; and Eurostat (2021), ICT Usage by Businesses data.
Figure 1.25. Belgium lags behind in the share of fibre and 5G readiness
Source: OECD Broadband Portal; and European Commission, Digital Scoreboard.
The barriers to effective 5G deployment should be removed. Spectrum licensing (in the European Union, spectrum bands coined as “5G pioneer bands”) had been delayed due to lack of consensus over auction design. In October 2021, the government approved a royal decree for 5G auctions, with an aim to have first auctions in the second quarter of 2022 and expanded the 5G information campaign to inform citizens’ understanding of the process and effects. The effective deployment will depend on the removal of regulatory barriers, including the stringent regional or municipal limits to electromagnetic fields (EMF). Some limits in Belgium, such as those in Brussels, are stricter than EU guidelines and are among the lowest in Europe (OECD, 2021[68]). The recovery plan includes reforms to revise EMF limits, if recommended by the relevant regional committees looking at the issue. In October 2021, a draft law to lower EMF limits was brought into public consultation in Brussels, which is welcome. The revision of these limits should be made as soon as feasible to enable effective deployment, once the auction is successful.
The existing measures to reduce high-speed network deployment costs should be further extended. Belgium has a central electronic counter to promote access to existing infrastructure and also seeks to optimise the co-ordination of roadworks and the distribution of costs among network operators (telecommunication companies, cable companies, power grid operators, water companies, transport, etc.) participating in the joint roadwork (OECD, 2021[69]). Fibre deployment is being fostered by co-investment agreements, but the difficult coordination of digging and trenching works and inefficient dispute resolution processes create challenges (EC, 2020[70]). Flanders plans to facilitate infrastructure sharing by creating a tower company to lower costs and accelerate the rollout of high-speed networks, including in rural areas. Such initiatives to decrease barriers to deployment should be extended (OECD, 2020[71]).
High broadband prices and the high level of market concentration in both fixed and mobile broadband market shares (Figure 1.26) could reflect weak competition in the communication sector (EC, 2020[72]). According to the OECD Telecommunications Services Trade Restrictiveness Index (STRI), while around the OECD average, the restrictions are well above neighbouring countries. Lowering entry barriers should be accompanied by measures that ease consumer mobility across communication providers. The use of “Easy Switch”, which strengthens incentives to switch suppliers since 2017 by allowing the new operator to terminate the services of the customer with the old provider, has increased from 19.7% to 23.4% in 2020, but more could be done to promote and ease its use (BIPT, 2021[73]).
Figure 1.26. Barriers to competition in the communication sector can be eased
Note: Panel B: Fixed broadband includes equipment. Panel D: STRI refers to Services Trade Restrictiveness index.
Source: European Commission, Digital Scoreboard; Belgian Institute for Postal Services and Telecommunications; OECD (2020), Digital STRI database.
Digital technologies and data can be pivotal in rethinking how the public sector operates, improving public services’ quality and cost effectiveness, widening access and improving trust in public institutions (OECD, 2020[74]). Digital government is not well-developed in some respects in Belgium, such as the strategic use of digital technologies and data, the availability of basic online services for businesses and citizens’ use of digital government services (Figure 1.27). OECD research suggests that closing one half of the gap to best practice in digital government use can increase firm productivity through digital adoption by 1.2% after three years (Sorbe et al., 2019[75]).
Figure 1.27. Digital government is not well-developed in some respects
Source: Digital Government Index; European Commission, Digital Scoreboard; OECD, Going digital toolkit; OECD, Open, Useful and Re-usable Data Index, 2019.
The recovery plans rightly focus on the digitalisation of the public sector, with projects at each level of government. The main reforms are to digitalise social security and justice systems, implement the Single Digital Gateway to facilitate governance, sharing and reuse of data through the “only once” principle, redesign administrative processes and digital public services and improve e-procurement. Belgium has established an adequate governance for digital government through the Directorate-General Digital Transformation at the Federal Public Policy Service and Support. Flanders has adopted a data strategy and Wallonia has created a digital public service. Nevertheless, a coherent strategy and digital architecture covering different levels of government remains lacking. The development of silo-based digital initiatives throughout the government can make it difficult to reap the full benefits of the planned reforms. Enhancing digital skills of users (Chapter 2) will be key, as low-educated citizens tend to use digital government services less often (OECD, 2020[71]). It is also important to support demand for digitalised public services, for example by assuring users that their personal data are protected while being strategically used to improve services (OECD, 2019[76]).
Attracting digital talent and developing up-to-date skills across the public administration is essential to accelerate its use of digital technologies. Given Belgium’s skill shortages, the public sector needs more agile recruitment and career management to attract skilled workers. The government plans to assess the digital competencies of public servants and the digital skillset needed to identify the needs for training. This assessment should be done quickly and used as a basis to create specific programmes to increase the digital skills of public workers. Going beyond basic digital skills to develop public servants’ skills in other areas (e.g. digital leadership, project management, data analysis) would contribute to a digital culture that can support a deeper digital transformation of the public sector. For example, Canada Digital Academy was created to offer both general and more specialised learning opportunities, in the classroom and online, for public servants at all levels (OECD, 2021[77]).
Another key component of digital government is access to open government data, which can foster social participation, business opportunities and innovation, where Belgium performs below the OECD average (Figure 1.27, Panel D). Regional open data portals exist, but there is a need to improve their coherence. Specifically fostering public value creation through data reuse within and outside the public sector is lagging behind (e.g. through forums for discussions, the possibility for users to add their own data and visualisations). Increasing the still moderate levels of engagement with external stakeholders and public officials to promote their re-use of open data, via additional strategic partnerships, training programs and events, should be part of the new digitalisation agenda (OECD, 2020[78]). The development of a legal framework for data protection and security in Estonia contributed to increasing the share of individuals using internet to interact with public authorities from 50% in 2009 to 80% in 2019 (OECD, 2020[79]). An effective data governance framework in the public sector should be prioritised through the promotion of a data-driven government approach (Box 1.4).
Box 1.4. Data governance frameworks in the public sector: New Zealand and Norway
Statistics New Zealand has developed a data governance framework to promote better data management practices across the public sector. One of the central pillars is the “whole-of-data life cycle approach”, meaning public bodies and employees are encouraged to think more strategically about the governance, management, quality and accountability of their data, over the whole data life cycle. The Agency for Public Management and eGovernment in Norway created an information governance model that positioned the management of public sector data at the centre of the digital transformation of the public sector, providing Norwegian public bodies a rich set of tools to help leverage data as a strategic asset for decision making and reuse.
Source: (OECD, 2019[76]).
Improving the digitalisation of the justice system, as recommended in the 2020 Economic Survey, will also be key (OECD, 2019[80]). Lack of consistent, reliable and uniform court data makes it difficult to assess the efficiency of the justice system (EC, 2021[81]). A digital case management system was introduced in 2019, but the use of digital tools and technologies in courts remains low (Figure 1.28; (EC, 2021[82])). The recovery plan aims to improve case management and introduce data collection automation to reduce the time needed to process cases, and increase the rate of online publication of judgments to foster legal certainty. These plans are welcome and should be accompanied by further extension of ICT training for judges to enable their effective use.
The digitalisation of the justice system can also enable improvements in evaluation and the facilitation of alternative dispute mechanisms, which are not widely utilised (Figure 1.28). While individual courts in Belgium are required to prepare an annual activity report, there is no system for regular evaluation (in terms of performance and output), performance and quality indicators are not defined at the court level, and evaluation is not linked to allocation of resources to individual courts (CEPEJ, 2021[83]). Digital tools can also enable Belgium to create one-stop shops for dispute resolution, which would allow the users to solve their disputes in one place, including gathering information, submitting applications and documents as well as enforcing outcomes received, as is the case in half of the OECD countries (OECD, forthcoming).
Figure 1.28. Digitalisation of the justice system remains low
Note: Panel A: Maximum possible: 7 points. Panel B: Maximum possible: 68 points. Aggregated indicators based on 17 indicators.
Source: European Commission, Justice Scoreboard 2021.
Further strengthening the fight against corruption
The control of corruption is around the OECD average, but below some peers in some dimensions (Figure 1.29). While measures to prevent corruption are generally in place, some gaps remain in terms of the prevention of conflict of interest for ministers and their advisors, the transparency of asset disclosure and lobbying activities (EC, 2021[81]). According to the OECD PMR indicators, there is no mandatory requirement for interest groups to register in a public registry. Some progress in the prevention of conflicts of interests have been made by the 2018 code of conduct for federal public servants, but this should be extended to all senior posts (GRECO, 2020[84]), and include rules in the interaction with third parties, especially lobbyists.
Figure 1.29. Some gaps remain in the prevention of corruption
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project. Panel E summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows first round results; a second round is ongoing. Panel F shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: Transparency International; World Bank, Worldwide Governance Indicators; Varieties of Democracy Project, V-Dem Dataset v11; OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).
Transparency measures related to lobbying are applicable to ministers and their cabinets, but they do not apply to members of parliament or public officials, in contrast to a majority of OECD countries (OECD, 2021[85]). Hence, clear standards and rules should be introduced for public officials of both the executive and legislative on how to engage in relations with lobbyists and other third parties (GRECO, 2021[86]). Some countries (Canada and France) are using digital tools to enhance the quality of reporting and transparency in this area. Finally, Belgium does not have any sanctions, including disciplinary and administrative ones, for lobbyists and public officials who breach standards and disclosure requirements related to lobbying activities (OECD, 2021[85]). Even if the use of sanctions remains low in countries where they exist, they could play a deterrent role, and could be considered.
More priority should be given to enforcing bribery offences when committed by Belgian nationals and companies abroad. Legislative reforms, including on the statute of limitations for bribery offences and whistleblower protection, are still missing. There are two sectoral whistle-blower regimes for the private sector, regarding infringements of the financial legislation and money laundering. Formal whistleblowing procedures exist for staff members of the federal and Flemish public administrations to report suspected harm to integrity within the federal administration, but not to those reporting suspected acts of bribery of a foreign public official by a Belgian national or company (OECD, 2013[87]; OECD, 2018[88]). The transposition of the EU Whistle-blower Directive has been delayed to the second quarter of 2022, which should be completed as soon as feasible.
Table 1.9. Past OECD recommendations on labour markets and productivity
Bold efforts are needed to advance the green and energy transition
Belgium had a mixed performance on achieving its 2020 energy and climate targets. The target for non-ETS emissions reductions will be achieved under EU accounting rules that allow credits from years when emission were below annual targets to offset deficits for years when emissions exceeded annual targets. The energy efficiency targets were not achieved and achievement of the renewable energy target of 13% required purchasing statistical transfers from other EU member states.
Belgium’s Long-term Strategy’s aim is to meet the expectations of the Paris Agreement, but does not include a target for national climate neutrality by 2050. Additional measures (shown in the dashed lines) will be needed to reach the current 2030 targets of reducing emissions not covered by the EU Emissions Trading System as the 2019 National Energy and Climate Plan (NECP) projects a small decline over 2020–30 under existing measures (dotted lines) (Figure 1.30, Panel A; (OECD, 2021[89])). Partly reflecting the sectoral composition of the economy (large share of polluting industries) and dependence on fossil fuels, GHG emission intensity in Belgium is relatively high in transport, housing, and industry, pointing towards scope for reforms (Figure 1.30, Panel B). A number of initiatives, discussed below, have identified reform (e.g. carbon tax) and investment needs, but implementation has been lagging. The recent developments have highlighted the urgency of action in long-term planning and certainty for investment.
Figure 1.30. Additional measures are needed to reach 2030 targets
Note: Panel A: GHG emissions excluding land use, land-use change and forestry. Dotted lines refer to projections of the National Energy and Climate Plan (NECP), with existing measures. Dashed lines refer to projections of the NECP, with additional measures. Non-ETS targets: under the EU Effort Sharing legislation. These targets do not reflect the new targets proposed by the EU “Fit for 55” package.
Source: OECD (2021), Environmental Performance Review: Belgium, 2021; and OECD (2022), Environment database.
The recovery plans’ large focus on building renovation (Chapter 2) and mobility solutions is welcome as transport and buildings account for the bulk of non-ETS emissions. There is a need for additional investments and to improve coordination across levels of government and ensure effectiveness of public investment. For example, there have been various regional and federal initiatives to boost sustainable mobility (mobility budget, 1st federal action plan for the promotion of cycling, new investment in railway infrastructure and transport, Mobilidata programme). However, regions have different preferences for road pricing for cars (2020 Economic Survey). The Executive Committee of Mobility Ministers has not coordinated a consistent vision of sustainable mobility across the federated entities (OECD, 2021[89]), despite some initiatives to align policies in certain areas (2040 Rail Vision, MaaS Vision). There is a need to strengthen the committee’s role and evaluation capacity as cost-benefit analysis of infrastructure projects is ad hoc and public entities at different levels apply their own practices (Strategic Committee, 2018). Cost-benefit analysis of public investment projects in line with EU guidelines, which includes at least long-term CO2 emission paths and emissions avoided, should be systematically conducted.
Politicised debates hamper or delay the agreement and implementation of a more coherent path to achieve national targets. Investment needs for energy (EUR 60 billion) and mobility (EUR 22-27 billion) are substantial over 2019-30 for Belgium, according to the 2018 Strategic Pact for Investment (Table 1.10). However, the coherence between these investment needs and measures in the National Energy and Climate Plan (NECP) is not clear (EC, 2020[90]; NCC, 2019[91]). Long-term infrastructure planning and public investment can not only crowd-in private capital and help the green transition, but can also have the double dividend of addressing productivity growth and resource allocation challenges discussed above. Climate action policies are expected to create about 60 000 additional jobs in Belgium (increase by up to 1% of total employment) (EC, 2020[41]). Hence, it is important to include future skill requirements and the policy implications of the green transition in Belgium’s skills planning and anticipation activities, and ensure that active labour market policies include training for skills demanded in green jobs, as in Denmark (D’Arcangelo et al., 2022[92]). The ongoing study by the federal government on the challenges of decarbonisation for employment and training is welcome.
Table 1.10. Investments needed to achieve Belgium’s 2030 energy and climate targets
Note: This table provides estimations made by an expert group which submitted their report to federal and regional authorities in 2018. The Strategic Committee was formed as an initiative of the previous federal government to unite all stakeholders in strategic investments around a common vision and goals to be achieved by 2030.
Source: Strategic Committee (2018), Strategic Pact for Investment.
A common long-term vision on energy and climate objectives and policies between the federal and regional governments would provide long-term certainty to stakeholders for making the necessary investments for decarbonisation. The update of the NECP in 2023-24 should present a clear and more coherent path to achieve national targets and long-term goals. In some areas, it is unclear how the different regional efforts support achievement of national targets (EC, 2020[90]). Since 2002, the National Climate Commission (NCC), including through a joint steering group with the State and Regions Energy Policy Coordination Platform (CONCERE/ENOVER), coordinates the efforts of the regions and the federal government, which share competencies regarding implementation and monitoring of policies and measures (Table 1.11), but the NCC is not playing its role effectively (OECD, 2021[89]).
Effort sharing of 2030 national objectives should be swiftly established. It took seven years to reach an agreement on burden-sharing following adoption of the 2020 targets on emission reductions in sectors not covered by the EU-ETS (UNFCCC, 2019[93]). The new effort sharing agreement should use transparent mechanisms and methodologies, and be concluded in a timely manner to avoid renegotiations during the implementation period and to give clarity to all stakeholders involved in its implementation (IEA, forthcoming). y. In the United Kingdom, targets have to be established by the government on the basis of advice from an independent expert body, the Climate Change Committee (CCC), which also monitors compliance and reports on progress to meet the targets to the Parliament. The permanent and independent nature of the CCC has helped to ensure a focus on long-term targets, and has inspired institutional set-up in other OECD countries, and should be considered in Belgium, as recommended in the 2019 OECD Environmental Performance Review of Belgium. In the medium-term, a national Climate Law to strengthen institutional co-operation on energy and climate policies, as recommended by experts (SPF, 2018[94]), could be explored, but is difficult as it likely requires constitutional change.
Table 1.11. The allocation of responsibilities across different levels of government
Note: This table does not include all types of policies, and lists only the main responsibilities and thus is not exhaustive.
Designing and communicating a long-term trajectory for carbon taxation, as in some EU countries, would steer firms and households towards more climate-friendly fuel sources. Belgium should reform its carbon taxation in the medium term, once the current energy price increases subside. Furthermore, this reform has to be made in the context of EU-wide proposals and initiatives, including those to extend carbon pricing to road transport and buildings within the “Fit for 55” programme.
There is no explicit national carbon taxation scheme beyond the EU Emission Trading Scheme (ETS). In sectors other than non-professional transport, fossil fuel use is either untaxed or taxed at low rates, including when emissions are not priced by the ETS, as it is not required by EU legislation. As a result, most CO2 emissions are priced at rates below EUR 60, the midpoint estimate of carbon costs in 2020 and the low-end estimate for 2030, and higher than current costs (Figure 1.31, Panels A-B). Hence, in the medium-term, the pricing of CO2 emissions should be raised substantially, according to a predictable timetable and ensuring equal pricing of the climate externality from CO2 emissions so that emission reductions are cost-effective. Pricing all greenhouse gas emissions at a uniform minimum rate reflecting the evolution of prices in the EU ETS would contribute to cost-effective abatement.
As in other OECD countries, there is a need to mitigate the effect of such taxes on low-income households (Cornille et al., 2021[95]; Burggraeve, De Mulder and De Walque, 2020[96]). In Switzerland, for example, the carbon tax bill passed in 2018 included allocating about two-thirds of the tax revenue to redistribution to households and firms (D’Arcangelo et al., 2022[92]). The National Debate on Carbon Pricing identified options for carbon pricing, including targeted social transfers and public investment to support the transition to a low carbon economy, and should be followed up (Box 1.5).
Figure 1.31. More effective pricing of carbon emissions is needed
Note: Panels A and B: Data include explicit carbon pricing from carbon taxes, ETS and fuel taxes, not other market and regulatory measures or public service obligations. Panel C: Data include direct transfers, preferential loans, collateralised loans, capital injections, tax credits, tax reductions and other fiscal incentives involving a loss of revenue, public provision of services and public purchases of goods, public price and income support.
Source: OECD (2022), Effective Carbon Rates database; and Our World in Data.
Fossil fuel subsidies are among the highest in the EU (Figure 1.31, Panel C), which undermine the carbon price signal, discourage the efficient use of energy resources and contribute to poor air quality. The recent inventory of the fossil-fuel subsidies by the federal government is welcome (FPS_Finance, 2021[97]), and the plans for their gradual phase-out in the 2019 national climate and energy plan should be implemented. There will be a need to adopt a sequential approach to minimise the political backlash and risk of backtracking that often accompanies such reforms (Elgouacem, 2020[98]). For example, establishing a multi-stakeholders’ mechanism to monitor and support the reform of environmentally harmful subsidies, as in France, can help (OECD, 2021[89]).
Box 1.5. National Debate on Carbon Pricing
In 2017, the federal government launched a national debate on the potential modalities for implementing a carbon price in non-ETS sectors, based on an exchange among Belgian and foreign experts covering the public, private, academic and trade union sectors. Options considered to introduce an additional carbon component to excise duties with the possibility, in the transport sector, to shift to road pricing. Three price trajectories were assessed, starting from EUR 10/tCO2 in 2020 to EUR 40, EUR 70 or EUR 100/tCO2 in 2030. The analysis showed the impact of higher carbon pricing could be manageable, especially when additional fiscal revenue (up to EUR 2.6 billion annually by 2030 at EUR 70/tCO2) is used to compensate for potential adverse impacts and finance complementary measures and provided a roadmap for reform. A public survey revealed potentially high support of the Belgian population for carbon pricing, provided compensatory measures are implemented.
Source: (NDCP, 2018[99]); (OECD, 2021[89]).
In the face of the war in Ukraine and rising energy prices, the commitment to phase out nuclear electricity generation by 2025 has been reconsidered. The federal government decided in March 2022 to take the necessary steps with a view to extend the lifetime of 2GW of nuclear capacity for a period of 10 years. Phasing out nuclear energy requires major investment in power generation, cross-border interconnections, smart grids, storage and demand response, given the high share of nuclear power in electricity generation in Belgium (Figure 1.32). To ensure electricity supply, Belgium developed a capacity remuneration mechanism (CRM) that will use auctions to support deployment of additional generation capacity and retention of existing capacity. This additional time should be used to ensure clarity on the policy stance on nuclear energy, increase certainty and promote private investment in alternatives. Hence, it is welcome that a package of measures, including fiscal incentives to boost electrification, speeding-up the delivery and extending the capacity of offshore wind developments, improving electricity interconnection, faster development of a hydrogen backbone and reducing administrative and technical barriers to the deployment of renewable energy (EUR 1.2 billion) was simultaneously announced.
To enable a smooth phase-out of nuclear energy as agreed by the federal government in March 2022, securing electricity supply and contingency planning will be important. Regional permits will be needed for the timely deployment of projects to prevent the CRM from missing its targets, which can cause delays. With the additional time to prepare, the authorities should identify and mitigate such risks and prepare clear scenarios for maintaining generation adequacy after the phase-out in case the CRM insufficiently triggers investments. The potential deployment of new gas-fired electricity generation resulting from the nuclear phase-out is expected to increase emissions. While a royal decree made it mandatory for new plants to commit to net-zero emissions by 2050, more detailed plans to reduce the climate impacts of any new gas-fired generation and provide guidance to investors could be useful (IEA, 2022[100]).
Figure 1.32. Nuclear is major source of the energy supply and electricity generation
Note: Panel B: Gross electricity production.
Source: IEA (2021), Electricity Information Statistics - OECD Electricity and Heat Generation (database), International Energy Agency, Paris.
Table 1.12. Past OECD recommendations on environment and energy
Table 1.13. Recommendations on macroeconomic and structural policies
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