Belgium must regain its long-term financial sustainability after COVID-19
Like all other countries, the Belgian economy was hit hard by the COVID-19 outbreak in 2020. Since then, vaccine launches have accelerated and there is now room for optimism. According to the recent European Commission Economic Outlook for Spring 2021Indeed, all EU member states must see their economies return to pre-crisis levels by the end of 2022.
In an interview with The Brussels Times, economics professor André Decoster at the Catholic University of Leuven (KUL) gave his view on key economic indicators in the commission’s forecast, comparing Belgium with its neighboring countries and Belgium’s future macroeconomic challenges. Economy. .
Question: What are the most pressing issues on Belgium’s economic agenda after the health and economic crises during COVID-19?
AnswerThe most pressing issue is long-term fiscal sustainability – neither the government deficit nor the high debt level, which now stands at 115% of GDP. In Belgium, there is a problem of long-term fiscal sustainability given the projected spending on pensions, projected spending on healthcare, and given the options the previous government made on the revenue side.
Economists have indicators to express the imbalance between expenditures and revenues in the very long run. Before the coronavirus crisis, these indicators showed that the initial structural balance needed to improve by about 4% of GDP to restore fiscal sustainability. It is important to emphasize that it is not the epidemic that has created the challenges of financial sustainability.
Restoring long-term financial sustainability will consist of both measures to improve expenditure management and reform the revenue side to strengthen social support for contributions and / or taxes. In terms of expenditures, the current government has pledged to put in place a plan to contain the increase in pension expenditures.
The first drafts of this plan were pledged in September of this year. There are no indications yet that this will be realistic. Previous attempts to rebuild the publicly funded portion of the pension system have always failed.
In terms of income, there are two challenges: the current financial system, especially income tax and corporate tax, is considered to be very unfair and complex and the average tax rate is very high.
The second, lesser known challenge is the erosion of social security financing sources. The two main sources now are social security contributions to work income and government benefits. Social Security contributions have been reduced to lower labor costs, but this affects the finances of the system.
In short, what we need is pension reform, basic tax reform, and a long-term vision for how to finance Social Security.
Question: How has the Belgian economy, compared to other member states of the European Union, affected by the 2020 crisis in terms of economic growth, unemployment, budget deficit and debt ratio? How do you expect the economic recovery in 2021 and 2022 in terms of these key numbers?
a: There are two types of macroeconomic forecasting sources. One is Expectations Belgian Federal Planning Office (FPB) It was produced in February 2021. It will last until 2026 and has been submitted to the European Commission. The other is the commission Economic Outlook for Spring 2021 From May. Both forecasts are broadly the same, but the commission’s projections include comparable numbers for neighboring countries.
According to the European Commission’s spring forecast, the sudden decline in Belgian GDP in 2020 by -6.3% was in line with the average of the European Union (-6.1%) and the Eurozone (-6.6). The forecast for this year is + 4.5%, which is again equivalent to the average of the European Union and the Eurozone. The decline in GDP for 2020 is larger than the decline in Germany and the Netherlands, but smaller than in France.
However, the expected recovery for the Netherlands and Germany is also lower than the expected recovery for Belgium and France. The overall growth of Belgium and France in 2022 is slightly less than that of the Netherlands and Germany.
Unemployment is expected to increase by +0.9 percentage points in 2021 and decline by -0.2 percentage points in 2022. Unemployment figures again show that the Belgian macroeconomic performance is following France better than the Netherlands and Germany.
Bottom line: there is no real difference between Belgium and the neighboring countries. The real difference between the EU and the US / China. And internally in the European Union (and with the United Kingdom).
Q: Belgium has (or has in the past) one of the highest tax burdens in the OECD, with high marginal taxes and an emphasis on labor and social taxes. Will this change in the future with shifts in consumption taxes and green taxes to reduce greenhouse gas emissions?
aThe current government has announced a “fundamental tax reform” to address perceived problems (excessive taxes on employment; perceived inequality) and less perceptive problems (inefficiency of the tax system). The Minister of Finance was tasked with preparing a report / review by a group of experts / academics. The kit has not been installed yet but may be announced soon.
Its main purpose is to reduce corporate income taxes and not necessarily reduce total tax revenue as a percentage of GDP. Some voices in the public debate are already supporting the shift to a value-added tax / excise tax on goods and services. Except for environmental reasons, I do not endorse this view. Like many economists, I think the shift from a labor tax to a value-added tax has only secondary effects.
If one really wants to distance himself from work, then there is only another source of income, namely, the capital of the production worker. Even without shifting the balance between labor and capital, I believe there are significant gains to be made by reforming the capital income tax: making it more neutral to different forms of investment, moving away from transaction taxes, and taxing capital gains.
For personal income tax, the year-round recommendation to broaden the tax base by removing all kinds of tax deductions can easily lower the average rate.
Q: Many countries were underfunded for health systems before the crisis, and today there are demands to fill the gaps. Do you expect a sharp increase in the health budget as a result of the crisis?
a: The COVID-19 crisis was already a stress test for the Belgian healthcare system. But most people would agree that it performed well. If there were problems in the first wave, it had to do with nursing homes.
However, there are long-term challenges to matching the increase in healthcare expenditures with additional income. The immediate effect I now notice is that the public call, or political struggle, to limit this increase is now somewhat muted. However, this reaffirms one of the aforementioned challenges: developing a viable and credible plan to finance increased spending on Social Security; Especially in healthcare, if this increase is driven by technological advances.
Q: One of the most popular EU measures to help member states deal with the economic crisis during the pandemic is the “proven” tool for obtaining loans to finance short-term national action plans so that companies can keep their employees with support. Of the state income for hours that did not work during the crisis. How was the situation in Belgium? How many workers are they expected to return to their previous jobs?
a: Belgium received 8.2 billion euros in financial support under the SURE social insurance system, of which 6.2 billion euros have already been paid out. Spending on unemployment benefits more than doubled from 4.8 billion euros in 2019 to 12.7 billion euros in 2020. This increase of 7.9 billion euros is mainly a result of temporary support mechanisms for both employees and the self-employed.
In 2020, one in three employees, or 1.4 million employees, became temporarily unemployed as a result of COVID-19 in 2020. At the height of the first wave – March / April 2020 – 1.2 million were temporarily unemployed, and this decreased to About 300,000 in January 2021. They earned 70% interest on their earnings during the period they were unable to work, which is higher than the replacement rate of 65% before Covid-19. Access to the system has also been made easier.
Self-employed persons who have been temporarily forced to cease their activity receive a lump sum allowance of up to 1,600 euros per month. In addition to the federal ‘Income Compensation Scale’, there were also several support measures from the three regional governments, focusing as much as possible on the sectors most affected (hotels – restaurants – coffee shops; cultural events, etc.). This regional support varied greatly from region to region.
The costs of the two federal measures amounted to 4 billion euros and 3.4 billion euros, respectively, in 2020. Thus the aforementioned increase in spending of 7.9 billion euros is mainly attributed to these two measures. The two measures will continue in 2021, albeit for a limited number of people, so it appears that total spending on income support mechanisms will exceed € 8.2 billion in financial support under the SURE program.
It is difficult to answer the question of how many employees are expected to return to their previous jobs. The hope for a “temporary” support mechanism is that all workers, after a temporary hiatus, will return to their jobs and resume their activities.
The decline in the number of temporary unemployed persons from a peak of 1.2 million at the start of the first wave to about 300,000 in early January 2021 indicates that a large proportion of the temporary unemployed have resumed their original activity. However, this does not mean that unemployment is unlikely to increase in the coming months, driven by momentum in hard-hit sectors once government support mechanisms are withdrawn.
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