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• Mark
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  Basic statistics of belgium, 2010
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  Executive summary
  Belgium weathered the crisis well with a relatively modest rise in unemployment. Subsequently, the economy has been recovering faster than the euro area and the fiscal deficit is falling rapidly. Nevertheless, Belgium is at a crossroads with public debt at 97% of GDP, and a renewed and sustained effort to prefund ageing costs is needed, including revisiting intergovernmental prefunding agreements. To boost subdued potential growth, measures to substantially increase employment are required while greener growth should be secured through more extensive use of environmental taxation.
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  Assessment and recommendations
  Belgium has weathered the global crisis relatively well, with a smaller rise in unemployment than the OECD average and an economic recovery that is stronger than in the euro area. At the same time, inflation has accelerated from one of the lowest to one of the highest in the euro area (it stood at around 3½ per cent in early 2011), reflecting a relatively fast and strong pass-through of energy prices. This may create a risk to the recovery as persistent inflation pressures, arising from the automatic indexation of wages (as well as transfers and a number of service prices) and weak competition in energy markets may eventually hurt Belgian cost competitiveness.
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  Bringing public finances to a sustainable path
  Economic growth is projected to be strengthening from mid-2011 onwards, but will be insufficient to restore the sustainability of public finances. The Belgian strategy to prefund ageing costs by generating fiscal surpluses to bring down public debt was derailed by the global crisis. Restoring the strategy is a priority, especially as spreads on Belgian debt have increased. This will require cuts in public spending, improving efficiency of policies, containing the growth of ageing-related costs and making the tax system more conducive to growth. While past experiences, such as in the 1990s, have shown that successful large consolidations are feasible, the task seems even more difficult this time as potential growth will be muted and interest rates are likely to increase. In this context, a credible fiscal consolidation plan requires the participation of all governments. Its effectiveness can be strengthened by improving the fiscal framework, in particular by introducing multi-year budgets, annual expenditure rules consistent with long-term targets and an enhanced role of an independent fiscal policy watchdog.
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  Enhance the inclusiveness of the labour market
  The global crisis led to a smaller increase in the unemployment rate than in most other OECD countries as employment has been sustained through intensive use of reduced working time schemes. These schemes have mostly benefited workers with permanent contracts while the higher unemployment mostly affected workers with weaker labour market attachment. A main challenge for policy makers is therefore to avoid that the increase in labour market segmentation between insiders and outsiders that would hurt the most vulnerable. Over the medium term, labour market policies need to respond to the ageing of the labour force, which implies that an increasing number of workers with permanent contracts will retire. Thus, policies must focus on enabling the current labour market outsiders to get a stronger foothold on the labour market as well as to mobilise under-utilised labour resources. The wage determination system has allowed wages to increase faster than the main competitors and faster than productivity, leading to a gradual loss of cost competitiveness. Minimum wages are high by international standards, hampering entry to the labour market for many low-skilled workers. Unemployment benefits are relatively generous, and particularly for long-term unemployed. A complicated tax-benefit system has created high effective marginal tax rates and numerous labour market traps.
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  Greener growth in the Belgian federation
  The degradation of the environment due to climate change and pollution can harm living standards and damage growth prospects. In Belgium, one of the most densely populated OECD countries, pressure on the environment is particularly strong, and is reinforced by the high energy intensity of the economy and concentrated agriculture. Environmental policy backlogs accumulated over the years highlight the challenges of reducing greenhouse gas emissions and water pollution in a cost-efficient way. To achieve environmental goals at minimum cost across the economy polluters should face the marginal costs of the externalities they impose, which should be achieved by increasing reliance on environmental taxation. Potential adverse effects on income distribution could then be addressed in the tax benefit system. Moreover, where environmental responsibilities are better dealt with at the regional level, regions should have the most efficient tools, such as taxation powers. Where, due to economies of scale and scope or important cross-regional effects, environmental issues are better dealt with at the national level (for instance in renewable energy sources and transport policies), better coordination among regions or a greater role of the federal level should be envisaged.
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  Glossary
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