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Chapter 2: securing fiscal sustainability during the economic downturn and beyond.

The current strategy toward fiscal sustainability needs to be revised

The government needs to revise its pre-funding strategy for securing fiscal sustainability through generating increasing surpluses in order to reduce the high public debt-to-GDP and thus free up resources to finance the costs of ageing (as laid down in the Ageing Law and described in Stability Programmes). The current crisis is significantly widening Belgium's sustainability gap. Prior to the crisis, the sustainability gap in Belgium was above the average in euro area countries and the relative position has deteriorated since previous assesments. Estimates from the European Commission show that maintaining fiscal sustainability (i.e. financing ageing related costs without abrupt spending cuts or tax increases) requires a primary surplus of 6.3% of GDP during 2012-2016 (EC, 2008). However since then, the starting point for the primary fiscal balance has deteriorated, which leads to a significant worsening of the sustainability gap estimates. Moreover, previous estimates were based on macroeconomic assumptions that may no longer be relevant. Potential growth was assumed to fall on the back of an ageing population, but also to be sustained by higher labour productivity and higher participation rates. However, if the current crisis turns out to have a long-lasting negative impact on the functioning of the economy -especially if the government does not succeed in maintaining growth-oriented policies during the current downturn (Chapter 1)--the assumptions on productivity growth and higher participation rate will prove unrealistic and the sustainability gap estimates could deteriorate further (Box 2.1).

A new strategy for securing fiscal sustainability needs to be credible. Accordingly, it should avoid fiscal stimulus measures that will lead to a structural deterioration in the fiscal balance and, in case this is not possible, offset the negative impact of such measures by implementing policies that will eventually have a positive impact on the structural fiscal balance. If these requirements are fulfilled, new fiscal measures will support the economy during the downturn without putting the sustainability of public finances at risk in the medium term. The government should aim at supplementing the pre-funding strategy by reducing the burden of ageing, primarily through more ambitious pension reforms. It should also strengthen the credibility of a new medium-term strategy by accompanying it with stronger fiscal rules and a larger role for external experts. Finally, the institutional arrangement between the federal and the regional levels of government should be revised in a way that preserves, or even improves, fiscal sustainability, as discussed in Chapter 3.

Short-term fiscal measures should not be detrimental to long-term sustainability

As discussed in Chapter 1, the government has adopted fiscal stimulus measures in order to support the economy during the crisis. However, some of the adopted measures may further undermine long-term fiscal sustainability, as they are permanent and not accompanied by a sunset clause that would automatically withdraw the measure once fiscal stimulus is no longer necessary (Box 2.2). Permanent or likely permanent measures include those taken in the context of the wage agreement, some of the energy subsidies, the general reduction of labour charges and the additional reduction for night and shift workers. On top of their (quasi) permanent nature, a number of these measures do not appear timely (some public investments will be implemented with a considerable delay) or well targeted to households and companies most affected by the crisis (most of the energy subsidies will affect all households, the general reduction of labour charges will affect all employers and the additional reduction for night and shift workers, aimed at assuring competitiveness of exporting industries will also affect workers in domestic-oriented sectors). Also, some measures, such as the higher benefits for workers on reduced working time (chomage temporaire) or energy subsidies, will dampen the incentives for structural adjustment or harm attempts to meet environmental objectives.
Box 2.1. Ageing costs and sustainability gaps remain daunting

According to the most recent study of the Study Committee for
Ageing (June 2008) the net cost of population ageing will increase
by 6.3% of GDP from 2007 to 2050--an estimate that is in line with
that of the European Commission (Table 2.1 and HCF, 2008). On the
other hand, OECD calculations indicate that ageing related
increases in health costs could be larger (see previous Survey).

A usual way of assessing sustainability of public finance is to
estimate the permanent adjustment of fiscal revenues necessary to
achieve sustainability, the so-called tax gap or "sustainability
gap". These gaps come in different versions. The European
Commission calculates a sustainability gap--the so-called S2
indicator--which shows the difference between the primary balance
required in order to meet the criterion for sustainable fiscal
policy over the infinite period--equating the current value of debt
and future discounted values of primary surpluses--and the actual
structural primary balance. In 2007, the sustainability gap was
estimated to be 3% of GDP (EC, 2008). However, the primary balances
have since then deteriorated, and the accumulating public debt is
also raising the required primary balance. Thus, with the 2008
structural primary balance at about 1.8% of GDP (Stability
Programme, 2009), new estimates of the sustainability gap exceed 4%
of GDP. Looking forward, with the assumption of unchanged policies,
the sustainability gap is likely to exceed 7% of GDP by 2011. In
addition, deviations in the macroeconomic assumptions could further
increase the sustainability gap. Sensitivity scenarios by the
European commission show that a permanent decrease of labour
productivity by 0.25 percentage point increase the tax gap by 0.3
percentage point; a decrease of the total employment rate by 1
percentage point would increase the tax gap by the same amount.

Box 2.2. Fiscal stimulus measures in response to the crisis

The discretionary fiscal stimulus measures adopted by the
government in response to the unfolding crisis concentrate mainly
on sustaining purchasing power, employment, and supporting
enterprises. More specifically, the fiscal actions are oriented at:

* Relief for enterprises:

* Facilitating credit access and the abolition of the tax on credit
insurance.

* Measures to improve the liquidity of companies in financial
trouble, including possible deferral of tax payments, reduction of
penalty interest rates, and faster VAT refund on behalf of the
government.

* Measures intended to compensate companies for the rise in
salaries, agreed upon in the inter-professional agreement: reduced
taxes and charges including wage subsidies implemented through a
reduction of withholding taxes paid by companies (both general
subsidies and specific subsides for the employment of night, shift
and R&D workers) and a tax reduction for overtime.

* a reduced VAT rate for a number of construction activities.

* Guaranteeing employment and purchasing power:

* The increase of: benefits for workers on reduced working time
(chomage temporaire); certain professional deductions; pensions for
employees and self-employed, social benefits (enveloppe bien-etre).
Introduction of an electricity bill subsidy.

* Measures oriented at facilitating job-seeking for workers subject
to restructuring.

* Investing in sustainable growth:

* Additional funds for environmentally friendly investments to
reduce energy consumption, including investments in public
buildings, accelerating a number of infrastructure projects.

* The government also included the improvement of export financing
facilities under this heading.

Furthermore, in late 2008, the regional governments have announced
their own limited fiscal stimulus packages. Both the Flemish and
Walloon plans are to focus on facilitating credit access, some
labour market policy initiatives and measures to accelerate public
investments. The costs of these investments are to be financed
through public private partnerships. The Flemish government decided
to add a second stimulus package in January 2009.


In this light, the government should, as a priority, implement scenarios for phasing out the stimulus measures as soon as they are no longer necessary. If the government is determined to introduce further fiscal stimulus, it should simultaneously incorporate measures improving fiscal sustainability over the medium term. For example, packaging short-term stimulus together with compensatory long-term structural improvements may take the form of combining a rise in unemployment benefits with a restriction in their duration and an increase in their regressivity. Such accompanying measures will create more dynamic job search incentives once the crisis subsides--hence fostering growth and alleviating sustainability issues in the long term--without damaging the immediate discretionary fiscal support to the economy.

Postponing fiscal consolidation will shift the ageing cost burden to younger generations

As a result of the fiscal response to the crisis, the fiscal deficits have widened further. The High Council of Finance (HCF) has recently estimated that the general government deficit in 2009 will reach 3.5% of GDP and, with unchanged policies, will rise to 5.1% of GDP in 2011, which is 6 percentage points below the government's target as presented in the previous Stability Programme (Stability Programme 2008 and Table 2.2). OECD projections are more pessimistic with projected deficits of around 4.5% of GDP in 2009 and above 6% of GDP the following year (OECD, 2009). The path back to a balanced budget has de facto been significantly shifted away. The HCF calculated that, under unchanged policies, a significant tightening of 1.1% of GDP per year starting already in 2010, would be necessary to achieve a fiscal balance by 2013 (HCF, 2009). In response to the aggravating problem with the sustainability of public finances, in April 2009 the government presented an updated Stability Programme, which stipulates a more gradual adjustment to achieve a fiscal balance by 2015, in accordance with an alternative HCF scenario. The government's plans condition the consolidation in a given year on real GDP growth, but so far no details have been given on how the consolidation will be achieved. Therefore the next step should be to design concrete measures, starting in 2010 and at all levels of government, to achieve this objective. If this consolidation path is to be reached without an increase in taxes, it would require the government to at least stabilise expenditures in real terms, which is an ambitious task given the average (structural) real primary expenditure growth of about 2.5% in the period 2002-2008.

The fiscal response to the crisis, coupled with the government interventions in the financial sector (Chapter 1) and budgetary slippage in the previous years, will lead the public debt-to-GDP ratio at the end of 2010 to be about 26% of GDP higher than in the scenario laid out in the previous Stability Programme (Figure 2.1). OECD calculations show that, in order to reduce this additional burden of public debt by 2050, the primary balance generated annually over 2011-2050 will have to be on average 0.7% of GDP higher than in the previous, already ambitious scenario (the additionally required primary balance is 0.5% of GDP if debt increases resulting from interventions in the financial sector are excluded). The previous pre-funding scenario already assumed generating primary balances above 4% of GDP until 2020, only gradually reducing to a primary balance by 2040 and roughly maintaining it afterwards (Stability Programme, 2008). The additional effort required makes the prefunding objective, which has already proven difficult to achieve, increasingly problematic. This points to the fact that prefunding needs to be complemented with reforms to reduce ageing costs and boost the potential growth of the economy (see below).

[FIGURE 2.1 OMITTED]

Moreover, postponing prefunding has implications on intergenerational equity, putting a disproportionate burden on future generations. Simulations comparing scenarios of "early adjustment" (increasing primary balance till 2015 in order to achieve a balanced budget by 2050) and "gradual adjustment" (spreading the increases over 2008-2050) show that early adjustment entails a more even cost of ageing to be borne by all generations born after 1990, while gradual adjustment entails a sharp increase in costs for future generations (Balassone et al., 2009). For example, in the gradual adjustment scenario, the life-time cost for Belgian men born in 201B would be about 25% higher than for those born in 1990 and the cost for men born in 2050 would be 40% higher than for those born in 1990.

Restoring a credible path towards sustainability requires better expenditure control and institutional reforms

As laid out in the new stability programme, the government intends to maintain the prefunding element of its strategy to restore fiscal sustainability. Hence, the government should aim at bringing public finances in line with medium-term objectives as soon as possible, which is a challenging task. One way to close the sustainability gap is through increasing taxes. As the tax system is complicated and generally not particularly conducive to growth, there is room for tax reform, which is discussed in Chapter 4. However, the tax burden in Belgium is already high and even higher taxes will hamper economic growth. Therefore, government needs to increase the emphasis on the other elements of the strategy. Structural reforms increasing labour market participation and enhancing productivity have been proposed in the previous Survey and in Chapter 5 of this survey. But, because most of these reforms will have their full effects only in the long run and their eventual impact remains uncertain, the government should not take into account such effects when revising its medium-term fiscal objectives, which should be based on conservative growth assumptions. Higher growth owing to structural reform should be treated only as an upside risk. Consequently, the main element of the strategy should be to limit expenditure growth, given the empirical evidence that consolidation through the control of expenditures tends to be the most sustainable in the long run (see Guichard et al., 2007). In that respect, controlling the increase in ageing-related expenditures is a key issue.

The delayed pre-funding strategy requires more ambitious pension reform

Theoretically, there are a number of areas for potential savings or outcome improvements on the expenditure side beside ageing-related expenditures. For example, while health spending seems relatively efficient compared to other European countries, there seems to be room for improvement in the efficiency of spending on public order and safety, and on education in the French-language Community (Eugene, 2008). Another route, which the federal government is intending to follow, is to take advantage of the age structure of the federal employees to reduce their number. The fact that during the next decade a large number of federal civil servants will retire, allows potential savings by only partially replacing retiring staff. (1) However, the delayed pre-funding strategy, while ageing costs are about to rise significantly, requires a more thorough control of expenditure by implementing a more ambitious pension reform.

The costs of ageing will mostly fall on the social security system which is a federal responsibility. Indeed static calculations indicate that if these costs were to be financed only through the social security contributions, these would have to increase by roughly 50% (from 12% of GDP to 18%). This implies that the standard contribution rate would have to go up from around 48% to above 70%. (2) The magnitude of these results highlights the fact that substantial reform is urgently needed.

The replacement ratio (pension payouts relative to the final salary) is already relatively low compared to many other OECD countries, in particular outside the public sector (OECD, 2007a). Therefore, there seems to be little room for a substantial lowering of future pension payouts. On the other hand, the effective retirement age, slightly below 60 in 2007, is low by international comparison (OECD, 2006). Previous Surveys recommended further steps to discourage early retirement and, although the measures adopted are starting to yield effects, they will not be sufficient and efforts should be increased. Furthermore, they should be accompanied by an increase in the legal retirement age, currently at 65. The government has already increased the legal retirement age for females making it equal to the one for males, however a number of OECD countries have a higher legal retirement (e.g. Norway, Iceland and since recently Germany) of 67 and others are seriously considering such an increase (e.g. the Netherlands). In order to improve the incentives to work beyond the official retirement age, the government needs to lower the effective taxation of continued work, for example through an enhanced bonus/malus system linking pension payouts to the age at retirement.

Institutional reform should foster the credibility and the ownership of the medium-term strategy

The previous Surveys discussed in detail the past achievements of consolidation of public finances. Historically, the impressive decrease in public debt to GDP ratio in the second half of the 1990s owed much to a structural improvement in public finances, although the decrease in interest payments also played a positive role. However, the track record has deteriorated more recently. Despite high GDP growth, fiscal policy has generally remained expansionary throughout the 2000s (Figure 2.2). Political problems with establishing a government lead to delayed approvals of 2007 and 2008 budgets, and may have resulted in less ambitious objectives, as reflected in the 2008 Budget, which aimed at a general government balance significantly below the High Council of Finance's advised scenario of a 0.5% surplus (HFC, 2008).

[FIGURE 2.2 OMITTED]

These recent slippages (Figure 2.3) emphasised that a durable improvement in the fiscal balance needs to be of structural nature. In that respect, more recent achievements are disappointing: the fiscal balance deteriorated by a cumulative 0.7% of GDP between 2001 and 2007 despite lower interest rates and favourable cyclical developments. The deterioration in the structural primary balance reached above 3.5% of GDP over the same period. An analysis of the factors behind the changes in the structural balance, Box 2.3 shows that the negative impact of tax reduction on the structural balance (1.8% of GDP over the 2002-2007) was only partially offset by an expenditure effort and partly rested on non-discretionary factors, which may prove unsustainable. This also means that the tax reductions in 2000s (see Chapter 4) were not fully backed with expenditure control.

This analysis suggests the government needs to refine the institutional framework for fiscal policy in order to favour sustainable improvement in the fiscal balance. As emphasised in previous Surveys, the government should adopt an explicit structural target for the budget balance. A cyclically adjusted target, which excludes one-off measures, should allow the budget to achieve the long-term goal of fiscal sustainability while allowing for automatic stabilisers to fully work in the short-term. The government could draw some inspiration from countries such as Switzerland (or Chile) which have structural targets in place, especially on how to solve some technical difficulties, such as the estimation of the business cycle (e.g. the end-of-sample problem, estimating potential output). The rule should be kept as transparent as possible. The forecasts and estimations of structural and cyclical components should be delegated to an independent institution such as the Federal Planning Bureau (FPB) to enhance the transparency and credibility of such a measure.

[FIGURE 2.3 OMITTED]
Box 2.3. To what extent do discretionary efforts contribute to the
fiscal sustainability?

An improvement in the structural fiscal balance has different
implications for fiscal sustainability depending on whether it
originates from new tax measures or from a better control of
expenditures. Empirical research shows that consolidation through
the control of expenditures tends to be more sustainable (see
Guichard et al., 2007). Furthermore, an increase in tax collection
does not necessarily reflect a discretionary effort by the
government to collect extra revenues. Tax elasticity fluctuates
overtime and may lead to exceptional--and consequently
unsustainable--tax revenue levels.

This phenomenon has an important consequence: it blurs the
interpretation of the structural balance change. An improvement in
the structural balance owing to higher tax elasticity may be
attributed to government efforts although it is out of the
government control. This fallacious interpretation stems from the
construction of the structural balance, which is computed as the
"residual" between the actual balance and its cyclical component
(the structural balance is derived from the "cyclically-adjusted"
balance, a concept computed as the "residual" between the actual
balance and its cyclical component). Consequently, any factor that
does not explicitly appear in the cyclical balance is, by
construction, of structural nature, including short-term
fluctuations in tax elasticity.

A more satisfactory measure of the discretionary component of
public finances has been proposed, among others, by Duchene and
Levy (2003). Their analysis focuses on two "structural effort"
factors that explain changes in the structural balance: i) the gap
between the growth in public expenditure and potential growth,
which may be called the "structural expenditure effort", and ii)
the new measures affecting the tax burden (compulsory levies
collected by the general government). These two factors clearly
show the discretionary power of the government as limiting the
expenditure growth rate or raising taxes can lead to a sustainable
improvement in the government balance. The residual part of the
change in the structural balance can be attributed to
non-discretionary factors as it mainly arises from changes in tax
elasticities (and more marginally to non-tax revenues) that do not
lead to a sustainable improvement in the government balance. Using
this approach, Table 2.3 below helps analysing the underlying
factors of the change in the Belgium fiscal balance since end-2001.

Between end-2001 and end-2007, this analysis indicates that the
cumulative change in the structural balance is equal to zero. This
is insufficient in view of the long-term sustainability of Belgium
public finances. First, the evolution of the structural fiscal
balance obscures the fact that a substantial fiscal loosening is
partially offset by the fall in interest payments of more than 2.5%
of GDP in the same period. Second, even a neutral fiscal stance is
not sufficient to address the projected rise in ageing-related
costs. Third, the analysis through the "structural effort" concept
shows lacks of discretionary efforts, which may endanger fiscal
sustainability. Over the 2002-2007 period, new tax measures have
led to a reduction in tax burden by 1.4% of GDP. The negative
impact of this tax reduction on the structural balance was only
partially offset by an expenditure effort (0.4% of GDP over the
period) and, overall, the discretionary effort to improve fiscal
sustainability was negative during this period (-1% of GDP).
Financing of tax reductions mainly relied on an improvement in
non-discretionary factors (1% of GDP).

The above analysis suggests that Belgium financed three quarters of
tax reduction with higher revenues from non-discretionary factors
(above average tax elasticity or changes in non-tax revenues),
which may prove unsustainable and consequently endanger the
long-term sustainability of the fiscal balance.


The credibility of the above commitment should be strengthened by switching to multi-year budgeting, which has proven effective in a number of OECD countries including Australia, New Zealand, the Netherlands and the United Kingdom and imposing explicit expenditure rules, which can be done either at the overall level of the budget or at the level of individual spending departments. Multi-year budgeting allows for a more coherent long-term path of government policies together with the prioritisation of strategic goals, which can be planned within a longer time frame. Individual budget line units such as ministries and government agencies should be subject to strict expenditure control and should be responsible for reaching their sub-part of the planned multi-year budget within the overall spending target. This would induce automatic compensation for overspending in one area with cuts in other areas, leaving some room for manoeuvre while saving overall fiscal discipline. The credibility of multi-year budgeting could be enhanced by requiring the government to explain deviations to the legislature, as part of the budget presentation. An additional benefit of multi-year budget plans may be apparent in the Belgian context of repeated problems with establishing a government coalition. If these problems were to reappear in the future, multi-year budgeting could help maintain fiscal policy on its desired path during the interim period.

The budgetary process has been favourably judged in the previous Survey for the involvement of independent institutions and thorough budget controls (see also NBB, 2008). Nonetheless, further increasing the role of independent institutions should enhance the budget control. The Federal Planning Bureau (FPB) is already in charge of preparing the macroeconomic forecasts to be used as inputs for the assumptions for the budget. Its role in this process should be expanded to evaluate the projected budget outcomes with the assumption of unchanged policies, to provide a publicly available baseline for the effects of fiscal policy. A somewhat similar setup seems to function well in the Netherlands. Additionally, more transparency in the budgetary process should benefit credibility. In order to clarify the budget objectives, therefore, newly introduced measures should be accompanied by the expected non-fiscal effect of the measure (e.g. number of created jobs), in order to facilitate their ex post evaluation. The performance of the measure relative to the initial assumption could be later evaluated by the FPB, and the government should be obliged to explain any substantial deviations in the budget outcomes before the parliament. (3)

While a very detailed overview of the government budget proposal is published on the parliament website a simpler and concise overview of the budget should also be available. This would ideally include the main budget assumptions and objectives, the main figures, assumptions (e.g. tax elasticities), policy changes and their foreseen effects and an analysis of the fiscal stance. Some of this information is already available in the budget Overview. Moreover, the budget, together with all the related documents (e.g. results of the Budget Control), should also be available on the website of the single delegated ministry responsible. This would increase the transparency of the budget and facilitate access to information for the wider public, thereby contributing to the credibility of the government's long-term objectives.

Finally, much of the consolidation responsibility lies at the federal level. As a result of the devolution of powers and the tax revenue sharing mechanism (see Chapter 3), the federal level is faced with a mismatch between its dynamically increasing spending responsibilities, mainly through the social security system, and relatively slow-growing revenues. Consequently, substantial changes to the fiscal federalism framework are needed to realign the spending and revenue responsibilities and improve the incentives to curb expenditure on all levels of the government (see Chapter 3).
Box 2.4. Policy recommendations to secure fiscal sustainability

* In light of the severe economic downturn, the automatic
stabilisers should be allowed to work fully. However, the
government should restrain from further discretionary stimulus, in
particular if unilateral, given the severe problems with fiscal
sustainability.

* The government should ensure the measures already introduced are
withdrawn once the crisis subsides. Any further measures to
stimulate the economy, if necessary, should be timely, i.e. lead to
a short-term stimulus effect, well targeted at groups most affected
by the crisis, and accompanied by a sunset clause to guarantee
automatic withdrawal.

* It is desirable for counter-cyclical measures to be coupled with
measures improving long-term sustainability. Such measures can take
the form of, for example, an increase in unemployment benefits
together with a limit on their duration and steeper regressivity to
provide more dynamic job-search incentives.

* The government should supplement the strategy of prefunding
upcoming costs of ageing with structural reforms in the pension and
health systems in order to reduce these costs. Therefore pension
reform should be sped up by increasing the effective and legal
retirement age in order to reflect past and future gains in life
expectancy.

* In order to assure partial catch-up to the previous budgetary
targets over the medium term, the pre-funding strategy should set
realistic medium-term targets and be accompanied by credible
instruments to guarantee their achievement. The budget targets
should be structural, in order to reduce the pro-cyclical tendency
of the fiscal policy during periods of high growth. Multi-year
budgeting should improve the room for manoeuvre in the short term
while stressing the priority long term goals. Individual ministries
and agencies should be subject to strict spending targets and
should compensate overspending in one area with cuts in another. An
additional improvement can come from the introduction of
expenditure rules.

* The credibility of the budgetary process can be increased by
fostering the role of independent institutions. For example, the
Federal Planning Bureau should not only prepare the macroeconomic
budget assumptions but also evaluate the budget proposal and carry
out updates during the year. It should assess the effectiveness of
budgetary measures in terms of fulfilling their economic
objectives.

* In order to increase the transparency, the budget should also be
presented in a more streamlined version, including the main figures
on assumptions (e.g. the tax elasticity) and outcomes, and new
measures introduced together with their expected (fiscal and
non-fiscal) impact. It should also be placed on the website of the
responsible minister together with the results of budget controls
and adjustments made to the budget.


Bibliography

Balassone, F., J. Cunha, G. Langenus. B. Manzke, J. Pavot, D. Prammer and P. Tommasino (2009), "Fiscal Sustainability and Po]icy Implications for the Euro Area", Research Series Working Paper, No. 155, National Bank of Belgium, January 2009.

Budget (2007), Budget des recettes et des depenses pour l'annee budgetaire 2007, Expose general, DOC 51 2703/001, 6 novembre 2006.

Budget (2008), Budget des recettes et des depenses pour l'annee budgetaire 2008, Expose general, DOC 52 0992/001, 19 mars 2008.

Budget (2009), Budget des recettes et des clepenses pour l'annee budgetaire 2009, Expose general, DOC 52 1526/001, 6 novembre 2008.

Duchene, S. and D. Levy (2003) "Solde 'structurel' et 'effort structurel' : un essai d'evaluation de la composante 'discretionnaire' de la politique budgetaire", Analyses economiques, Direction de la Prevision, no 18, novembre.

European Commission (2006), "The Long Term Sustainability of Public Finances in the European Union", Directorate for Economic and Financial Affairs, 4/2006.

Eugene. B (2008), "The Efficiency Frontier as a Method for Gauging the Performance of Public Expenditure: A Belgian Case Study", National Bank of Belgium, Research Series Working Paper, No. 138, September 2008.

Guichard, S., M. Kennedy, E. Wurzel and C. Andre (2007), "What Promotes Fiscal Consolidation: OECD Country Experiences", OECD Economics Department Working.

High Council of Finance (2008), Annual Report, June 2008.

High Council of Finance (2009), "Avis sur les perspectives budgetaires en prealable au programme de stabilite", 2009-2014, March 2009.

National Bank of Belgium (2008), The Use and Effectiveness of Fiscal Rules and Independent Fiscal Institutions, Economic Review, June 2008.

OECD (2006), Ageing and Employment Policies/Vieillissement et politiques de l'emploi, Liue Longer, Work Longer, Paris.

OECD (2007a), Pensions at a Glance: 2007, Paris.

OECD (2007b), OECD Economic Survey of Belgium 2007, OECD, Paris.

OECD (2008), OECD Economic Outlook No. 84, Paris.

OECD (2009), OECD Economic Outlook No. 85, Paris.

Plan de Relance, (2008), 11 December 2008.

Notes

(1.) About 30% of the public servants at all levels of government ate expected to retire, however estimates of the number of federal public servants expected to retire in the coming decade range as high as 40%.

(2.) This calculation assumes that contribution rates for all the groups currently enjoying lower rates (e.g. self-employed) would also increase by 50%. If they would increase less, the standard rate would have to increase by more.

(3.) An example of such a commitment mechanism can be found in the monetary policy framework in the United Kingdom, where the Governor of the Bank of England must explain substantial deviations of inflation from the targets in a letter to the Chancellor of the Exchequer.
Table 2.1. Budgetary costs of ageing
In per cent of GDP

                                      New projections, June 2008

                                      2030      2050   2007-13
                                     level     level    change
Entity I (Federal government
    and social security)
  Pensions                            12.1      13.0       0.7
  Of which pensions of
    Entity II                          2.0       2.2       0.3
  Health costs                         8.1       9.6       0.8
  Other social and work
    related expenditure                5.2       4.6      -0.1
Total                                 25.3      27.3       1.6
Entity II (regional and local
    governments and
    communities)
  Pensions                             2.2       2.5       0.3
  Of which charged to Entity I        -2.0      -2.2      -0.3
  Costs of health and social
    aid                                0.7       0.7       0.0
  Other social expenditure             0.7       0.7      -0.1
Total                                  1.6       1.6      -0.1
Total (Entity I and II)               26.9      28.9       1.5

                                     New projections,
                                        June 2008

                                   2007-30   2007-50
                                    change    change

Entity I (Federal government
    and social security)               3.5       4.5
  Pensions
  Of which pensions of                 0.8       1.0
    Entity II                          1.9       3.3
  Health costs
  Other social and work               -1.1      -1.5
    related expenditure                4.3       6.3
Total
Entity II (regional and local
    governments and
    communities)                       0.8       1.1
  Pensions                            -0.8      -1.0
  Of which charged to Entity I
  Costs of health and social           0.0       0.0
    aid                               -0.1      -0.1
  Other social expenditure             0.0      -0.1
Total                                  4.3       6.3
Total (Entity I and II)

Source: High Council of Finance (2008), Annual Report.

Table 2.2. Medium-term fiscal balance paths

                            2008    2009    2010    2011

                                    Per cent of GDP
Previous strategy
  (SP 2008-2011)             0.0     0.3     0.7     1.0
HCF unchanged policies
  scenario                  -1.1    -3.5    -4.4    -5.1
Proposed strategy
  (equilibrium in 2013)     -1.1    -3.5    -3.4    -2.8
April 2009 Stability
  Programme targets
  (equilibrium in 2015)     -1.2    -3.4      -4    -3.4

                            2012    2013    2014    2015

                                     Per cent of GDP
Previous strategy
  (SP 2008-2011)            ...     ...     ...     ...
HCF unchanged policies
  scenario                  -5.1    -4.9    ...     ...
Proposed strategy
  (equilibrium in 2013)     -1.5     0.0    ...     ...
April 2009 Stability
  Programme targets
  (equilibrium in 2015)     -2.6    -1.5    -0.7     0.0

Source: Stability Programmes and High Council of Finance (2009),
Avis sur les perspectives budgetaires en prealable au programme
de stabilite 2009-2014.

Table 2.3. Fiscal consolidation in the 2000s
Per cent of GDP

                                      2002   2003   2004

General government fiscal balance     -0.1   -0.1   -0.3
Change in the general
     government fiscal balance        -0.5    0.0   -0.2
  Of which: cyclical component        -0.8   -0.7    0.1
  Of which: structural component       0.3    0.7   -0.3
  Of which: discretionary effort      -1.0   -1.3    1.3
    Of which: new measures
      affecting the tax burden        -0.5   -0.3    0.0
    Of which: effort in controlling
      nominal expenditure growth      -0.5   -1.0    1.3
  Of which: non-discretionary
    component                          1.3    2.0   -1.6

                                      2005   2006   2007

General government fiscal balance     -2.7    0.3   -0.2
Change in the general
     government fiscal balance        -2.4    3.0   -0.5
  Of which: cyclical component        -0.2    0.6    0.4
  Of which: structural component      -2.2    2.4   -0.9
  Of which: discretionary effort      -2.7    2.9   -0.3
    Of which: new measures
      affecting the tax burden        -0.1   -0.4   -0.1
    Of which: effort in controlling
      nominal expenditure growth      -2.6    3.3   -0.2
  Of which: non-discretionary
    component                          0.5   -0.5   -0.6

Source: OECD (2008), Economic Outlook No. 84 database,
National Bank of Belgium and OECD calculations.
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Publication:OECD Economic Surveys - Belgium
Date:Jul 1, 2009
Words:5784
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