Is Belgium's economic strategy up to the challenge?

• Pages: 67-69

Page 67

So far, the government's strategy has met with success, though not without costs in terms of economic performance. Historically, Belgium's welfare state has been associated with high fiscal deficits and rapidly accumulating public debt. Even as recently as the early 1990s, budget deficits of 10 percent of GDP were not uncommon. Following a recession in 1993, public debt peaked at a staggering 138 percent of GDP. Since then, this ratio has fallen steadily to about 100 percent- a remarkable achievement. No doubt, a cyclical recovery in the mid-1990s and declining inflation helped. But it was Belgium's steadfast commitment to the Maastricht Treaty goals (particularly the fiscal deficit limit of 3 percent of GDP) and to the Stability and Growth Pact (requiring budget balance over the economic cycle) that did the trick. To accomplish the required deficit reduction, taxes were raised and noninterest spending was curtailed. As a consequence, the noninterest budget surplus (also known as the primary surplus) averaged 6.5 percent of GDP over the past seven years. Such an achievement would be deemed impossible in most parts of the world.

Still, while debt dynamics are now favorable, these efforts have taken their toll, and Belgium is not out of the woods yet. The high tax burden and generous social safety net have dampened long-term economic growth. And following years of strict budget discipline, policymakers are feeling the pressure from pent-up spending needs and demands for tax cuts.

Taxes and transfers discourage work

Taxes and transfers affect the choices people make. Overtaxing capital induces businesses to relocate- with adverse consequences for growth. Work is also taxed at a high rate. In Belgium, the average person earning Euros 100,000 takes home only

Euros 51,000. This does not encourage work in the formal economy.

The counterpart to high taxes is extensive transfers that benefit almost everyone. At the same time, however, these transfers raise the wages that people are willing to work for in the formal economy. Some transfers are particularly detrimental to the labor supply. Publicly sponsored early retirement schemes, previously seen as a socially expedient solution to the unemployment problem, are still pervasive. Even today, they are sometimes granted to "facilitate" industrial restructuring.

But even apart from such schemes, it often does not pay to work a full career in Belgium. The penalties for taking early retirement are small, and it is therefore not surprising that only one in four persons aged 55-64 works and that the overall share of the active population in employment is one of the lowest in the...