Annexes to COM(2019)531 - Belgium Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the EU - Main contents
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| dossier | COM(2019)531 - Belgium Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the EU. |
|---|---|
| document | COM(2019)531  |
| date | June 5, 2019 |
The Country report also highlights measures supporting the recent job-rich economic growth, via improved competititiveness, including a “tax shift”; a related labour market reform that, among others, supports wage moderation policies; as well as a corporate income tax reform. Gradual decreases in personal income taxation and employers' social security contributions, with more than proportional reductions for lower salaries, have been legislated. Targeting low wages favours the young and the low-skilled, who tend to have lower wages, but also the lowest employment rates; thus it supports activation for some of the most vulnerable groups. However, labour remains highly taxed as a factor of production in Belgium. Although the tax shift reduced the labour tax wedge (income tax plus employer and employee contributions) for very low wage earners (fifty percent of the average wage), it remains the highest in the EU for average wage earners. With respect to the high income tax burden on labour, this is due to narrow personal income tax brackets, even if the “tax shift” has broadened the base of the 40% tax bracket, as even average income earners are subject to the highest income tax rate. Broadening the tax base by reducing tax expenditures could generate the necessary revenues to broaden tax brackets, as the extensive use of tax expenditures reduces the efficiency of the Belgian tax system. In that regard, the recent reform of the corporate income tax to move towards a system with lower statutory rates and fewer tax exemptions will help simplify the tax system and increase the attractiveness of the Belgian economy.
Belgium has modernised its public pension system in recent years. A first set of pension reforms was legislated in 2015. They reduced early exit possibilities, by further tightening the standard eligibility requirements for both early and pre-retirement, and increased the legal retirement age from 65 to 66 in 2025 and to 67 by 2030. As a result of those reforms, and taking into account the new 2018 demographic projections for Belgium of the Ageing Working Group, public expenditure on pensions is now expected to increase by 2.9 pps. of GDP by 2070, mostly during the next two decades, compared to the 3.3 pps. expected prior to their adoption (with an horizon 2013-2060). However, life expectancy is projected to increase faster than the effective retirement age. In particular, introducing a link between, on the one hand, early and statutory retirement ages and, on the other hand, gains in life expectancy, would help contain ageing costs beyond 2030. Furthermore, early retirement conditions for several large groups of civil servants remain more favourable than the standard conditions. Public spending on long-term care is projected to increase by 1.7 percentage points of GDP by 2070, an above average increase starting from what is already one of the highest levels in the EU.
Nevertheless, after the publication of the 2019 Country report Parliament adopted a number of additional measures. They include the “Jobs deal”, a package of 28 labour market measures divided into two pillars: fiscal and social. They include new incentives to support job creation and employment, promote job training and skill upgrading, increase the participation of older workers, and offer further options for mobility to workers beyond the “cash for car” possibility already in place. Finally, a reform of the public administration is ongoing, but the Programme does not provide a quantitative detail of its impact.
4.4. Other factors considered relevant by the Commission
Among the other factors considered relevant by the Commission, particular consideration is given to financial contributions to fostering international solidarity and achieving the policy goals of the Union, the debt incurred in the form of bilateral and multilateral support between Member States in the context of safeguarding financial stability, and the debt related to financial stabilisation operations during major financial disturbances (Article 2(3) of Regulation (EC) No 1467/97).
Rescue operations in the financial sector explain part of the debt increase since 2007 as discussed in section 4.2. The direct cumulative debt impact of those operations reached almost 7% of GDP in 2011 but declined to around 3% of GDP as of 2018 due to the sale of some of the acquired assets as well as the reimbursement of loans. Contingent liabilities related to guarantees granted to the financial sector all relate to Dexia. Awaiting full resolution, the Belgian State guarantees 51.4% of Dexia's liabilities. Those guarantees reached 7.4% of GDP as of April 2019, down from 8.7% at the end of 2016.
Article 12(1) of Regulation (EU) No 473/2013 requires that this report considers also "the extent to which the Member State concerned has taken into account the Commission's Opinion on the country's Draft Budgetary Plan, as referred in Article 7(1)" of the same Regulation. The Commission Opinion on Belgium's draft budgetary plan for 2019 pointed to a risk of non-compliance with the provisions of the SGP in 2018-2019. In particular, it projected a risk of significant deviation from the required adjustment towards the MTO for and a risk of non-compliance with the debt reduction benchmark in 2018 and 2019. The Commission invited the authorities to implement the necessary measures within the national budgetary process to ensure that the 2019 budget complies with the SGP and to use windfall gains to accelerate the reduction of the government debt-to-GDP ratio. However, a federal budget for 2019 was not adopted in Parliament. Upon the resignation of Belgium’s Prime Minister on 18 December 2018, a caretaker government has been adopting “current affairs” budgets. Since March 2019 Parliament further concretized remaining measures of the “Jobs deal” (see section 4.3.).
4.5. Other factors put forward by the Member State
On 31 May 2019, the Belgian authorities transmitted documents concerning relevant factors in accordance with Article 2(3) of Regulation (EC) No 1467/97 (‘the Belgian observations’). The analysis presented in the other sections of this report already broadly covers the factors put forward by the authorities.
The Belgian observations stress the impact of a “tax shift” and “Jobs deal” to strengthen job creation via both labour supply and demand. In this regard, the former reduces both labour costs and the burden on labour income; while the latter promotes further labour market participation, including for vacancies in professions facing labour shortages. The authorities’ observations also refer to the corporate income tax reform that has implemented a significant fall in the tax rate for businesses, with particular incidence on small and medium sized enterprises (SMEs). They point out a strategic public investment plan (the “National Pact for Strategic Investments”) that has already identified six thematic and four cross-cutting areas where the new incoming governments will have to further specify investments. Finally, they emphasize the continous reform of the pension system, with measures already implemented in the previous legislature, to increase the age and career conditions for early retirement; and new measures to increase the age for early retirement, harmonisation of regimes, address certain forms of abuse and incentive developing the second pillar pension.
Other relevant factors put forward by the Belgian authorities include the general consensus in Belgium to reduce public debt and deficits, as evidenced by the system of strict budgetary discipline introduced by the caretaker government since december 2018. The Belgian observations also include an assessment of the evolution of advanced corporate income tax payments. In particular, they decompose the evolution in a structural and a one-off component. The former is due to, among other things, the reformed and reduced notional interest deduction rate and increase in gross operating surplus of companies. The latter is related to the shift from tax assessments to advanced payments as a result of the increased penalty for companies that do not make advanced payments as from 1 January 2017. The authorities estimate an equal (50%) decomposition between these two components.
5. Conclusions
General government gross debt stood at 102.0% of GDP at the end of 2018, well above the 60% of GDP reference value. Belgium did not comply with the debt reduction benchmark in 2018. Moreover, the Commission forecast does not expect Belgium to comply with the debt reduction benchmark either in 2019 or in 2020, based on a no-policy-change assumption. This suggests that before consideration is given to all relevant factors, the debt criterion as defined in the Treaty does not appear to have been fulfilled prima facie in 2018. In line with the Treaty, this report also examined the relevant factors.
An overall assessment of compliance with the preventive arm points to large uncertainties related to key factors of fiscal performance in 2017 and 2018, notably regarding the extent to which the recent improvement in the headline balance is of a structural nature. It cannot be excluded that there is a significant deviation over 2017 and 2018 taken together even after taking into account those uncertainties. At the same time, in any event, the excess over the 0.25% of GDP threshold for a significant deviation appears to be very small once those uncertainties are taken into account. Therefore, on that basis, there is no sufficiently robust evidence to conclude on the existence of a significant deviation from the adjustment path towards the MTO in 2018 and over 2017 and 2018 taken together. Belgium is assessed to be at risk of some deviation in 2019, and at risk of a significant deviation over 2018 and 2019 together and in 2020. Hence, the necessary measures should be taken as of 2019 to comply with the provisions of the Stability and Growth Pact. The use of any windfall gains to further reduce the general government debt ratio would be prudent. At the same time, Belgium's debt ratio has declined by 5.5 percentage points since 2014 and is projected to fall by another 1.3 percentage points by 2020, despite sizeable debt-increasing stock-flow adjustments in recent and following years.
Belgium has made progress in implementing the structural reforms announced since the beginning of 2015, notably in the area of pensions, competitiveness and taxation. For several of those reforms, progress is considered substantial. They are expected to contribute to enhancing the economy's growth potential and reducing the risks of macroeconomic imbalances, thereby having a positive impact on debt sustainability in the medium to long term. The non-budgetary neutral nature of the tax reform undertaken has worsened the budgetary position in 2017 and 2018, although. In a letter sent to the Commission on 31 May 2019, the Belgian authorities highlighted their commitment to structural reforms and a strategic public investment plan.
The analysis presented in this report includes the assessment of all the relevant factors and notably: (i) the macroeconomic conditions, which are no longer considered a factor to explain Belgium's gap to the debt reduction benchmark; (ii) the implementation of growth-enhancing structural reforms in past years, several of which are considered substantial and projected to help improve debt sustainability, even if they have a temporary non-neutral budgetary impact; (iii) the fact that there is no sufficiently robust evidence to conclude on the existence of a significant deviation from Belgium’s adjustment path towards the MTO in 2018 and over 2017 and 2018 taken together. Overall, the current analysis is not fully conclusive as to whether the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is or is not complied with.
(1) 1 OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation of the Stability and Growth Pact and guidelines on the format and content of stability and convergence programmes”, adopted by the Economic and Financial Committee on 5 July 2016, available at:
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm .
(2) 2 Regulation (EU) No 473/2013 of the European Parliament and of the Council on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area (OJ L 140, 27.5.2013, p. 11).
(3) According to Regulation (EC) No 479/2009, Member States have to report to the Commission, twice a year, their planned and actual government deficit and debt levels. The most recent notification of Belgium can be found at http://ec.europa.eu/eurostat/web/government-finance-statistics/excessive-deficit-procedure/edp-notification-tables.
(4) Eurostat news release No 67/2019, https://ec.europa.eu/eurostat/documents/2995521/9731224/2-23042019-AP-EN/bb78015c-c547-4b7d-b2f7-4fffe7bcdfad
(5) Compliance with the debt benchmark is assessed on the basis of three different configurations: the backward-looking, the forward-looking and the debt reduction benchmark adjusted for the impact of the cycle.
(6) See the Assessment of the 2019 Stability Programme for Belgium.
(7) High Council of Finance (2019), Avis 'Trajectoire budgétaire en préparation du Programme de Stabilité 2019-2022'. Based on data provided by the Federal Planning Bureau.
(8) The federal debt represents 84.6% of the general government debt.
(9) Belgian Debt Agency, 2018-2019 Review outlook.
(10) Belgian Debt Agency, 2018-2019 Review outlook.
(11) The proportion of outstanding debt which matures in a given time period or which is subject to changes in interest rates because of a floating interest rate.
(12) Belgian Debt Agency, 2018-2019 Review outlook.
(13) Fiscal Sustainability Report 2018, Volume 2 – Country Analysis. Projections start from the European Commission 2019 winter forecast, with the no-policy change assumption translated into a structural primary balance kept constant (excluding ageing costs) at the level of the last year of the forecast (2020). The baseline scenario is based on the following macroeconomic assumptions for the long term: potential GDP growth remains around 1.2%; inflation and the change in the GDP deflator stabilise at 2% in the medium term; long-term interest rates on new and rolled-over debt converge to 3% in real terms by 2027 and short-term rates to a value consistent with the long-term interest rate and historical (pre-crisis) euro area yield curve (see also European Commission, 2012). Projected ageing costs are based on the 2018 Ageing Report.
(14) Stability Programme Belgium 2019-2022, p. 21.
(15) The Concertation Committee (Comité de concertation/Overlegcomité) brings together all Belgian governments to reach a common position in the case of shared competences or to solve conflicts between governments.