The gap across Belgium is no longer tenable: an analysis in 5 points – Policy
Belgium is socio-economically aware of Bart De Wever (N-VA) thinks of a big bang, regardless of the constitutional rules. The fact that it has been able to come to this is a consequence of a based lack of sense of urgency in NV Belgium. Flanders, Wallonia and Brussels have grown so far apart economically that it is no longer sustainable. An analysis in five points.
1 The pension bill, the cobblestone in the Belgian budgetary shoe
Nothing is more symptomatic of the Belgian stagnation than the approach to the pension problem. Dependent on the Study Commission on Aging for over twenty years for current expenditure. According to the European Commission, the pension bill increased by 3 percent of gross domestic product (GDP) between 2019 and 2050, from 17 billion euros. With the exception of Luxembourg, aging costs have not risen faster in any EU country than in Belgium. It is not a pebble but a cobblestone in the Belgian budgetary shoe. (see graph Almost nowhere does the pension bill rise faster).
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Nothing is more symptomatic of the Belgian stagnation than the approach to the pension problem. Dependent on the Study Commission on Aging for over twenty years for current expenditure. According to the European Commission, the pension bill increased by 3 percent of gross domestic product (GDP) between 2019 and 2050, from 17 billion euros. With the exception of Luxembourg, aging costs have not risen faster in any EU country than in Belgium. It is not a pebble but a cobblestone in the Belgian budgetary shoe. (see graph Almost nowhere does the pension bill rise faster). The De Croo government never gives the impression of wanting to do anything about it. The previous government, a centre-right coalition led by Charles Michel, had five years to make decisions, but did little. The statutory retirement age will go up to 66 in 2025 and 67 in 2030, and that’s it. A plan has been prepared by a number of experts to make the system more transparent and affordable: the pension with points that should strengthen the link between pension payment and years worked. But there was no sense of urgency and reform failed to materialize. “Pension with points is definitely buried,” said UCL expert Pierre Devolder at a National Bank colloquium last month. Reforms in this country only happen with a knife on the keel. Such as at the end of 2011, when the Belgian interest rate on the national debt rose and the Di Rupo government had to intervene with stricter rules for bridging pensions and early retirement in order to appease the financial markets. In similar circumstances – with increased pressure from the financial markets – countries such as Spain and Italy have reformed their pensions. Marjan Maes, pension expert at KU Leuven, said about the same NBB colloquium that “after 2010, those countries have adapted their pension systems to rising life expectancy, resulting in long careers. There, aging costs will even fall in the long term. Two thirds of the OECD countries already link the pension scheme fully or partially to life expectancy.” Belgium does not. In the third quarter of 2022, 72.1 percent of 20 to 64-year-olds in Belgium were working. Belgium remains just below the EU average of 73 percent. This is a result of two typical Belgian qualifications: the high wage costs and too many unemployment traps, which means that not working remains financially more interesting than a job. Our country is a textbook example of the insider-outsider theory: those who have a job earn well and in 90 percent of cases have a permanent job. The outsider without a job can make the jump to the labor market difficult. But the poorly functioning Belgian labor market is only part of the story. The differences in employment rate between Flanders, Wallonia and Brussels are also very large. Flanders scored quite well with 76.8 percent. Wallonia and Brussels (both just under 66 percent) are lagging behind. And above all: the gap has been and will remain large for decades. In no other European country, with the exception of Italy, are regional productivity differences as large as in Belgium. That has serious consequences. The Flemish contribute much more to social security and pay more tax. The Walloons then have to rely more on social benefits. Add to that the higher Flemish incomes, and the fiscal capacity is much greater than in other societies. The classical mechanisms to resolve the divergence also do not work. There is too little interregional mobility. The centrally controlled wage setting (interprofessional and sectoral) ensures that poorer Wallonia does not get the chance to become more attractive to employers, for example with lower gross wages (which are more in line with lower productivity). That all years of ongoing transfers of billions, which just maintain the economic gap. Belgian government expenditures meet 55 percent of GDP, among the highest in the European Union. Belgium had a budget deficit of 5.1 percent of GDP in the third quarter of last year. This is the largest deficit in the eurozone (3.3% on average). In the discussion about derailed public finances, the main focus is on the federal government, which of course takes care of the closure of expenditure via social security. But the situation is also dramatic in almost all regions and hypotheses, with the exception of Flanders. Last year, the National Bank compared the budget deficit and debt against the disposable income of the various governments. Those numbers were disturbing (see chart. Almost every government has a hole in its hand). Wallonia has a deficit of 20 percent of regional revenues and a debt of more than 250 percent of revenues. Only Flanders evolves towards equilibrium in the long term and does not see its debts explode. No one seems to be in a hurry to do anything about it. Again, economic differences play a crucial role. There are two ways to clean up a budget. You can raise taxes to finance the extra expenses. This includes the less important region. The richer region is more likely to think of savings to clean up the budget. A second explanation is that the region bears little responsibility for prudent fiscal policies. The labor economist Stijn Baert calls this the Dutch disease. A country will disappear from this condition if a certain sector is doing so well that it has disastrous consequences for other sectors in the same country. This was the case in the Netherlands in the 1960s. Natural gas sales abroad have exploded, leaving the rest of the economy with no incentive to be competitive. This is comparable to what is happening in Belgium. Thanks to Flemish prosperity, Wallonia has no incentive to implement reforms that can really improve its economy and labor market. Accordingly, we come to the following weakness of Belgium NV: some regions constantly expect to be saved. When they are in financial trouble again, there is always another government that throws a lifeline. The state reforms of 1988 and 2001 were a financial bailout of the French Community, including education on the verge of bankruptcy. In 2011, the budget of the Brussels Region had to be saved and the federal government was given more breathing space. Qualifications regarding health care and labor market policy were guaranteed to the regions, but resources did not follow 100 percent. Now that Wallonia and Brussels are in trouble again – a result of the persistent socio-economic gap – and the federal government expects another begging tour (after 2024?). Wallonia and Brussels have almost never been able to keep up with the growth rate of Flanders in recent decades. In the north of the country, more jobs were systematically tracked and labor productivity rose faster. That opens a deep wealth gap. In Flanders, the gross disposable annual income in 2020 per capita shared 28,383 euros, compared to 22,948 euros in Wallonia and 23,948 euros in Brussels. Thanks to its distribution via the government, the differences in net disposable income are smaller, but Flanders is still 5 percent above the Belgian average, Wallonia and Brussels are 7 percent below. It has mainly started that this growth difference between the federal states has persisted for decades. Normally you could expect a catch-up movement from the lagging regions, but there is little of the brands in Belgium. The Walloon economy was hit harder in the last century by the crisis in the coal and steel industry, but that should no longer be an excuse. A successful reconversion is possible in ten to twenty years, learning abroad, but in the Walloon basin the scar has still not healed. After the turn of the century, growth differentials almost completely disappeared, only to return after the 2009 recession. Only in the last two years before the outbreak of the corona pandemic caused by the Walloon economy remarkably faster than the Flemish one. It is encouraging that the Walloon economy has been growing faster since 2008 than the average in the eurozone. The corona crisis nipped a possible start of a race to catch up in the bud. Flanders digested the crisis faster than Wallonia. It is also striking that in times of international crisis the Walloon economy is hit harder, while the open Flemish economy is hit by a decline in international trade. That was the case in 2009, that was the case during the European debt crisis and now during the pandemic, which hit Wallonia and Brussels hard due to the relatively large share of trade, catering and contact professions in their economy.