The 2015 European Semester and Belgium: EDP Decisions & Country Profile 02/03/2015

Autumn Forecast Winter Forecast Spring Forecast 15 Oktober May/JuneNovember EA MS: Draft Budgetary Plans Opinion on DBP Communication on action taken in EDP AGS 15 April AMR The new annual coordination cycle NRP Decisions in SGP SP Fiscal surveillance Macro-economic surveillance EU2020 strategy CSR 2 Country Profile Early March

3 The February 2015 Economic Package A "chapeau" Communication from the Commission, including the decisions on further steps within The Macro-economic Imbalances procedure (MIP) The Stability and Growth Pact (SGP) 3 Reports prepared in accordance with article 126 (3) TFEU (BE, IT, FI) A Recommendation to the Council on France's deficit (article 126 (7) TFEU) 27 Commission Services' Country Profiles + 1 Report on the Euro Area

4 Formal decisions in the framework of the Stability and Growth Pact In light of the excess over the deficit reference value and insufficient progress towards debt reduction, the Commission has drawn up a report (art. 126 (3) TFEU). Main conclusions: the estimated excess over the deficit reference value can be qualified as exceptional and temporary BE deviates from the required trajectory towards debt reduction In light of all relevant factors, however, this does not warrant the opening of an excessive deficit procedure at this stage Next steps: Stability Programme by mid-April The publication of notified and validated fiscal data may entail a new assessment.

Outline of the art. 126 (3) report Art. 126 (3) TFEU: "If a MS does not fulfil the requirements under one or both of these criteria [with regard to the deficit and debt ratio], the Commission shall prepare a report. The report of the Commission shall […] take into account all other relevant factors, including the medium-term economic and budgetary position of the Member State." Assessment of the deficit criterion: Estimated deficit outcome for 2014 is close to the reference value (Δ = 0.2% GDP) Estimated excess is exceptional Statistical changes in national accounts of October > Δ 0.3% of GDP in 2013 – likely similar magnitude in 2014 Revenue shortfalls, some of which were foreseeable (e.g. reduced dividends and guarantee fees from the financial sector). Assessment of the debt criterion: Required MLSA of 0.7% GDP vs. deterioration of 0.1% GDP As of 2015: MSLA of 1.1% vs. improvement of 0.6% Relevant factors: Progress towards mid-term objective is satisfactory Structural reforms in the area of pensions, cost-competitiveness, labour market participation Extraordinary economic conditions: low inflation on top of low growth

6 Formal decisions in the framework of the macro-economic imbalances procedure Belgium is considered to be in a situation of macro-economic imbalance requiring policy action and monitoring Main issues: External competitiveness of goods Public debt Next steps: Bilateral and multi-lateral discussions on the findings of the in-depth review and the other chapters of the Country Report Presentation of National Reform Programme by Mid-April Country-specific recommendations in May

Commission Services' Country Report on Belgium 2015

8 Outline of the Country Report on Belgium Executive Summary & Scene Setter Imbalances, risks and adjustment Cost competitiveness Non-cost competitiveness Public Indebtedness Household indebtedness and the housing market Other structural issues Labour market and education Taxation and fiscal framework Service and product markets Greening the economy

9 Outline of the Country Report on Belgium Executive Summary & Scene Setter Imbalances, risks and adjustment Cost competitiveness Non-cost competitiveness Public Indebtedness Household indebtedness and the housing market Other structural issues Labour market and education Taxation and fiscal framework Service and product markets Greening the economy

10 The competitiveness issue

11 The role of labour costs

The steep decline of manufacturing Share of manufacturing in total value added

The steep decline of manufacturing

14 Policy responses Fight against inflation Competition enhancing interventions in key markets Reform of the health index Wage cost reduction policies Real wage freeze Reductions of employer social security contributions and other wage subsidies Temporary suspension of indexation clauses in collective bargaining agreements Reform of the wage setting framework?

15 The role of energy input costs Situation Higher energy intensity than neighbours and euro area Natural gas cheaper for industrial consumers Electricity prices large industrial users 10% higher than neigbours, but decreased since 2013 Reductions of levies & charges at federal level compensated with increases at regional level Main challenges: legacy costs of uncharged certificates, costs of additional renewables, security of supply Policy response SME: prolongation of safety net mechanism (for commodities) Plans for energy norm (for all price components) Requires collaboration with regions Interference may discourage investments Invest in interconnections instead

16 The role of services input costs

17 Decomposition gross manufacturing exports by value added (2009)

18 The role of non-cost factors Declining contribution from total factor productivity to potential growth Increased share of low-skilled employment Sectoral composition of the Belgian economy Resource misallocations Integration of Belgium in the world economy Geographical focus on EU trading partners but deep integration Type and quality of exported products do not contribute (much) to overall competitiveness Other bottlenecks: Labour market performance Taxation system Inequality of educational outcomes

19 Strengths of the Belgian innovation system

20 Mixed innovation output performance

21 The public debt issue Public debt had been revised upwards since last year's In Depth review Reclassifications of corporations into the general government sector Only partly offset by the upward revision of GDP While the risk of fiscal stress in the short term seems to be contained, a sustained interest rate increases might have a negative impact on Belgium's public finances The sustainability outlook over the longer term remains bleak due to Anticipated costs of population ageing Low growth potential Fiscal coordination between government levels remains challenging

Situation Historical rising house prices: 110% since 2000 and 209% since 1985, but stabilised in recent years Inelastic supply, strong demand Risk factors Rising mortgage indebtness (from 40% to 60% of GDP), but low average risk rates 10% (EU 16%) Debt/financial assets increased but below euro area (high wealth) Unemployment risks higher than interest risks, but + outlook Price/income and price/rent ratios above historic average, but no over-evaluation if corrected for demand and supply fundamentals Risk of a sharp correction in real estate prices appears contained. If prices fall, sound lending practices should limit impacts on banks Household debt and the housing market

Deflated house price index

Price to rent and price to income

Overvaluation gap with respect to main supply and demand fundamentals

26 Outline of the Country Report on Belgium Executive Summary & Scene Setter Imbalances, risks and adjustment Cost competitiveness Non-cost competitiveness Public Indebtedness Household indebtedness and the housing market Other structural issues Labour market and education Taxation and fiscal framework Service and product markets Greening the economy

Labour market performance

High tax wedges hamper job creation…

…and contribute to remaining unemployment traps

Mismatches cause labour market tension

Young unemployed face structural barriers to entry

The situation of migrant unemployed is particularly precarious

Employment and activity rates of the elderly are low

36 Policy responses Wage subsidies to reduce the tax burden on labour Deadweight losses Readability of the system Benefit reform and targeted interventions in the taxation system to reduce disincentives to work Complexity of the system hampers incentive effects Unemployment traps remain comparably sizeable in some cases (e.g. singles, single parents) Reform of the old-age social security system Educational reform and first efforts to strenghten partnerships between labour market and educational institutions

Taxation Environmental taxation %GDP (2012) Decomposition of implicit rates on labour (2012) Situation: high taxes skewed towards labour

Taxation Comparing Belgian tax revenues with EU averages

High rates and narrow tax bases Some positive spill-overs of tax expenditures But foregone revenue EUR 25.6 billion or 6.8% of GDP in 2012 Broad tax base with lower rates is less distortive Policy responses VAT: no broad review of reduced rates Personal income rebates: mostly a social character Corporate income rebates: high rates and low base Some reductions of labour costs but no compehensive tax reform Conclusion Commitment in government agreements to reform taxes Avoid polarised debate between tax on labour & capital Shift to wide range of taxes that distort less & cut tax expenditures Taxation

Service and product markets Churn rates retail Churn rates professional, scientific and technical activities

Electricity prices for residential consumers

Remaining gap towards 2020 target for non-ETS GHG emissions

Greening the economy Renewable energy On track to 2020 target (13%) with share in final energy demand of 7.5% in 2013 and share of 25% in total electricity production But expensive and achieving target will require much more efforts Resource efficiency Energy intensive economy Not on track to meet target of 18% energy efficiency improvements by 2020 (compared to projections from 2007) Should be priority in future energy pact to be decided by end of 2015 Belgium has already made headway on waste treatment, but more to be done on promoting waste prevention, avoid incinerating reusable or recyclable waste, promoting economic attractiveness of reuse and recycling. Peak hour congestion Economic costs of 1% of GDP Areas of concern: company cars, road charging, efficiency of public transport

Full reports and references The "chapeau" Communication from the Commission, including the decisions on further steps within SGP and MIP 27 Commission Services' Country Profiles conomic_imbalance_procedure/index_en.htm conomic_imbalance_procedure/index_en.htm Reports prepared in the framework of the Stability and Growth Pact (BE,FR,IT,FI) rective_arm/index_en.htm rective_arm/index_en.htm

AGS: Annual Growth Survey AMR: Alert Mechanism Report AW: Average wage COMP: Combination of sub-components GOOD and SERV, using equal weights CSR: Country-specific Recommendations DBP: Draft Budgetary Plan DYN: Innovativeness of high-growth entreprises EA MS: Euro Area Member States EDP: Excessive Deficit Procedure GOOD: High-tech and medium-tech product exports as % of total exports KIA: Employment in knowledge-intensive activities in business industries as % of total employment MLSA: Minimum linear structural adjustment MS: Member State NRP: National Reform Programme PCT: Number of patent applications per billion GDP SERV: Knowledge-intensive services exports as % of total exports SGP: Stability and Growth Pact SP: Stability Programme TFEU: Treaty on the functioning of the European Union Abbreviations