Federal Planning Bureau Economic analyses and forecasts 1 An assessment of Belgian NRP macroeconomic objectives in a medium term framework Francis Bossier and Igor Lebrun 38 th CMTEA, Kranjska Gora,14-15 June 2007

2 The economic outlook for the Belgian economy Detailed macroeconomic projection Forecast for current year based on a economic budget Simulation with five year horizon using the HERMES model Unchanged policy scenario with regard to fiscal and social policies International scenario produced by international organizations Exogenous variables generated outside the core model Starting point for variants: impact of higher crude oil prices, effects of various tax policies, effects of labour market reforms,…

3 Key macroeconomic results for the medium-term outlook Demand-side Potential export markets GDP Private consumption Gross fixed capital formation Net exports (contribution to GDP) 0.2 Private consumption prices Domestic employment0.70.9

4 Key macroeconomic results for the medium-term outlook Supply-side Potential GDP Labour productivity Capital deepening TFP Potential employment Labour supply NAIRU0.00.2

Output gap in % of potential GDP

6 Are effects of structural reforms introduced in the baseline? Yes, when data and methodology available (analysis of micro data, survey, single-equation or satellite model). Examples: Labour market reforms:  Impact of restrictive access conditions to early retirement  Impact of pension bonus on employment Reforms of Network industries (telecom, energy):  Impact of liberalisation on production structures  Impact of increased competition on prices and trade When considered too uncertain, no impact is introduced

7 Major quantitative objectives of the Belgian NRP Objective 1: continue fiscal consolidation  debt ratio under 60% in 2014  budget surplus of at least 1.0% in 2010 Objective 2: reduce labour costs  decrease tax wedge on wages by 2.2% of GDP between 2005 and 2010 Objective 3: reform labour market  participation rate of older workers increasing faster than the average (EU15) by 2010  an employment rate verging on 70% Objective 4: boost R&D and continue reforms in network industries  3% GDP investment in R&D by 2010 Objective 5: reduce environmental nuisance  reducing CO2 emissions by 7.5% for the period compared with 1990

8 Some key results of the medium term projection in relation with the NRP objectives

9 Billion of euros General government financing capacity Billion of euros and % of GDP % of GDP

10 Primary surplus and interest payments in % of GDP

11 Primary surplus and interest payments in % of GDP

12 Belgian Stability Programme in % of GDP Belgian Stability Programme0,00,30,50,70,9 Budget balance0,20,1-0,5-0,3-0,1 Deviation0,2-0,2-1,0

13 Primary surplus required to stabilise the public debt in % of GDP

14 Public debt In % of GDP In billion of euros

15 Taxes on labour and total tax burden in % of GDP

16 Employment evolution and employment rate

17 Employment evolution and employment rate

18 Older worker labour market participation

19 Older worker labour market participation

20 Registered and structural unemployment

21 Registered and structural unemployment

22 Energy intensity of GDP index 2000 = 100

23 Greenhouse Gas emissions in million of tons of CO 2 equivalent

24 Kyoto objective Greenhouse Gas emissions in million of tons of CO 2 equivalent

25 Easing the fiscal and parafiscal pressure on labour NRP objective: reduction by 2.2 of GDP between 2005 and 2010 Projection : reduction by only 0.75% of GDP Additional effort- equal to 1.45% of GDP- to be planned. Consequences of this additional effort simulated with a macroeconomic model Actions simulated: a cut in indirect labour costs (reduction of employers and employees social security contributions) Option 1: General reduction; Option 2: Employers’ social security contributions reductions concentrated on low wages

GDP Employment (%) Employment (thousands) of which: older workers Employment rate Employment rate (level) Public finances - Billion of euros % of GDP GHG emissions Simulation results: effects of the variant on the main macroeconomic indicators differences, in %, w.r.t. the baseline Option I

GDP Employment (%) Employment (thousands) of which: older workers Employment rate Employment rate (level) Public finances - Billion of euros % of GDP GHG emissions Simulation results: effects of the variant on the main macroeconomic indicators differences, in %, w.r.t. the baseline Option II

28 Conclusions Sizable efforts still to be made in order to comply with the Belgian NRP objectives; Contradictory objectives to be reconciled; Targeted reductions in labour costs more efficient to meet labour market objectives; Further budgetary choices to be made; But higher growth through structural reforms could ease the process.

Federal Planning Bureau Economic analyses and forecasts 29 END