Abstract
This Selected Background Issues paper analyzes sectoral wage differentiation and labor cost issues in Belgium. The paper discusses wage dispersion across sectors in Belgium and compares it with the pattern in other European countries. It analyzes the data for the Organization for Economic Cooperation and Development used in the Central Economic Council assessment of competitiveness, underscoring the role of social security contributions and restrictions on part-time work in the evolution of labor costs per employee. The paper also examines trends in saving and investment, and the pension reform in Belgium.
II. Belgium: Trends in Saving and Investment 1/
1. Introduction
The staff report for the 1995 Article IV consultation (SM/96/16) provides a summary of developments in saving and investment. This background note examines trends in saving and investment in more detail with the aid of a set of charts covering the period 1970-94.
It may be helpful to note relevant definitions at the outset. The current account equals the national saving surplus, which in turn is the difference between saving and investment. 2/ The saving surplus is equivalent to the financing capacity, assuming capital transfers are negligible. 3/ At the sectoral level, the same concepts apply. Thus, a positive household saving surplus (saving less investment) adds to household financial wealth, and the government saving deficit--in the absence of capital transfers--equals the government borrowing requirement.
2. Developments
The external current account of Belgium on a national accounts basis rose to 4.3 percent of GDP in 1994 from 0.6 percent in 1990 and a deficit of 4.3 percent of GDP in 1980 (Chart 1). 4/ The long-term upward trend follows from saving and investment behavior in the government, corporate, and household sectors: the government reduced the fiscal deficit, the corporate sector eliminated its borrowing requirement, and the household sector maintained a roughly stable saving surplus. Specifically, the government saving surplus was deeply negative in the early 1980’s at some 12 percent of GDP, but recovered to around a negative 6 percent in the 1990’s as a result of fiscal consolidation; the corporate saving surplus has exhibited a clear change from a negative 4 percent of GDP in the 1970’s to a level fluctuating around zero since 1983; and the household saving surplus as a proportion of GDP has not exhibited a clear trend in the period since 1970, remaining in a range of 6 to 10 percent of GDP.
BELGIUM Saving Surplus
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Saving Surplus
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Saving Surplus
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.Combining the corporate and household sectors, the private sector saving surplus fluctuated around 4 percent of GDP in the 1970’s before jumping to a level of about 8 percent subsequently. Such an excess of private saving over investment is high by European standards, and has been characteristic of Belgian private saving and investment behavior for some time. Since 1970, the differential with the rest of the European Union (EU) has generally been some 3 to 6 percentage points of GDP (Chart 2).
BELGIUM Private Saving Surplus
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Sources: National Accounts 1994; IMF, World Economic Outlook; and OECD, Analytical Database.1/ Excluding Belgium and Luxembourg.BELGIUM Private Saving Surplus
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Sources: National Accounts 1994; IMF, World Economic Outlook; and OECD, Analytical Database.1/ Excluding Belgium and Luxembourg.BELGIUM Private Saving Surplus
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Sources: National Accounts 1994; IMF, World Economic Outlook; and OECD, Analytical Database.1/ Excluding Belgium and Luxembourg.Corporate investment relative to corporate saving dropped sharply in the early 1980’s, eliminating the corporate saving deficit (Chart 3). 5/ Meanwhile, corporate saving (corporate income before investment spending) began to rise as profitability, measured by the gross operating surplus relative to GDP, recovered markedly--a recovery that mirrored the decline in the share of labor income in GDP (Chart 4). Since the early 1980’s, the corporate saving surplus has exhibited cyclical behavior. Investment peaked later than profitability and saving (in 1989-90), and subsequently was cut to a level lower than corporate saving, even as saving began to recover (in 1994).
BELGIUM Corporate Saving and Investment
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Corporate Saving and Investment
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Corporate Saving and Investment
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.
BELGIUM Share of Labor Income in GDP
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: OECD, Economic Outlook.BELGIUM Share of Labor Income in GDP
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: OECD, Economic Outlook.BELGIUM Share of Labor Income in GDP
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: OECD, Economic Outlook.The household saving surplus, while not exhibiting a trend over the years, was relatively elevated in the early 1980’s and early 1990’s (Chart 5). In 1981, with the economy in recession, household transfers to the government declined and the household share in national disposable income rose (Chart 6). Household saving increased and investment collapsed, sharply raising the saving surplus and helping protect household financial wealth. By contrast, in 1991 household saving increased by 3 percentage points of GDP as the share of household disposable income rose and that of the corporate sector declined, reflecting the renewed rise in the share of labor compensation in GDP. Households saved virtually the total increase in their disposable income in 1991 relative to GDP (about 3 percentage points), and maintained this stance in subsequent years. Thus, even though household disposable income rose by 3 percentage points of GDP in 1991 and stayed at this level in 1992 and 1993, private consumption relative to GDP was virtually unchanged (Chart 7). Similarly, in 1994 the fall in disposable income relative to GDP was largely reflected in saving and not consumption. It could be inferred that households treated the increase in wage income in the early 1990’s as a windfall that did not justify raising current consumption. With the beginning in 1994 of a reversal of the windfall, households reduced their saving while again largely safeguarding the level of private consumption (relative to GDP).
BELGIUM Household Saving Surplus
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Household Saving Surplus
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Household Saving Surplus
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.
BELGIUM Disposable Income
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Disposable Income
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Disposable Income
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.
BELGIUM Household Consumption and Income
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Household Consumption and Income
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Household Consumption and Income
(In Percent)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.Changes in saving and investment find their counterpart in changes in the components of the current account (Chart 8). An examination of factors reflected in the increase in the trade balance between 1987 and 1994 suggests that the increase can be fully explained by the improvement in the terms of trade, which was due primarily to weak prices of imported raw materials (National Bank of Belgium, 1994). 6/ The improvement in the terms of trade could be interpreted as having affected private saving much more than private consumption--the private sector possibly having viewed it as a windfall that might be reversed at some point in the future. 7/
BELGIUM Components of Current Account
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Components of Current Account
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.BELGIUM Components of Current Account
(In Percent of GDP)
Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A002
Source: National Accounts.3. Conclusions
In the last twenty-five years, the government’s finances underwent major changes, while the private sector saving surplus (as a ratio of GDP) maintained a relatively stable differential vis-à-vis the EU average and the household component exhibited no upward or downward trend. There is thus no clear evidence that fiscal consolidation in Belgium has exercised a significant effect on the balance of private sector saving and investment behavior. Further fiscal consolidation would therefore appear likely to lead to some increase in the national saving surplus. Nonetheless, fiscal consolidation in the course of the next few years may be consistent with a less than one-for-one rise in the current account. In particular, on the corporate side, a cyclical pick up in investment similar to that observed in the late 1980’s would tend to reduce the corporate saving surplus. Furthermore, if rates of return on investment were to show a sustained improvement, then corporations would be induced to make fuller use of their improved financial position, and a secular recovery of investment would be possible. Fiscal and labor market initiatives along the lines discussed in the staff report would likely move in the direction of reducing any distortions that may be depressing rates of return on investment.
Bibliography
Ford, R. and D. Laxton (1995), “World public Debt and Real Interest Rates,” IMF Working Paper 95/30.
Tanzi, V. and D. Fanizza (1995), “Fiscal Deficit and Public Debt in Industrial Countries, 1970-1994,” IMF Working Paper 95/49.
National Bank of Belgium (1994), “Verlies van Marktaandelen bij de Uitvoer en Verbetering van het Handelssaldo: een Paradox?”
Prepared by Frank Lakwijk.
The saving surplus also equals disposable income (including the change in mathematical pension reserves) after consumption and investment spending.
Capital transfers are subtracted from the saving surplus to obtain the financing capacity.
The current account of the BLEU (Belgium-Luxembourg Economic Union) reached a surplus of 5.6 percent of Belgian GDP in 1994. The difference between the current account surplus of the BLEU and the current account of Belgium derived from Belgian national accounts has been relatively small and invariant as a ratio to Belgian GDP. However, this difference, which is the Luxembourg current account surplus, is large relative to Luxembourg’s GDP.
Higher real interest rates in the 1980’s than in the 1970’s (likely related to higher public debt levels around the world--see Ford and Laxton (1995) and Tanzi and Fanizza (1995)) may have induced corporations to reduce investment relative to saving.
Splitting nominal trade data in price and volume components has always been problematic, but it does not appear plausible that data errors are at the root of the large terms of trade increase during 1987-94. A greater export volume (resulting arithmetically if export price increases were lowered) would run counter to the notion that exports have been under pressure from real exchange rate appreciation, while a lower import volume (resulting arithmetically from higher import price rises) would result in an even lower import elasticity, which is already among the lowest in the EU.
Note that over time increased world supply of the goods that are relatively cheap to produce with the low-cost raw materials, and higher world demand for these inputs, would tend to eliminate the terms of trade gain.
