Belgium: Selected Issues

Belgium: Selected Issues

Abstract

Belgium: Selected Issues

Belgium—Making Public Expenditure More Efficient1

1. Belgium faces fiscal challenges that call for a substantial consolidation over the medium term. Belgium’s long track record of primary surpluses was undone by the global financial crisis and the public debt-to-GDP ratio increased again into triple digits. Recent fiscal consolidation in Belgium has so far been modest and mostly revenue-based (Hallaert and Nowak, 2015; Figure 1). The overall deficit has been hovering around three percent of GDP. The tax-to-GDP ratio is now the third highest in both the OECD and the EU, limiting the scope for further tax hikes. The public expenditure-GDP ratio is also significantly higher than before the crisis and among the highest in the world (more than 10 percentage points of GDP higher than the EU average). Taken together, these developments have created vulnerabilities and squeezed the fiscal buffers that may be needed in the event of future shocks.

Figure 1.
Figure 1.

Fiscal Consolidation

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: Haver Analytics, Eurostat, and IMF staff calculations.

2. The government plans to achieve a structurally balanced budget by 2018, which is ambitious. The strategy described in the 2015 stability program (European Commission, 2015a) is to reduce significantly the expenditure-to-GDP ratio over 2014–18 and reach balance while reducing the revenue-to-GDP ratio by 0.6 percentage point (Figure 1). Staff estimates that this will require identifying additional savings of almost two percent of GDP, the bulk of which would have to come from the spending side.

3. The sizable expenditure reduction contemplated by the authorities will be difficult without deeper structural reforms. Reducing the expenditure-to-GDP ratio by almost four percentage points between 2014 and 2018 would be a substantial effort. In a low inflation environment, it cannot be achieved solely by containment or spending freezes. Moreover, given the potential adverse impact on growth and social protection of across-the-board cuts, it will be important to identify expenditure savings that minimize these effects.

4. Reforms that improve the efficiency of public spending can help underpin fiscal adjustment while minimizing the drag on growth and protect social cohesion. The purpose of this paper is to identify areas where there is scope for expenditure efficiency gains. The methodology is based on a double benchmarking, comparing both the level and the outcome of spending in different categories to other European countries (with a particular focus on three neighboring countries: France, Germany, and the Netherlands). The paper is organized as follows. The first section highlights the sources of expenditure growth and discusses how the structure of public expenditure differs from what is observed in other European countries. The second section benchmarks the level and the efficiency of spending in various sectors. Both sections point to areas where efficiency gains can be achieved.

A. Sources of Expenditure Growth

5. At 55 percent of GDP, general government spending is high by EU standards, reflecting in particular sizable social benefits and wage expenditures (Table 1). Current expenditure has been the driver of recent spending growth. It was 10 percentage points of GDP above the EU average in 2014. This primarily reflects social benefits, on which Belgium spends more than most other countries, but also by the relatively high public wage bill and subsidies. Despite the high debt level, interest payments are currently only slightly above the EU average, thanks to a relatively low interest rates. By contrast, capital spending, notably public investment, was below the EU average.

A01ufig1

Composition of Public Expenditure in Belgium and in Europe, 2014

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: Eurostat.
Table 1.

General Government Expenditure by Economic Classification in Europe

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Sources: Eurostat and IMF staff calculations.

Simple average.

6. Unlike in most EU countries, spending continued to grow post crisis. Despite a decline in debt service (by -0.5 percentage point of GDP), current spending increased by 1.4 percentage points of GDP over 2010–14, with fiscal consolidation relying heavily on revenue raising efforts (Figure 1). Together, social benefits and the wage bill account for 90 percent of the increase in the primary expenditure-to-GDP ratio since 2010. This stands in stark contrast to most EU countries, which reduced spending, including current spending, significantly in recent years (Table 2).

A01ufig2

Real Primary Expenditure Growth in Belgium

(In index, 1995=100)

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: IMF staff calculations.
Table 2.

Selectivity in Spending Cuts/Increases in Europe

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Sources: OECD and IMF staff calculations.Note: Countries are ranked according to the value of the selectivity indicator in 2010–13. Spending is in national currency deflated by the GDP deflator. The closer to 0 the indicator the more spending change was similar across classifications. For details on the methodology, see Lorach and Sode (2015).

For Spain up to 2010–12.

For Belgium, Italy, and Sweden: 2001–07.

Out of a maximum of 66 COFOG categories as three categories are excluded (0107, 0401, 0407).

7. Belgium’s expenditure policy has been less selective than in most other European countries. This likely reflects greater reliance on across-the-board containment as opposed to more targeted spending measures. At the same time, the practice of indexation of wages and social transfers (which has been recently suspended) tends to generate a certain underlying spending growth trend across many categories. As a result, as illustrated by a selectivity index (which is equal to 0 when all fiscal categories grow at the same rhythm), Belgium’s spending policy has been one of the least selective European countries (Table 2).

Social Benefits

8. At over 25 percent of GDP, social benefits are significantly larger than the EU average, and have increased faster than in most countries. Over 2007–14, they increased by 4 percentage points of GDP (explaining 58 percent of the increase in total expenditure).

A01ufig3

Market and Disposable Income Inequality in Europe, 2013

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: Eurostat and IMF Staff calculations.

9. Social transfers and income taxes contribute to a significant reduction in income inequality, more so than in most other EU countries. Disposable income inequality is the lowest in Europe thanks to the largest redistributive impact of taxes and transfers after Ireland (Figure 2). Fiscal redistribution reduces the Gini index by 0.25 compared to 0.20 on average in the EU and in the three neighboring countries. However, though Belgium has the second largest social spending level in the EU (after France), it ranks only ninth in the reduction in income inequality achieved with transfers. In the EU, on average, transfers contribute to 78 percent of the reduction in income inequalities (75 percent on average in the three neighboring countries). In Belgium, the share is only 67 percent; the lowest in Europe. Therefore, taxes contribute more to the reduction in income inequality than in the rest of Europe. In particular, direct taxes reduce more inequalities than in any other EU country.

Figure 2.
Figure 2.

Contributions of Fiscal Policy to the Reduction of Income Inequality in Europe, 2013

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: EUROMOD, Eurostat, and IMF staff calculations.Note: SC= Social Contributions; DT=Direct Taxes; MT=Means-tested social spending; NMT=Non-means-tested social spending.

10. The redistributive power of social spending (i.e., the reduction in the Gini coefficient per one percent of GDP in social spending) is low by European standards (Figure 2). Illustrating the potential for efficiency gains, if Belgium could raise the redistributive power of social spending to the (weighted) EU average, it could achieve the same reduction in inequality with 3¼ points of GDP lower spending.

11. Another sign of potential large efficiency gains is that, despite the substantial income redistribution, poverty remains relatively high in Belgium. The share of the population at risk of poverty (an indicator for the most vulnerable households at the lower end of the income distribution) is lower than European average but significantly higher than in the three neighboring countries (Figure 3). There are wide differences in the risk-of-poverty ratio by regions that strikingly mirror regional differences in unemployment. In 2011 (latest available data), the risk-of-poverty ratio reached at 15.0 percent in Flanders, 25.4 percent in Wallonia, and 40.4 percent in Brussels.

Figure 3.
Figure 3.

Poverty in Belgium and in Europe

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Source: Eurostat.

12. A stronger emphasis on means-testing and better targeting the poor could improve the efficiency of social spending (Figure 4). Only about 5 percent of social expenditures (in kind and in cash) are means-tested. This is 2½ percentage points less than EU average,2 and significantly below countries with the same level of spending including the three neighboring countries (11 percent in France, 12 percent in Germany, and 15 percent in the Netherlands). For example, in 2012, family-related spending was not means-tested at all in Belgium while, on average, in the EU and in the three neighboring countries about one quarter of this type of spending was means-tested.

Figure 4.
Figure 4.

Means-testing of Social Expenditures and Targeting of Safety Nets, 2012

(In percent of social expenditures)

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: Eurostat, OECD, and IMF staff calculations.Note: Dashed lines represent EU medians.1/ Difference in the net income value, in percent of median household incomes, of a married couple with two children qualifying for cash housing assistance and a single person that does not qualify for cash housing assistance.

Wage Bill

13. The wage bill is another reason for large and growing public expenditures. At 12.7 percent of GDP in 2014, the wage bill is one of the highest in Europe (Figure 5). Moreover, whereas most EU countries cut the wage bill during the recent consolidation period—on average by 0.5 percentage point of GDP over 2010–14—in Belgium, it increased by 0.4 points in the same period (Table 1).

Figure 5.
Figure 5.

Belgium: Public Sector Employment and Wage Level

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: Haver Analytics, Eurostat, OECD (2015a), National Bank of Belgium, Federal Planning Bureau (2015a), and IMF staff calculations.1/ Public administration, defense, and education.

14. The large wage bill reflects the size of public employment rather than the salary levels. Driven by an expansion at the sub-national government level (in part due to the decentralization),3 public employment is among the largest in Europe. However, there is no wage premium for the public sector as evidenced by a lower public-private wage compensation gap than in other European countries (Figure 5). The absence of a wage premium is confirmed by Eugène (2011) and Giordano et al. (2011) who, on the basis of survey data, find that when all sources of differences in the structure of employment (age, employment status, gender, education level, working hours, and managerial duties) between public and private sectors are taken into account, wages in the public sector were only 1.7 percent higher than in the private sector in 2004–07. This gap is smaller than in France and Germany (between 10 and 15 percent).

15. Structural measures have a more durable impact in reducing the public wage bill. An analysis of recent consolidation episodes in advanced economies concludes that the reduction of the government wage bill has been larger and more durable when the adjustment included structural measures (Figure 6 and IMF, 2014). Structural reforms include rationalizing the size and structure of government, outsourcing non-core functions, and improving the efficiency of the wage formation and hiring processes. Short-term measures such as wage or hiring freezes have generally expired within a few years, and generated less durable reductions in the wage bill.

Figure 6.
Figure 6.

Cumulative Change in the Public Wage Bill Ten Years after the First Year of Measures

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Source: IMF (2014).Note: t indicates the year of introduction of the wage bill measure. Episodes with structural measures are: Austria (1996–97), Belgium (1982), Canada (1991–92), Italy (1993), Portugal (2005–07), the United Kingdom (1994). Those without are: Belgium (1992, 1994), Denmark (1983–84), Germany (1983–84), Germany (1995, 1997, 2000), Ireland (1982), Ireland (1987–88), the Netherlands (1984–86), the Netherlands (2005), Portugal (2000, 2003), Spain (1997).

16. This suggests that wage bill containment would be best achieved through targeted rationalization and greater efficiency of public employment. This would complement the policy of wage moderation pursued in recent years, including the temporary suspension of the wage indexation. Already, measures are taken at various levels of government to reduce the number of civil servants.4 As a result, after reaching a peak at the end of 2014, public employment started to decline in 2015 (Figure 5), although at a still relatively modest pace.

Spending on Goods and Services and Public Investment

17. In contrast to social and wage spending, Belgium’s public sector spends comparatively little on goods and services. At 4.4 percent of GDP, spending on intermediate consumption is significantly lower than the EU average and in the three neighboring countries (Table 1), suggesting that the scope for savings is more limited in this category.

A01ufig4

Spending on Goods and Services in Europe, 2014

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Source: Eurostat.

18. Public investment is also lower than in most European countries. At about 2½ percent of GDP, public investment is well below EU average and median of 3¾ percent of GDP and in the three neighbors except Germany. As a result, the public capital stock is among the lowest in Europe (Figure 7). In almost every functional category, public investment is lower than 80 percent the EU average. There is one notable exception: investment in “general public services.”5 In this category, which accounts for 36 percent of total public investment, Belgium spends 60 percent more than the EU average or the three neighbors’ average.6

Public Expenditure by Functional Categories, 2013

(In percent of GDP)

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Source: Eurostat and IMF staff calculations.Note: In red are areas where Belgium’s spending exceeds EU average by 20 percent or more; in green are areas where spending is at least 20 percent below EU average.
Figure 7.
Figure 7.

Public Investment, Capital Stock, and Infrastructure Quality

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Source: Eurostat, World Economic Forum, and IMF estimates.Note: Dashed lines indicate medians.

19. There may be scope for redirecting resources to more productive investment projects. While capital spending on general public services is relatively high, investment in “economic affairs”, at only 0.6 percent of GDP, is about half the EU average.7 In particular, transport infrastructure is perceived to be of lower quality than in the three neighboring countries. The perceived quality of both road and rail infrastructure have declined in recent years, and traffic congestion is a serious problem. Within transport infrastructure, the priority appears to be maintenance rather than expanding the size of the networks8 (Figure 7).

B. Public Expenditure by Sector

20. High public spending is reflected across most functional categories, especially for social protection and health (Table 3). Belgium spends less on defense, environment protection, and housing and community amenities than EU average and neighboring countries. However, spending is substantially above the EU average on education (by 1.1 percentage points of GDP), economic affairs (by 1.3 percentage points of GDP), health (by 1.5 percentage points of GDP), and social protection (by 2.6 percentage points of GDP). To some extent, this reflects the broader issues identified above: (i) social spending is not always well targeted; (ii) the wage bill is driven by high public employment; (iii) investment is low and insufficiently oriented toward productive activities. However, to identify specific efficiency gains, it is necessary to examine individual functional spending in more depth.

Table 3.

General Government Expenditure by Functional Classification in Europe1

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Sources: Eurostat and IMF staff calculations.

When this study was undertaken, data by functional classification are not yet available for 2014.

Simple average.

21. Social spending is high and has grown substantially over the past decade. Social spending is among the highest in the OECD (Figure 8). Over the last decade, it increased by over 5 percentage points of GDP.9 This is more than twice the OECD average and the third largest increase in the OECD. A large share of this increase took place in the recent past: during 2010–14, social spending increased by almost 2 percentage points while it declined on average by 0.1 percentage point in the OECD. Only Finland experienced stronger growth.

Figure 8.
Figure 8.

Social Expenditure in the OECD, 20111/2/

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Source: OECD.1/ Total public social expenditure reached 31.9 percent of GDP in 2014. The breakdown by categories is only available up to 2011.2/ Social expenditure are defined as social transfers in cash. Services spending, and spending on active labor market policies.3/ Pensions are defined as in cash spending for old age and survivors. Private expenditure includes both mandatory and voluntary schemes.

22. Recent reforms have contained social spending growth. Pre-crisis, real spending on early retirement had been growing at 4 percent per year, second only to health care spending. As a result of recent reforms (focused on tightening the generous early retirement schemes and encouraging longer employment), spending on early retirement is now declining. However, spending on pensions continued to increase rapidly, as in other European countries. The reform of the unemployment benefits reduced slightly the growth of unemployment spending despite the impact of the crisis, but the parallel increase in the demand for sickness and disability allowances suggests the presence of substitution effects across benefits. Structural reforms are continuing (Table 4). In the long term, the impact of the pension reform adopted in August 2015 will have the largest impact but the short-term fiscal saving is expected from measures to contain the growth of the health care spending.

A01ufig5

Real Annual Growth in Social Spending1

(Deflated by the GDP deflator, in percent)

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: Haver Analytics, WEO database, and IMF staff calculations.1/ Unemployment benefits are adjusted for cyclical developments.
Table 4.

Estimated Fiscal Savings from Recent Measures1/

(Cumulative, in million of Euros unless otherwise specified)

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Sources: Federal Planning Bureau and IMF staff calculation.

The impact of some measure such has the saving on social expenditure from the temporary suspension of the wage indexation, and the indirect effects on employment and unemployment are not taken into account.

Second pillar available only at the new legal retirement age.

Faster digressivity.

Subsistence minimum, guaranteed income for elderly and the lowest pensions.

Sickness, disabilities, pensions.

Pensions

23. As in other European countries, pensions are the largest social spending category accounting for over a third of the total. Spending on pensions is broadly in line with other European countries (Figure 8). At 10 percent of GDP in 2011 (i.e., before reforms started to be implemented), it was above the OECD average of 7.6 percent and the average of other EU countries member OECD of 9.4 percent but below France’s and Germany’s level. However, this comparison is somewhat misleading as part of unemployment benefits (the so-called “unemployment with employer top-up”) act as a de facto early retirement scheme. Unemployment benefits “for early retirement for labor market reasons” represented a spending of 0.7 percent of GDP in 2011, by far the largest amount in OECD and well above the EU average (0.1 percent).

24. The pension system is a key contributor to the reduction in inequality through fiscal redistribution (Figure 2). Pensions explain 73 percent of the income reduction achieved through transfers. This is higher than the EU average (68 percent) or any of the three neighboring countries (34 percent in the Netherlands, 60 percent in France, and 71 percent in Germany).

25. The fiscal cost of early retirement is partly offset by a slightly less generous system than in other countries. With one of the lowest effective retirement ages in the OECD,10 Belgium has the second largest life expectancy after pensionable age after France: 25.8 years for men and 21.2 years for women (OECD, 2015b).11 The fiscal cost of this demographic is partly offset by a relatively lower replacement rate. This suggests that pension reforms should target the retirement age rather than the level of benefits.

Pension Replacement Rate, 2014

(in Percent of pre-retirement earning)

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Source: OECD.

When the replacement rate differs for men and women, the table reports both as follows men/women.

26. In light of the relatively rapid ageing of population, reforms of the pension system are necessary to maintain the financial sustainability of the system. According to the EC’s 2015 Ageing Report, produced before the 2015 pension reform, spending on public pensions would increase by 3.4 percentage points of GDP between 2013 and 2035 and would remain broadly stable afterwards. National estimates that include the impact of the 2015 reform project a more limited increase in the fiscal cost of pensions, which remains substantial (Figure 9).12

Figure 9.
Figure 9.

Fiscal Cost of Ageing

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Source: EC (2015b) and Study Committee of Ageing.

27. In this context, the 2015 reform is a major step toward maintaining fiscal sustainability in the long term. The main elements of the pension reform adopted in August 2015 involve (i) gradually increasing the legal retirement age from 65 to 66 in 2025 and 67 in 2030; (ii) raising the minimum age and career length required for early retirement in 2017; and (iii) boosting the minimum age for survivor’s pension. This reform, combined with earlier efforts to tighten early retirement schemes,13 addresses the main reason for the cost of pensions described above: the early effective retirement age. The authorities expect that it will halve the annual growth in pension costs from the current 4–5 percent per year, reducing significantly a major element of the fiscal cost of ageing. In addition, the authorities plan to further reform the pension system in 2016 by focusing on civil servant pensions and the second pillar (notably by disallowing benefitting from the supplementary pension before the legal age of retirement). This would again provide incentives to increase the effective retirement age. In the same spirit and, given their fiscal cost, further reforms could tighten the regime of unemployment with employer top-up, which still accounts for a large share of labor market exits among seniors.

A01ufig6

Labor Market Exits among 50 to 64 Year Olds1/

(In percent of the corresponding population)

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: NBB calculations based on DGS-FPB, PDOS-SdPSP, NIHDI, NEO, NPO.1/ Estimated totals, obtained by combining data that don’t necessarily reflect the same period. For the year 2000, for which insufficient data are available, it was assumed that the share of mixed careers in the total number of pensions was the same as in 2014 (to avoid double counting in the case of mixed public/private careers).

Health

28. Health spending is under pressure. At almost 8 percent of GDP, health spending is high by international standards. It is well above EU or OECD averages though slightly lower than the spending level in the three neighbors (Figure 8 and Table 3). Moreover, health spending is increasing rapidly. Between 2007 and 2013, it increased by 1.2 percentage point of GDP, much more than EU average of 0.6 percentage point, and more rapidly than in France and Germany (both at 0.7 percentage point), but less than in the Netherlands (1.5 percentage point). Due to medical progress and the ageing of the population there will be longer-term cost pressure. Both the EC and national estimates project that health spending would increase to reach about 10 percent of GDP by 2060 (Figure 9).

A01ufig7

Increase in Public Health Spending in Europe, 1999-2013

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Source: Eurostat.

29. The government has taken measures to contain health spending growth (Table 4). The Federal Planning Bureau (2015a) projects a trend growth in public health spending of 2.1 percent per year in real terms over 2016–20. However, the Belgian government has set a growth ceiling of 1.5 percent annually for the current legislature (2015–19). To limit spending growth, the government has announced various containment measures such as price cuts on pharmaceuticals, a reform of the calculation of the sickness and disability allowance, and a reduction in the length of stay in maternity wards. In the long run, structural measures will need to be taken in coordination with the regions and communities: in 2015 regions and communities became responsible for elderly care (0.9 percent of GDP) and in 2016 they will be responsible for hospital investment (0.15 percent of GDP).

30. The efficiency of public health spending could be increased. Belgium achieves a good overall health outcome, but at a higher fiscal cost than in peer countries (Figure 10). The Health-Adjusted Life Expectancy at birth is high but in many countries is achieved at a lower cost. Most health indicators are significantly better than EU average but tend to be lower than in neighboring countries that, as mentioned above, have similar level of spending.

Figure 10.
Figure 10.

Health Outcomes1/

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: Eurostat, WHO, and IMF staff calculations.1/ Health-Adjusted Life Expectancy at birth is the average number of years a person can expect to live in good health or free of disease and injury.

31. However, the health outcomes are not evenly distributed within the Belgian population. The self-perceived level of good health exceeds EU average except for the poorest (first quintile) and other comparative data suggest that health inequalities, though lower than in France, are higher in Belgium than on average in the EU, in Germany, and in the Netherlands, (Figure 11). Access to dental and medical examination is worse than in Germany and the Netherlands.14 It is important to consider self-reported unmet healthcare needs in conjunction with other indicators of potential barriers to access, such as the extent of health insurance coverage and the amount of out-of-pocket payments. In Belgium, while public health insurance covers almost all inhabitants (99 percent), households out-of-pocket expenditure reached 18 percent of total health expenditure in 2013 a level similar to the average for the EU members of the OECD of 19 percent but significantly higher than in the three neighbors: 5 percent in the Netherlands, 7 percent in France, and 13 percent in Germany (OECD, 2015c).

Figure 11.
Figure 11.

Social Outcomes of Health Spending

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: Eurostat, OECD, and IMF estimates.1/ Standard deviation in mortality for population older than 10. EU average for OECD members only (excluding Greece).

32. Beyond the ongoing efforts to contain health spending growth, deeper structural reforms would help mitigate longer-term health-spending pressures. While budget caps and other macro-levels controls can reduce spending in the short term, they usually do not directly address the underlying causes of spending and are thus unlikely to be sustainable in the longer term. Going forward, Belgium could strengthen micro-level reforms to increase the efficiency of spending. Some advanced countries have undertaken reforms that could inform Belgium on how to contain health spending (IMF, 2012). In particular, reforms could:

  • Be based on cost-effectiveness evaluations to determine what health services should be financed by public funds (as in Australia, Finland, the Netherlands, Sweden, and the United Kingdom). Reforms in this area include delisting ineffective drugs (as in Germany) and treatments (as in the Netherlands).

  • Make generics prescription compulsory, impose electronic prescribing, and further develop clinical guidelines to cover a large share of drug prescribing, as in Portugal (OECD, 2015d). This would require progress in unifying patients’ health electronic records, and in ensuring a full integration of electronic systems on personal health records. In 2013, generics account only for 31½ percent of the volume of pharmaceuticals consumed in Belgium. This is well below EU average of about 60 percent or the three neighbors’ average of 44 percent (OECD, 2015c).

  • Rationalize the organization of the health system by giving sickness funds a more active role as promoters of cost-efficiency and focusing on medium-term budgeting (OECD, 2013).

  • Review the sickness and disabilities system. Spending on sickness and disabilities has grown more rapidly than in any European country except Ireland (by 2.1 percentage points of GDP during 2002–13). This increase is in part related to the reforms of early retirement schemes which led to an increase in the use of the sickness and disabilities scheme by older workers. Reforming the eligibility criteria would thus seem appropriate, possibly together with some means-testing. The government has reduced the allowance by reforming the calculation formula leading to some saving (Table 4) and announced that it will strengthen the control mechanism and promote re-activation policies to reduce the period of inactivity due to disability leave.

  • Pay specific attention to health inequalities, which may be warranted to improve outcomes for low-income population groups.

Education

33. At 6.4 percent of GDP, public spending on education is higher than the EU average and in the three neighbors (Table 3). This remains true even when controlling for lower private spending in Belgium than in other EU countries or for income level (Figure 12). Between 2010 and 2013, education spending has grown by 0.3 percentage point of GDP while it declined on average in the EU (-0.2 percentage point), in France (-0.1 percentage point), and in Germany (-0.1 percentage point), and in the Netherlands (-0.2 percentage point). Public spending on education is higher than EU average at all level of study, most notably at the secondary level.

A01ufig8

Public Spending on Education by Level of Study, 2012

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Source: World Bank.
Figure 12.
Figure 12.

Educational Inputs

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: Eurostat, and IMF staff calculations.

34. Public spending on education reflects a large wage bill. At 5.1 percent of GDP, the public wage bill accounts for 95 percent of total public spending on education. This is much more than EU average of 60 percent or the three neighbors’ average of 90 percent. As for the general government as a whole, the wage bill is large because of employment rather than salary levels (Figure 13). The recent decision of the Flemish community to limit the increase in the number of teachers should be seen against the backdrop of this broader staffing issue.

Figure 13.
Figure 13.

Compensation of Employee in the Education Sector

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: OECD and EC (2015b).

35. The high level of education spending is not reflected in improved student test scores, pointing to the scope for efficiency-oriented reforms (Figure 14). Student test scores are close to the three neighbor’s average, but have deteriorated in mathematics and science. In 2012, overall PISA scores were higher than EU average but slightly below neighboring average. The PISA score in math and sciences declined from 2003 to 2012, while they increased in Germany and the Netherlands. Student performance appears mediocre relative to the three neighbors when controlling for a significantly higher spending-per-student, reflecting the low student-to-teacher ratio (Figure 13). Moreover, though Belgium is the European country where education spending increased the most between 2003 and 2012, it is also one of the countries that experienced the largest decline in student performance.15

Figure 14.
Figure 14.

Educational Spending and Outcomes

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: OECD, and IMF staff calculations.

36. In addition, educational inequalities are more pronounced in Belgium than in most European countries (Figure 15). The 2012 PISA finds that the link between students’ socio-economic status and student performance is much stronger in Belgium than in most OECD and EU countries, notably Germany and the Netherlands. However, while Belgium performance scores in mathematics deteriorated between 2003 and 2012, equity improved.

Evolution of the Student Population, 2013–60

(In percent)

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Sources: EC (2015b).
Figure 15.
Figure 15.

Student Performance and Equity

Student Performance and Equity, 2012

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Source OECD.

37. Given long-term cost pressures, reforms of the education system should thus include efforts to make better use of resources. According to the EC’s 2015 Ageing report, in contrast to other European countries, the student population will increase substantially in Belgium through 2060. The increase is particularly sizable at the primary and lower secondary levels, where the student-teacher ratio is the lowest (Figure 13). The EC estimates that the projected increase in the student population would imply an increase in the number of teachers of 38 percent and an additional fiscal cost of 0.3 to 0.4 percent of GDP (most of it by 2030). Reforms could focus on organizational efficiencies, possibly through a rationalization of the school network (class and school merger) and an increase in the versatility of teachers.

Subsidies

38. Belgium spends more on subsidies than other countries and planned reductions are limited. Subsidies partly explain the larger spending on economic affairs in Belgium than in the rest of the EU and in any of the three neighboring countries. At 2.3 percent of GDP, subsidies are about three times larger in Belgium than on average in the three neighbors or in the euro area (0.8 percent of GDP in both cases). Moreover, subsidies increased by 0.8 percent of GDP between 2007 and 2012, while they remained broadly constant in other European countries (Table 3 and Figure 16).

Figure 16.
Figure 16.

Fiscal Cost of Business Subsidies, 1995–2013

Citation: IMF Staff Country Reports 2016, 078; 10.5089/9781513547695.002.A001

Sources: Eurostat, Groupe d’experts “Compétitivité et Emploi,” and IMF staff calculations.

39. A significant share of subsidies is intended to reduce labor costs. Some of these subsidies, such as the services vouchers, act as in-work-benefits aimed at providing jobs to the low-skilled (Figure 15). Others, which represent a larger share, aim at boosting competitiveness by reducing the labor costs or reducing the cost of innovation (9 percent of labor subsidies are directed to R&D jobs) and are planned to be further increased.

40. The government plans to reduce business subsidies. Over 2015–18, the planned reduction of EUR 600 million (0.1 percent of GDP) focuses on the subsidies to the railway company and leave untouched other subsidies.

C. Conclusion

41. The above double benchmarking exercise demonstrates that there is significant scope for increasing the efficiency of public expenditure in Belgium. This could play a key role in underpinning the authorities’ ambitious fiscal adjustment objectives by limiting potential adverse social and economic outcomes. It would also lay the foundations for placing Belgium’s high level of public debt on a more sustainable downward trajectory, supported by additional measures to address the fiscal cost of aging. A strategic approach to spending adjustment would be most effective because the expected impact differs across spending categories.

42. This paper identifies a range of policy options: Social spending is a key factor explaining Belgium’s comparatively high level of public expenditure. While social spending is the major tool for reducing inequality, it does so less efficiently than in most other European countries. If Belgium could raise the redistributive power of social spending to the EU average, it could achieve the same reduction in inequality with 3¼ percent points of GDP lower spending. Such efficiency would require deep reforms in a number of programs, notably by (i) expanding means-testing of social benefits and (ii) continuing to implement measures to increase the effective retirement age notably by further tightening the benefits that act de facto as early retirement scheme, such as the unemployment benefit with employer top-up.

Impact of Public Expenditure Reforms by Areas

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Wage Bill spending is high and there is scope for saving across all levels of government. As the level of the wage bill is primarily the result of high public employment, as opposed to generous salaries, the most promising approach would be to amplify the reduction in public sector employment initiated in 2015 –while ensuring that it is well targeted and oriented at the efficient functioning of both central and local governments—rather than extending the wage freeze currently applied to the whole economy.

Reforms should also aim at coping with longer-term fiscal pressures. The relatively rapid aging of the population will have a significant fiscal impact in the medium- to long-run for three important expenditure categories: pensions, health, and education.

  • Pensions. The 2015 pension reform increases the legal retirement. Focusing reforms on the retirement age rather than on the benefits is adequate given that the effective retirement age is low while the replacement rate tends to be less generous than in other European countries. These reforms could be complemented by measures to avoid a substitution toward other benefits. Partly as a result of the recent reforms tightening the early retirement, request for sickness and disability allowances have increased. In this context, it is important to review the eligibility criteria for and increasing the control of sickness and disabilities payments. Similarly it is important to tighten schemes that, de facto, act as an early retirement scheme.

  • Health. The efficiency of public health spending could be increased. Belgium achieves a good overall health outcome, but at a higher fiscal cost than in neighboring countries. Beyond the ongoing efforts to contain health spending growth, deeper structural reforms would help mitigate long-term spending pressures. Possible measures include (i) strengthening the cost-benefit analysis in order to limit the range of non-essential healthcare covered by the public insurance; (ii) increasing further the use of generics, including by making their prescription compulsory; (iii) rationalizing the organization of the health system by giving sickness funds a more active role as promoters of cost-efficiency and focusing on medium-term budgeting. A specific attention to health inequalities would also be warranted to improve health outcomes for low-income populations.

  • Education. Public spending on education is higher than EU average and in each of the three neighbors, mostly owing to high employment levels resulting in a low student-per-teacher ratio. Despite the high and fast growing level of spending, test scores are deteriorating, the efficiency in reducing inequalities is more limited than in most European countries, and many young people are not adequately prepared for the job market. The causes of these adverse trends should be carefully studied, and scope for efficiency gains should be seized to mitigate the spending pressures arising from a fast growing student population.

Publicinvestment. Part of the fiscal saving achieved through reforms could be used to increase public investment in areas that can boost the country’s potential growth. There appears to be scope to redirecting public investment to more productive projects, notably in transport infrastructure, where quality and efficiency could be improved significantly.

Subsidies. Subsidies are much larger in Belgium than in other countries. There is scope to go beyond the planned reductions in business subsidies. As the tax shift is implemented, some of the business subsidies, aiming at offsetting the impact of high taxes could be phased out.

References

1

Prepared by Jean-Jacques Hallaert (EUR). I thank David Coady, Nan Geng, Louis Sears, and Candice Liu for sharing the expenditure database they developed (Coady and Geng, 2015), and Jörg Decressin and Christian Mumssen for their suggestions.

2

Half a percentage point less than EU median.

3

The Federal Planning Bureau estimates that the sixth reform of the state led to a transfer of 4,700 civil servants from Entity I (federal government and social security) to communities and regions. No transfer is foreseen after 2015.

4

As illustrated in Figure 5, the reduction in public employment was in the past mostly achieved at the federal level. Regions and communities have recently taken initiatives. For example, the Flemish community took measures to limit the number of teachers and the Walloon will not replace 1 out of five retirees until 2017.

5

Differences for “public order and safety” and “social protection” are marginal as there is traditionally little investment.

6

Belgium started to diverge from EU average in 2008.

7

As in other countries, public investment also takes place through investment subsidies to and State owned enterprises and private entities (for example the railway company; see below section on subsidies). However, comparable data are not available. For details see Hallaert and Queyranne (2016).

8

Belgium has the highest road density in Europe at 504.5 km of roads per 100 square kilometer of land area. Rail density at 11.8 kilometers per 100 square kilometers of land area is the second largest in the EU (after the Czech Republic) and is more than twice the EU average (5.7).

9

OECD data are available for total social spending but the breakdown is available only until 2011.

10

In 2014, the average effective age of labor-market exit was at 59.6 years, a level similar to France but below Germany (62.7), the Netherlands (62.4), and the average for the other EU members of the OECD (62.1).

11

The OECD average was respectively 22.3 and 17.6.

12

For details including differences between National and EC estimates, see Federal Planning Bureau (2015b).

13

See the Staff Report’s appendix on Labor Market and Pension Reform Measures and De Vil et al. (2015).

14

For more details on inequalities in the access to healthcare, see Devaux and de Looper (2012).

15

In addition, the education system does not address enough an important skill mismatch. For details, see the staff report for the 2016 Article IV consultation and the chapter The Belgian Labor Market: Segmentations and distortions.

References

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