Macroeconomics: Country report Belgium Assignment

Macroeconomics: Country report Belgium Assignment Words: 940

Low Employment Rate The major labor problem Belgium faces is its employment rate. In 1970 the average age to retire was 64 years, today its only 59 years. For the age group from 55 to 64 men and women between 20 and 64 year was only 67. 0% in 2012 and remains very owe by European standards (Fig. 11). For the period 2012 to 2014, employment rate is not expected to increase. The EX. employment rate target for Belgium is 73. 2% by 2020. High rate of Employment in the public sector The total amount of people employed in the public sector is well over 1. Million persons on a labor force of around 5 million people. Belgium has a larger share of government-related employment and compensation than the Euro zone. Compared to the countries in the Euro zone, Belgium has the highest number of employees per inhabitant in education, and the second highest in administration. Almost 1 person more per 100 inhabitants works in this administration than on average in the Euro zone. Government Revenue Belgian public revenues as a percentage of GAP remained well above the Euro area average, owing this to the high rates of taxes, especially those on labor income.

This high level of labor taxes has a negative impact on Belgium cost competitiveness. The tax wedge level of the labor cost of low wage earners is at 50% the highest in Europe (Fig. 12). Moreover, the gap of the unit labor cost between Belgium and its main trading partners, Germany, France and the Netherlands is widening (Fig. 3). The automatic wage indexation system will increase automatically labor costs when inflation accelerates and will so increase labor costs even more. Productivity is higher compared to Germany and France, but productivity growth is negative.

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These evolutions are an indication that Belgium is losing competitiveness, which could lead to a negative impact on export and consequently on future growth. 4. Policy recommendations The policy recommendation for Belgium can be broken down into short run demand policy to increase aggregate demand and real GAP and long run supply policy to attain long term sustainable growth. Demand Side Policy My recommendation is to implement a fiscal policy. Tax rates in Belgium are very high. The discretionary fiscal policy should have its focus on decreasing the tax rate for low wage earning earners and firms.

Today, the tax wedge level of the labor cost of low wage earners is 50%. Decreasing income tax rate will increase their disposable income and this should lead to an increase in labor cost for firms. Lower labor cost lead to a decrease of the production price for goods and services and make them more competitive and as such can cause an increase in export. A decrease in the tax rate for firms should increase their investment expenditures. This leakage could have a multiplier effect on national income over a 5 to 10 year period.

A lower tax rate on labor and firms should have a positively impact on the aggregate demand and increase the real GAP. With a public debt in Belgium of almost 100% of the GAP and a budget deficit of 2. 9%, government spending should not be increased. The major trade-off of this proposed fiscal policy is the risk of stagflation. When the rise of aggregate demand is preceding the increase in output and the employment of resources, inflationary pressure may increase. Belgium is a highly open economy with high levels of import and export.

Another trade-off is that the increase in disposable income resulting in an increase in consumer spending will leak away via an increase in imports. Supply Side Policy My recommendation is to reduce taxation, reform the trade unions and improve the Taxes on labor for the low wage earners are the highest in Europe. The direct tax rate is therefore expected to be at a level above the optimal tax rate described by the Loafer curve. Hence a reduction of the direct tax rate should work as an incentive to increase the number of hours worked.

This incentive effect should increase the tax base and as such offset the decrease in tax revenues. The result should be an increase in tax revenues. The size of the shadow economy is estimated at 16. 8% of the GAP in 2012 10. It is likely that Stuntman effect from a lower tax rate will reinforce the Loafer curve effect leading to an even bigger increase in tax revenues, because more people would avoid taking the risk not to declare income. Belgian trade unions are one of the most powerful unions in Europe.

More than 50% of the labor force is a member of a trade union. The reason for this high membership rate is “Ghent system”. In this arrangement, one has to be a member in order to enjoy unemployment benefits. Powerful trade unions are contra productive, especially in times of crisis. The Belgian economy would greatly benefit from the reformation of the “Ghent” system. The employment rate in Belgium is very low by European standards. Only 67% of the labor force between 20 and 64 years old is employed. The average age of retirement is only at 59 years today.

Several measures can be implemented to increase the legibility of the labor market: limiting the duration of employment benefit greater digressively of unemployment benefits tightened Job search requirements for the unemployed higher minimum age for various early retirement benefits poverty trap and decrease government spending on transfers. In Belgium 1. 5 million people work for the government. Working in the public sector has several benefits compared to working in the private sector, such as pension benefits of 100% of the last salary, Job security, etc.

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