OECD Urges Comprehensive Reform Of Belgian Tax System

by Ulrika Lomas, Tax-News.com, Brussels

13 July 2009

The OECD has concluded its Economic Survey of Belgium, underlining major faults in the Belgian tax system, which it believes are hampering growth. The OECD advocates that Belgium revise its tax system to increase revenue contributions through ‘non-distortive’ income streams and simplify complex areas of tax policy, particularly its income tax system, to allow for lower, competitive, tax rates.

Its report conveys a resounding message “that bad times should not be used as an excuse to postpone structural reforms necessary to foster potential growth”.

Instead the report urges that “structural reforms should [be implemented to make] the labour market more flexible” and suggests enhanced economic productivity can be achieved “through improving the tax system and the competition policy framework”.

The report’s summary notes that “the current crisis is undermining [Belgium’s] fiscal position at a time when costs stemming from ageing are expected to start accelerating substantially in the coming years. Thus, the room for discretionary fiscal policy to support the economy is limited and the effectiveness of unilateral stimulus measures beyond those already adopted is constrained”.

“However, such short-term measures provide an opportunity for introducing long-term structural reforms as part of the package,” the report continues. “The fiscal consolidation efforts, supported by relatively high GDP growth and low interest rates on public debt during the past years, have recently faltered and the objective of generating increasing surpluses has become unrealistic in the medium run. Looking forward, the main challenge for fiscal policy is to devise a realistic and credible path towards fiscal sustainability. With a weaker than earlier expected role for pre-funding, renewed efforts to control the growth in ageing related costs should include a pension reform. Significant institutional reforms can help improve the credibility of future commitments”.

In its recommendations, the OECD firstly suggests that fiscal policy should be reviewed at both a federal and municipal level to correct imbalances:

“The current system of fiscal federalism is creating imbalances between the federal and the sub-federal governments (vertical imbalance), and between sub-federal governments (horizontal imbalance). Without reform, the vertical imbalance will widen as the fiscal burden from the ageing of the population falls mainly on the federal level. Reform should therefore strengthen the fiscal capacity of the federal government by improving its revenue sources and by shifting some spending obligations to sub-federal governments.”

“The imbalance between regions arises because of the lack of coherence between taxation and spending. Shared revenues from the personal income tax are allocated to the region of residence, while the region of the workplace does not benefit, which particularly affects Brussels’ revenue level.”

“This imbalance could be eliminated by allocating more of the shared personal income tax to the region of the workplace. Furthermore, the system of equalisation grants should be re-designed to provide incentives to the recipient regions to develop their own revenue base”.

It’s report further emphasises that centralizing government spending could also enhance Belgium’s fiscal flexibility.

“The performance of the fiscal system could further be improved by raising the efficiency of spending in areas of national interest which have been assigned to sub-federal governments or where there are overlapping responsibilities, such as in employment, R&D, training, education, energy and environmental policies.”

The OECD’s report presents several recommendations to fine-tune Belgium’s revenue streams to enhance efficiency and remove disproportionate burdens, especially on small- and medium-sized enterprises and start-ups.

“Individual elements in tax systems affect the growth process through different channels and to a varying degree. Consumption taxes are among the least distortive for growth, and there is considerable scope to increase the reliance on this tax source in Belgium.”

“Differential taxation of saving vehicles distorts investment decisions, hampering the reallocation of capital towards its most productive use. However, the most distortive taxes are on labour through their effects on workers’ labour market decisions. Recognising the latter, the Belgian authorities have aimed at reducing taxation on labour. However, its level remains internationally high, reflecting numerous exemptions, which reduce tax bases and thus require higher tax rates than otherwise.”

“To promote labour market prospects for individual groups on the labour market, wage subsidies and social security contribution reductions have been used extensively, leading to a complex system, often poorly targeted and at times subject to conflicting objectives. The end result is that the interaction between the personal income tax, the social security contributions, and the generous benefit systems has created a multitude of labour market traps which hold back employment.”

It concludes in stating:

“New tax reforms are constrained by the large and growing fiscal sustainability problem, implying that, unless substantial expenditure cuts are implemented, new tax reforms must be self-financed. This can be achieved by shifting the reliance of the tax system towards the least distortive sources and by broadening tax bases to allow lower tax rates.”

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