As the Federal Government negotiations culminate, Belgium's automatic wage indexation is one of the main sticking points. Talks are currently considering changing the system, which obliges employers to adjust wages upwards to keep up with increases in the cost of living.
Belgium has been without a Federal Government for almost eight months but the leaders of the five 'Arizona' parties (N-VA, CD&V, Vooruit, Les Engagés and MR) are now tackling some of the most contentious policy areas.
One topic in particular – the automatic wage indexation – could stall talks. Despite being on the table for several months, the Dutch-speaking socialist party Vooruit is dragging its heels.
What is Belgium's automatic wage indexation?
Belgium is the only eurozone country besides Luxembourg in which both public and private wages are indexed to inflation. This obliges employers to adjust wages upwards along with the increase in the cost of living. Pensions and benefits also automatically rise with it.
The wage rise is tied to the smoothed health index, calculated based on the average of the last four months. When people's wage is increased, and by how much, depends on the sector they work in. Due to automatic wage indexation, people's pay increased by 15% between 2021 and 2023.
What changes are considered?
Businesses have repeatedly called for the system to be revised, arguing it drives up wages in Belgium, making the country less competitive. But scrapping the instrument entirely is out of the question. Rather, the negotiating parties are tussling over "minor adjustments".
Federal formator Bart De Wever has proposed adjustments to the timing of the pay rise. He wants public servants to receive the automatic wage indexation just once a year, on 1 January. For around 40% of private sector workers, that pay rise already happens at this set time.
Under the current system, the calculation is done at different times and sometimes several times a year, depending on the level of inflation (if the index has risen by a certain level). De Wever's proposal would change the calculation, basing it on a 12-month average rather than the four-month period used currently. This would smooth the high inflation peaks that currently mean that wages can jump erratically.
It's a proposal that Vooruit has loudly rejected. CD&V has argued it could undermine purchasing power. Other critics say the system should be phased, with the lowest-income earners receiving the highest increase, and people with the highest wages receiving less.
What is the expected impact?
The opposition party PTB/PVDA (Worker's Party) has already come out strongly against the proposals, saying it could cost workers up to €2,195 annually whilst at the same time questioning whether the changes would make Belgium more competitive.
The Federal Planning Bureau already calculated the impact at the end of November based on the June 2024 economic outlook. It noted that the smoothed health index is about 0.6% lower when applying a 12-month average than when applying a four-month average over the period 2025-2029. However, in subsequent years, these differences almost disappear (with an average difference of barely 0.1 percentage point per year).
Effectively, the changes would impact employees during the first two years after they are implemented but in the longer term the effect would flatten out almost completely, VRT NWS reported. For an average Belgian gross wage of around €4,300, this would amount to a loss of around €20 a month in the first few years. The impact will be bigger for high-income workers than for those with lower wages.
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But the calculation assumes a relatively stable rate of inflation. Sudden jumps in consumer costs would amplify the difference between the two calculation methods. This calculation also doesn't account for the effect of raising the index just once a year for all employees.
Economist Gert Peersman (UGent) warned that if Belgium starts indexing just once a year, the system no longer makes sense to "stabilise" purchasing power. He fears that this will lead to a financial rollercoaster for employees if energy prices skyrocket.
In 2022, the pivot index was exceeded five times because prices rose so fast. For people whose wages are indexed several times, their pay increase quickly followed those price rises. This means their purchasing power was swiftly protected.
