Belgium's politically charged budget negotiations received a fresh injection on Tuesday from the OECD, which argued that Belgium primarily needs spending cuts – more so than tax rises – to balance its budget.
In its two-yearly economic survey of Belgium, scheduled for release before the onset of Belgium's current political crisis, the organisation argues that reducing Belgium's deficit should "rely primarily on expenditure restraint and efficiency gains, given already high tax levels."
The OECD (Organisation for Economic Co-operation and Development), a club for 38 market-based economies, also restated the urgency of bringing Belgium's budget back into balance, given the increased demands on the public purse that will be coming from an ageing population – such as pensions and healthcare, as well as higher defence spending.
The OECD's economists point to education, sickness and disability, health, and general public services (which include civil service staff costs) as areas where Belgium spends above average compared to the eurozone. These, it argues, should be prioritised for public sector reforms and spending reductions to improve spending effectiveness.
Despite much of the focus in recent weeks on federal government budget consolidation efforts, the OECD's report points to areas such as education, which fall under the competence of Belgium's language communities.
The French-speaking community government's efforts to reduce its budget deficit have sparked protests across Brussels and Wallonia, highlighting the political challenge of pushing through reforms.
The OECD recommends Belgium introduce binding multi-year spending ceilings for all of Belgium's governments, as their absence "contributes to persistent budget slippages."
Federal Planning Bureau scenarios project that all Regions and Communities will have a growing debt-to-revenue ratio over the coming decade.
Swapping subsidies for cuts to wage taxes
The OECD's report also points to the share of subsidies given to companies in Belgium – the highest as a share of GDP at 3.5% across all OECD countries – as an area that should be prioritised for cuts.
Around two-thirds of business subsidies are wage subsidies, effectively given to firms to offset Belgium's high tax on labour, noted Baudouin Regout, a commissioner at the Federal Planning Bureau, who hosted the OECD in Brussels for their report launch.
According to the OECD, these wage subsidies rose from 0.4% of GDP in 2000 to 2% in 2023 and cover employer social security exemptions, subsidising first hires, and other withholding tax exemptions, such as those on overtime pay.
For subsidies such as R&D tax incentives, the report notes that some are ineffective and are given to business activities that would have taken place anyway, especially in multinational firms.
Overall, the OECD argues that some of these subsidies may be unnecessary and calls for all Belgian federal and regional business subsidies to be reviewed, with some given expiry dates.
Crucially, they note that gradually withdrawing ineffective R&D and wage subsidies would help reduce the tax burden on labour.
The OECD's economists also call out Belgium's gap between labour and capital income tax rates, one of the largest in the OECD, and note that increased tax benefits and simplified rules for incorporating as a business encourage self-employed workers to incorporate as management companies to optimise taxes.
Attempts to reduce the use of management companies for tax optimisation have recently become a flashpoint in Belgium's budget negotiations.
On tax more broadly, the organisation restated its view that Belgium needs to improve its tax compliance and collection.
Belgium has one of the worst VAT compliance gaps in the EU, estimated at around €6.1 billion in the OECD's report, or 14% of potential revenue.
The federal government has taken steps to address the gap, such as introducing mandatory e-invoicing. From next year, a new VAT receipt lottery will be introduced to help clamp down on VAT evasion in the hospitality sector.
