Federal Planning BureauEconomic analyses and forecasts

1

An assessment of Belgian NRP macroeconomic objectives in a medium term framework

Francis Bossier and Igor Lebrun

38th CMTEA, Kranjska Gora,14-15 June 2007

2

The economic outlook for the Belgian economy

• Detailed macroeconomic projection

• Forecast for current year based on a economic budget

• Simulation with five year horizon using the HERMES model

• Unchanged policy scenario with regard to fiscal and social policies

• International scenario produced by international organizations

• Exogenous variables generated outside the core model

Starting point for variants: impact of higher crude oil prices, effects of various tax policies, effects of labour market reforms,…

3

Key macroeconomic results for the medium-term outlookDemand-side

2001-2006 2007-2012

Potential export markets 5.4 6.9

GDP 1.7 2.1

Private consumption 1.3 1.8

Gross fixed capital formation 2.2 2.7

Net exports(contribution to GDP)

0.2 0.2

Private consumption prices 2.1 1.9

Domestic employment 0.7 0.9

4

Key macroeconomic results for the medium-term outlookSupply-side

2001-2006 2007-2012

Potential GDP 2.1 2.0

Labour productivity 1.1 1.4

Capital deepening 0.3 0.5

TFP 0.8 0.9

Potential employment 1.0 0.6

Labour supply 1.0 0.4

NAIRU 0.0 0.2

-4

-3

-2

-1

0

1

2

3

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Output gapin % of potential GDP

6

Are effects of structural reforms introduced in the baseline?

Yes, when data and methodology available (analysis of micro data, survey, single-equation or satellite model).

Examples:• Labour market reforms:

Impact of restrictive access conditions to early retirement Impact of pension bonus on employment

• Reforms of Network industries (telecom, energy): Impact of liberalisation on production structures Impact of increased competition on prices and trade

When considered too uncertain, no impact is introduced

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Major quantitative objectives of the Belgian NRP

• Objective 1: continue fiscal consolidation debt ratio under 60% in 2014 budget surplus of at least 1.0% in 2010

• Objective 2: reduce labour costs decrease tax wedge on wages by 2.2% of GDP between 2005 and 2010

• Objective 3: reform labour market participation rate of older workers increasing faster than the average

(EU15) by 2010 an employment rate verging on 70%

• Objective 4: boost R&D and continue reforms in network industries 3% GDP investment in R&D by 2010

• Objective 5: reduce environmental nuisance reducing CO2 emissions by 7.5% for the 2008-2012 period compared

with 1990

8

Some key results of the medium term projection in relation with the NRP

objectives

9

-15

-13

-11

-9

-7

-5

-3

-1

1

1980

1985

1990

1995

2000

2005

2010

-15

-13

-11

-9

-7

-5

-3

-1

1

Billion of euros % of GDP

Bill

ion

of

euro

sGeneral government financing capacityBillion of euros and % of GDP

% o

f G

DP

10

3

4

5

6

7

8

9

10

1994 1997 2000 2003 2006 2009 2012

Primary surplus

Primary surplus and interest paymentsin % of GDP

11

3

4

5

6

7

8

9

10

1994 1997 2000 2003 2006 2009 2012

Primary surplus Interest charges

Primary surplus and interest paymentsin % of GDP

12

Belgian Stability Programme in % of GDP

2006 2007 2008 2009 2010

Belgian Stability Programme 0,0 0,3 0,5 0,7 0,9

Budget balance 0,2 0,1 -0,5 -0,3 -0,1

Deviation 0,2 -0,2 -1,0 -1,0 -1,0

13

-1

0

1

2

3

4

5

6

7

8

1995 2000 2005 2010

Primary surplus Primary surplus required to stabilize the public debt

Primary surplus required to stabilise the public debtin % of GDP

14

Public debt

60

70

80

90

100

110

120

130

140

1980

1985

1990

1995

2000

2005

2010

50

100

150

200

250

300

350

Billion of euros Euro area (% of GDP) % of GDP

In %

of

GD

P

In b

illio

n o

f euro

s

15

20

25

30

35

40

45

50

1995 1998 2001 2004 2007 2010

Fiscal and parafiscal pressure on labour Total tax burden

Taxes on labour and total tax burdenin % of GDP

16

Employment evolution and employment rate

-75

-50

-25

0

25

50

75

100

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

50

52

54

56

58

60

62

64

66

Employment evolution (thousands- LHS) Employment rate (RHS)

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Employment evolution and employment rate

-75

-50

-25

0

25

50

75

100

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

50

52

54

56

58

60

62

64

66

Employment evolution (thousands- LHS) Employment rate (RHS)

18

Older worker labour market participation

25

30

35

40

45

50

55

60

65

70

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Total population

19

Older worker labour market participation

25

30

35

40

45

50

55

60

65

70

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Total population People 55 and over

20

Registered and structural unemployment

6

7

8

9

10

11

12

13

14

15

16

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Registered unemployment

21

Registered and structural unemployment

6

7

8

9

10

11

12

13

14

15

16

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Registered unemployment Structural unemployment

22

Energy intensity of GDPindex 2000 = 100

70

80

90

100

110

120

130

140

150

160

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

23

Greenhouse Gas emissionsin million of tons of CO2 equivalent

125

130

135

140

145

150

155

160

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

24

125

130

135

140

145

150

155

160

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Kyoto objective

Greenhouse Gas emissionsin million of tons of CO2 equivalent

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Easing the fiscal and parafiscal pressure on labour

NRP objective: reduction by 2.2 of GDP between 2005 and 2010

Projection 2007-2012: reduction by only 0.75% of GDP

Additional effort- equal to 1.45% of GDP- to be planned.

Consequences of this additional effort simulated with a macroeconomic model

Actions simulated: a cut in indirect labour costs (reduction of employers and employees social security contributions)

Option 1: General reduction;

Option 2: Employers’ social security contributions reductions concentrated on low wages

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2007 2010 2012

GDP 0.02 0.36 0.53

Employment (%) 0.03 0.47 0.73

Employment (thousands) 1.34 20.58 32.65

of which: older workers 0.14 2.06 3.29

Employment rate 0.02 0.29 0.47

Employment rate (level) 62.5 64.1 65.2

Public finances

- Billion of euros -0.37 -3.53 -3.67

- % of GDP -0.11 -0.96 -0.92

GHG emissions 0.01 0.19 0.30

Simulation results: effects of the variant on the main macroeconomic indicatorsdifferences, in %, w.r.t. the baseline

Option I

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2007 2010 2012

GDP 0.03 0.41 0.66

Employment (%) 0.04 0.63 1.11

Employment (thousands) 1.66 27.73 49.84

of which: older workers 0.11 1.96 3.09

Employment rate 0.02 0.40 0.71

Employment rate (level) 62.6 64.2 65.5

Public finances

- Billion of euros -0.38 -3.82 -4.19

- % of GDP -0.12 -1.04 -1.05

GHG emissions 0.01 0.16 0.29

Simulation results: effects of the variant on the main macroeconomic indicatorsdifferences, in %, w.r.t. the baseline

Option II

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Conclusions

Sizable efforts still to be made in order to comply with the Belgian NRP objectives;

Contradictory objectives to be reconciled;

Targeted reductions in labour costs more efficient to meet labour market objectives;

Further budgetary choices to be made;

But higher growth through structural reforms could ease the process.

Federal Planning BureauEconomic analyses and forecasts

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