Belgium has come out of the global financial crisis faster than the euro area as a whole, but high public debt and the need to anticipate the cost of its ageing population require urgent fiscal consolidation, according to the OECD’s latest Economic Survey of Belgium.

Reinforcing economic dynamism by improving access to the labour market, particularly for young people and immigrants, is also a priority, says the report. At the same time economic growth needs to become greener. Belgium’s relatively weak environmental taxes should be developed to improve growth prospects and living standards. The report, presented today in Brussels by OECD Secretary-General Angel Gurría in the presence of Belgian Prime Minister Yves Leterme, shows that Belgium suffered only a relatively modest rise in unemployment during the crisis compared to other OECD countries. Nonetheless, the debt-to-GDP ratio increased by a total of 12.5 percentage points to 97 percent of GDP, derailing plans to pre-fund future financing needs.

“Belgium’s economy weathered the crisis relatively well, but it is nevertheless at a crossroad,” Mr. Gurría said. “While the crisis only had a modest impact, it has enhanced the urgency for a credible consolidation plan to put public debt on a downward path in the coming years to secure fiscal sustainability. Without such a plan, Belgium could continue facing higher borrowing costs owing to financial market concerns.”

The OECD Survey maps out requirements for a credible consolidation plan, based on the Belgian government’s own 2011 Stability Programme. To achieve this without hurting long-term growth prospects, Belgium should cut spending at all levels of government while making the tax system less distortive. Necessary tax reforms include a broadening of the tax base, lowering of rates and shifting taxes away from labour. Any reform of Belgium’s fiscal federalism arrangements should also focus on a sustainable burden-sharing of fiscal consolidation, the report says.

A special chapter underlines deep-rooted structural problems in the Belgian labour market and proposes policy reforms to increase employment. The reduced working hour schemes, used in Belgium twice as much as in Germany and Italy, served as a cushion during the crisis. However, an over-reliance on such schemes slows the structural adjustment of employment. The OECD also recommends reforms in the wage fixing system to better reflect domestic productivity developments and suggests the social partners consider phasing-out the wage indexation mechanism. Other recommendations include enabling young people to combine work and studies, integrating better immigrants into the workforce, and limiting early retirement programmes.

Belgium should also reduce the energy intensiveness of its economy, as part of wider efforts to achieve greener growth, the Survey says. A well-designed CO2 tax could reduce emissions from housing and transport, which are not covered by the EU emission trading scheme, as will fuel taxation, road pricing and congestion charges. The Survey also highlights the need for better co-ordination of environmental policies among all levels of governements.