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17 February 2012
Faced with a deteriorating European market, undermined by uncertainties around the Euro currency, Belgium is looking at fresh austerity measures in the forthcoming weeks. Richard Asquith, Head of VAT at TMF Group, comments on the potential for a Belgian VAT rate increase.
Belgium faces debt worries as the economy stalls, opening up an €11 billion funding gap at the end of last year - the recent hard-negotiated 2012 budget pact already appears insufficient.
The obvious source of new revenues may be consumers, with a rise in Value Added Tax (VAT). Belgium’s standard VAT rate is currently 21%. A rise would copy France and Germany’s lead, helping to fund a reduction in employee taxes, which in turn would help stimulate much-needed growth. Click here to see all current EU VAT rates.
Mounting problems with no sight of growth
- Belgium slipped back into recession at the end of 2011 (-0.3% shrinkage in GDP over the last six months of the year).
- Whilst it enjoyed a good start to the first half of 2011, buoyed up by German expansion, the brewing Euro crisis impacted confidence and trading.
- This led to credit rating cuts from S&P and Moody’s at the end of 2011 based on high levels of debt – debt to GDP is over 100%, compared to France at 80% – funding pressures and deleveraging by trading partners.
- The EU warned Belgium at the end of last year that it is at risk of failing to cut its deficit below the Euro compact 3% target.
- The 2012 budget, negotiated at the end of last year between the six coalition partners, aimed to reduce the deficit to less than 3% of GDP - Belgium is attempting to achieve a 2.8% deficit in 2012.
- This included austerity changes to pensions and entitlements.
- However, since the budget accord, weaker than expected growth means a further budgetary gap has opened up.
- The Belgian National Bank said this week that it expected an economic contraction of 0.1% for 2012.
Additional austerity required - Social VAT rise to mirror France and Germany
- Belgium needs to undertake significant tax reform of its labour markets to regain competitiveness and to create economic growth.
- Belgium has the highest employer taxes in the OECD, which discourages employment and inward investment.
- Belgium is one of the most popular destinations for non-European companies to locate their European headquarters, and so it needs to keep business taxes low.
- The most obvious way to fund a cut in employers’ social security contributions would be to match it with a Belgium VAT rise.
- This strategy of providing growth-creating employment subsidies was first adopted by Germany in 2007 (it raised VAT 3% to cut its “Unemployment Supplement Levy").
- President Sarkozy has just launched a similar proposal in France with a 1.6% VAT rise to underwrite a cut in France’s labour taxes. This is scheduled for October 2012, but the intervening Presidential elections, which President Sarkozy is struggling to prevail in, may derail this plan.
- This type of switch in the tax burden would effectively give Belgium a much-needed internal currency devaluation as VAT is not charged on exports and so Belgium’s goods would become cheaper on the global market with the cut in labour charges.
Any decision is likely to be announced at the start of March. Please click the link below to be kept up-to-date.
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