Koen Algoed, Ph.D., Economics, HUBrussels and Vives, KULEUVEN, Jachthorenstraat 14, Heverlee, 3001, Belgium
Ageing challenges Belgian public finances as it will raise public expenditures by 4.3 percentage points of GDP by 2030. Under current expenditure assignments only the federal government is confronted with a rise of age-related expenditures in terms of GDP, the net ageing costs being zero in % of GDP for the Regions and Communities.
The paper argues that changes in the fiscal federalism arrangements should be at the core of a comprehensive strategy to address the projected rise in ageing-related costs.
Sustainable public finances require increasing employment rates, especially in the South of the country. However, regions, which are responsible for education and active labour market policies, are confronted with a base tax back problem. The current vertical equalization system in conjunction with the grant financing system, leads to a poverty trap for the Regions benefiting from equalization.
Section 1 describes the key features of the Belgian financial arrangements for the federated entities. In section 2 the vertical fiscal gap is discussed. Section 3 highlights the base tax-back problem whereas section 4 discusses policy options for reducing vertical and horizontal fiscal imbalances in Belgium.