Belgium Reins in Labor Costs, Raises Taxes in Budget Deal

The Belgian government agreed to rein in wage growth and reduce social security contributions for employers to restore competitiveness as it raised a tax on investment income for the second time to cut the budget deficit.

Salary increases will be limited to inflation adjustments for the next two years and employers will get a 400 million-euro ($512 million) annual reduction in labor costs, Belgian Prime Minister Elio Di Rupo told reporters in Brussels today. It took his six-party coalition more than a month to complete budget talks, cutting the deficit to 2.15 percent of gross domestic product next year from an estimated 2.8 percent in 2012.

Toughening the Competition Act, designed 16 years ago to keep labor costs from rising faster than those in neighboring countries, and making changes to the consumer price index basket should help Belgium preserve an automatic link between wages and inflation and gradually restore competitiveness at the same time. Belgian labor costs should rise 1.6 percentage points slower than those in neighboring countries in the next two years, according to government estimates.

“It will take six years of wage moderation and additional tax reductions to eliminate Belgium’s wage handicap completely,” Economy Minister Johan Vande Lanotte said today. “It’s better to do this gradually. We’ve seen in the nineties there’s always a backlash when you do it too abruptly.”

Competition Act

Belgian labor costs have outpaced those in Germany, France and the Netherlands by 5.2 percent since 1996, according to government estimates. Labor unions say employment subsidies should also be taken into account, reducing the gap to 3.4 percent.

An amended version of the 1996 Competition Act will force employers and labor unions to reduce that gap further during their biennial national wage negotiations in 2015 and 2017, while safeguarding indexation. In return, the government pledged to lower social security contributions by an additional 0.5 percent twice, which is more than the 0.3 percent cut that will take effect in April 2013.

“Since mid-2010, Belgian labor costs per unit of output have risen 2.5 percentage points faster than the average increase in our neighboring countries,” Johan Van Gompel, an economist at KBC Bank NV in Brussels, wrote in a note last week. “The main reasons are slower productivity growth and relatively steeper inflation that was passed through via automatic wage indexation.”

Fight Inflation

Changes to the index basket, such as using scanning data from supermarket counters and taking into account discounts during the sales season to better reflect actual purchasing trends, should slow labor cost increases by 0.4 percentage points in the coming years, according to government estimates.

“Belgium is a wealthy country, with very rich citizens and a highly indebted government,” said Finance Minister Steven Vanackere. “So Belgians should be happy when the government takes measures to curb inflation.”

The Belgian federal government’s 2013 budget includes 1.38 billion euros of spending cuts, more than half of which from a slowdown in welfare expenditure, and 2.08 billion euros of additional revenue when taking into account the reduction in labor costs for employers.

Tax dodgers will get a final chance next year to declare previously unreported income at a penalty rate of 15 percent and repatriate their capital at a 35 percent levy, which should bring in an additional 513 million euros next year.

Capital Gains

Di Rupo’s government also agreed to tax investment income at 25 percent, one year after the rate was raised to 21 percent from 15 percent. The measure should generate 361 million euros of extra revenue next year, Vanackere said. Capital gains made by investment companies will be taxed for the first time, at a 0.4 percent rate, bringing in an estimated 98 million euros.

The tax on premiums for individual life insurance contracts will rise to 2 percent from 1.1 percent, which should generate almost 140 million euros of additional revenue. A bank levy should bring in an extra 50 million euros, according to Budget Minister Olivier Chastel.

Investors have rewarded Belgium for sticking to its deficit targets since it took the country a record 541 days to form a government after the June 2010 elections. Risk-adjusted returns show Belgian government bonds gained 2.98 percent this year, the best performance in the euro region after Irish bonds.

French Gap

The country sold 10-year bonds at a record low yield of 2.418 percent last month and bondholders now have to pay less to protect Belgian government debt against non-payment than to insure French bonds, according to credit-default swap prices compiled by Bloomberg.

The gap between credit-default swaps on Belgium and France is now a negative 3 basis points, compared with a record 156 basis points in November 2011. Moody’s Investors Service cut France’s credit rating to Aa1 from Aaa yesterday. Belgium’s rated two steps lower at Aa3 by Moody’s.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

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