Is Belgium’s tax reform a breakthrough?

Belgium’s mid-2014 general election and those at the same time to the European Parliament saw the N-VA Flemish nationalists become the country’s strongest party with almost a third of the votes in Flanders and approaching a fifth nationally. A year later, the new coalition has achieved a significant tax reform to reduce Belgium’s high labour costs. Although the N-VA had until last year been part of the European Parliament’s group of the Greens/European Free Alliance, along with other left-wing regionalists, its free-market economic views led its four MEPs in the newly elected Parliament to join the European Conservatives and Reformists. The N-VA’s economic agenda is at least as important to it as Flemish independence, so from the start of negotiations on a new governing coalition in Belgium, it refused to work with the francophone Parti Socialiste, which staunchly defends the country’s ‘old’ economic system with its high taxes and inflexible labour laws.

Belgium’s present centre-right federal government was sworn in after four and a half months of negotiations, and includes francophone liberals, Flemish nationalists, Christian Democrats and liberals. The deal was no further state reform or devolution of powers to the regions, which was a disappointment to hardcore N-VA supporters. Without the Parti Socialiste, the government is weak on its southern flank, as the francophone liberals represent only a quarter of Belgium’s French-speaking community.

The opposition parties have predictably fiercely criticised the government’s plans for spending cuts, for making the labour market more flexible and for increasing the pension age from 65 to 67 by 2030. Last winter, Belgium’s trade unions organised strikes and took to the streets in protest.

But despite internal disagreements over austerity measures, this summer saw the coalition partners reach a significant deal on tax reform. Partly inspired by IMF and EU recommendations on reducing taxes on labour, where Belgium ranks top in the world, a tax shift worth €7.2bn will reduce the burden on employers and is expected to substantially improve the international competitiveness of Belgian. In return, electricity is to be more expensive, along with diesel fuel, while a so-called health tax is being introduced that mainly targets soft drinks.

Belgium’s opposition parties have, meanwhile, begun to say that the tax shift isn’t ambitious enough. That’s because a lot of sacred cows popped up during the negotiations, such as the tax privileges for those with a company car, the true level of taxes on capital or on income earned from renting property. The EU’s recommendations for higher taxes on environmental pollution and on real estate have only been partly followed, and leftist parties say Belgium’s rich are still escaping the taxman’s grasp.