Supply-Side Economics takes root in Belgium

Today’s Brussels Metro (bilingual FR/NL – registration required), reports that Belgium’s social security budget deficit may pass the €2 billion mark in 2004, although the relevant Belgian minister claims that these figures are not definitive. The socialist union FGTB/ABVV wants to shift social insurance payments from being a payroll tax to an income tax, because non-salaried workers – independents and the like – pay into a separate fund.

What I find surprising in this short, front page article is towards the end, when Pieter Timmermans, head of the Belgian Chamber of Commerce, claims that:

Il ne faut pas plaider pour des recettes suppl?mentaires, le taux d’imposition en Belgique est d?j? trop ?lev?. Il faut plut?t diminuer les imp?ts pour red?marrer l’?conomie et garder la r?duction des charges de €800 millions pr?vue par le gouvernement. Ce genre de mesure permettra de cr?er de l’emploi et d?gagera des recettes suppl?mentaires pour la s?curit? sociale

We shouldn’t be asking for more taxes, they’re already too high in Belgium. We should lower taxes to get the economy moving and keep the €800 million tax cut that the government has already passed. This kind of measure will create jobs and lead to higher social security revenues.

That certainly sounds to me like supply-side economics. It hasn’t worked terribly well elsewhere, as others have pointed out. Europe has largely been free of this sort of thinking and I certainly hope that it doesn’t spread beyond the employer’s associations. Either cut taxes and accept lower spending, raise them and accept the consequences, or run deficits with the knowledge that you have to pay them back. This doctrine of painless tax cuts is not going to help anyone.

12 thoughts on “Supply-Side Economics takes root in Belgium

  1. Considering the Stability and growth pact, and the too-rigid-and-inflexible fiscal discipline it imposes on the eurozone, supply side economics are the last thing you need to worry about.

  2. I think, though I was young then and it was a while ago, that rightist in Sweden would sometimes make supply side arguments until the late nineties or so.

  3. Funny how you refer to Paul Krugman as “others” ;).

    But I guess the real problem at hand is not the usual “supply side or rather not” debate. This is about distribution, pure and simple. I don’t know a lot (to be exaggerating) about the particularities of the Belgian welfare system, so it’s difficult to judge, but in Germany, there’s some justification for the left’s dsire to have independents and others in the public system – because money was in ready supply, the contribution funded systems were often used to handle and pay for things the federal government should have paid for directly – mostly those locked into the state welfare system paid for these measures. This is especially important with respect to the costs of the German reunification which was to a large extent handled through welfare contributions – at the time that was not even the worst option given the macroeconomic problems Germany and Europe were facing in light of the massive German demand of money. It has, however, severely deteriorated the financial situaton of the welfare funds.

    And of course, the labour market structure is different today from what it was like when the continental welfare states grew – with a less clear cut employee society, a move to a less payroll supported welfare state does make some sense, in my opinion. But it’s clear that the predictable losers of such a change are not happy with it…

  4. Belgium can afford to go into debt for a while–it’s not an economic boom at the moment, after all–but if they aren’t fully concious of the consequences of that they’ll end up with the sort of economic situation that eviscerated Ireland during the 1980s.

  5. Supply side economics are rare in Europe, barred by Maastricht?

    Meet a nice fellow named Jacques Chirac, and his buddy Raffarin. Their econmic policies are pretty much the same as Bush’s, i.e. cutting taxes. Without seriously cutting spending, which is unfeasible in France, anyway.

  6. Linca – running deficits is not supply-side economics. It’s the belief that tax cuts lead to increased tax revenues by enhancing growth that defines supply-siders.

    There are reasons to criticise deficits and there are sometimes good reasons to run them, and there are sometimes good reasons to cut taxes and good reasons to raise them. The point, however, is that when you cut taxes, you can expect lower revenues, not higher ones.

  7. David – my Swedish boss says exactly the same thing, but points to Russia as an example.

    Tobias – I might add Brad Delong to that list of others too. I’m not actually defending the existing arrangement, which, I think, really does have very serious problems. I want to see a better public debate on how taxes are collected and distributed in Europe, I just don’t want supply-side slight of hand to intervene in the debate. Believing that you can cut taxes and still raise the same amount of money is false, and it’s an argument that shouldn’t even be on the table.

    Aidan – I don’t think Belgium can effectively raise income, payroll and sales taxes. I pay somewhere around 50% and my employer pays another 30% or so. Belgium does, however, have a very low capital gains tax, but for some reason raising it never seems to come up in discussions here.

  8. Scott, you seem to be trying to have it both ways. On the one hand you say that supply side economics shouldn’t even be on the table. On the other, you say that Belgian taxes are already too high for them to go higher.

    If Belgian tax were 100% do you think tax revenues would be higher than today? Perhaps they’d be zero; after all, why bother working if everything you earn is taken from you? I know I wouldn’t. Which means that supply side economics is true; what’s in doubt is at what level of tax do tax increases lead to decreases in tax revenue (or, alternatively, at what level of tax do tax cuts lead to increases in tax revenue).

    Krugman is talking about the US which has much lower taxes than Belgium. Trying to argue the supply side case in the US is therefore absurd, but it isn’t in Belgium – where taxes, as you point out, are punitive.

  9. John, if Belgian tax revenues were 100%, then tax revenues would be higher. Of course, at 100% taxation you have to plan the entire economy and provide all the services the public wants, which is not a particularly good idea and would likely inhibit long run growth.

    However, you have moved to the very extreme end of the argument. If taxes were 0%, growth would slow down too, since the government would be unable to offer any services at all, an economic calamity would ultimately ensue that would probably be larger than 100% taxation. Should we therefor conclude that raising taxes increases growth?

    In the world of real, functioning economies with effective tax rates above 0% and below 100%, there may be reasons to raise or lower the tax rate, or to run a deficit, but lowering taxes with the claim that they can be recuperated on the short-run through greater growth is dishonest.

  10. No, I cannot agree Scott. If Belgian tax was 100% no-one would work or they’d work in the black (already a big issue in Belgium at well below 100% tax). Either way, tax revenues would be lower, not higher, than they are now.

    I didn’t say that 0% tax was the right objective. I just said that unless people are willing to work even though they don’t get paid (what basically happens if tax is 100%), then tax revenues must at some point start to contract as tax rates rise. That may not happen until tax rates are 99%, but I doubt that. Would you be willing to work as hard as you do now for just 1% of your gross salary?

    On top of that, if employers have to pay a lot of tax to employ someone, then they’ll be less willing to employ as many people – replacing them with machines for example and cutting tax revenues.

    Krugman and de Long are arguing about the US economy with its low taxes. Belgium has high taxes so what they say may not apply to Belgium. You may be right that Belgium is still not so high tax that tax revenues will go down if rates go up. But let’s not just dismiss the possibility.

  11. John – I think on the short term I can still dismiss the idea – at least so long as one isn’t jumping to the extremes of near 100% taxation. Belgium got its high tax rates incrementally, without at any point suddenly seeing tax revenues shrink. Remember, if my taxes went from 50% to 75%, I would still work, even for half the money, because like most people I don’t have a choice. Although the state provides a lot, it doesn’t provide everything. At 100% taxation, that has to change – then the state has to provide everything.

    I suppose it is possible to lower tax revenue by raising taxes if one raised them a whole lot – like from 50% to 99% – and destroyed the whole economic order at once. But there again, it is at the extremes where the problem arises. I find it hard to believe that Belgian tax revenue would grow in the short term if taxes were lowered 5%, and I feel pretty certain that they would increase if taxes were raised 5%. In the long run, the story might be different, but it might not.

    I suppose I have to concede that it’s possible with a sudden shift in the tax rate of by some huge amount – enough to cause short term damage to the whole economy – to actually lower total revenue. However, the same logic applies to lowering taxes as raising them.

Comments are closed.