Université de Mons - European Commissionec.europa.eu/economy_finance/events/2013/25092013... ·...

Université de Mons Prof. PAGANO, Service de Finances publiques et fiscalité

Université de Mons

Mons & Charleroi

Prof. PAGANO, Service de Finances publiques et fiscalité

DG ECFIN WORKSHOP :“Medium-term challenges for

the Belgian economy”

The Current Institutional Setupof Belgium : Bonus or Handicap

for the Economy ?

By Prof. Giuseppe PAGANO


Introduction

Three questions

conomic growth and efficiency

Size of government and fiscalconsolidation

Solidarity and convergence

Conclusion


Introduction

ecentralization process : 6 stages

Const. Art. 1 : Belgium is a federalstate composed of Communitiesand Regions (1993)

“Double layer” or “twofold” system


1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

1st reform1970 :Constitutionalcreation ofCommunitiesand Regions

2nd reform1980 : Effectivecreation ofFlemish &WalloonRegions; OFL

3rd reform1988-1989 :Effective creationof BrusselsRegions;Transfer ofimportantresponsibilities;SFL : “fair return”+ NSM

4th reform1993 :“Federalstate”

5th reform2001 :RefinnacingofCommunities;broader taxautonomy forRegions

6th (ongoing)reform2013 :New transferof importantresponibilities;(almost) unlimitedtax autonomy forRegions; new NSM


Introduction

Responsibilities of Communities RegionsEducationCulture (broadcasting)Preventive side ofhealth carePersonal matters

EconomyResearchInfrastructuresTransportLocal autoritiesEmployment (training)AirportsTown planningEnvironmentWater & energyAgriculture


Introduction

Three questions


Three questions


Economic growth & efficiency

Size of government and fiscalconsolidationSize of government and fiscalconsolidation


Introduction

Three questions

conomic growth and efficiency


Economic growth and efficiency

Why decentralization fostersefficiency and ecnomic growth

Reduces cost of information

Makes choice possible (Tiebout)

Makes benchmarking possible

Makes tailored policies possiblewhen preferences differ (Oates -1972)



Why decentralization curbefficiency and ecnomic growth

Economies of scale or (increasingreturns)

Makes structure more complicated

Spillover & tax export



Citizens’ welfare can be improve byimplementing the optimal level ofcentralization / decentralization

WelfareFl

WelfareW

Sa E

A

D

B

C



Did decentralization in Belgiumhave an impact on growth ?

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1

1,5

2

2,5

3

3,5

4

4,5

5

5,5

B UE-15 Euro Zone

1970 : 1streform

1980 : 2ndreform

1989 : 3rdreform

1993 : 4threform

2001 : 5threform



Test : GB = f(GUE + Decentralization)



Decentralization in Belgium seems tohave had little influence on overalleconomic growth. Between 1960 and2010, Belgium has followed the globaltrend of OECD and EU towardsreduced growth rates and there is noindication in data analysis that thereduction of the growth rates couldhave been in Belgium more or lesssignificant than it has been elsewhere.


Small open country (export = 80 %of GDP), sensitive to the economiccycle of its partner’s

Belgian decentralization processalso pursued non economic goals :

culture and language diversity,political stability

successfully


Introduction

Three questions



(1) Size of government


Size of government and budget consolidation

Why decentralization can increasethe size of government

Multiplication of administrativebodies (two layer system)

Diseconomies of scale


Why decentralization can reducethe size of government

Competition among federateentities

Avoid “Waffle-iron policy”



Automaticallyproduces twowaffles evenwhen only oneis needed orwanted



Did decentralization ratherincrease or reduce the size ofgovernmentin Belgium ?


Test : PEB = f(PEUE + Decentralizat.)


Did decentralization ratherincrease or reduce the size ofgovernmentin Belgium ?


There is a strong indication thatdecentralization in Belgium at leastdid not hamper the reduction of thesize of overall government, or evenmay have fostered it.


Introduction

Three questions




(2) Deficit


Reducing the size of governmentgenerally implies reducing thedeficit; What in Belgium ?


Test : BBB = f(BBUE + Decentralizat.)


Did decentralization play a positiverole in the reduction of the deficit ?


There is a strong indication thatdecentralization in Belgium at leastdid not hamper the reduction of thedeficit, or even may have fostered it.This conclusion is coherent with thethe preceding one. .


Introduction

Three questions




(2) Deficit

(3) Public Debt


The impact of decentralization onthe level of public debt is probablyof indirect nature : through deficit



Did decentralization in Belgiumplay a positive role in the reductionof the debt ratio ?


Test : PDB = f(PDUE + Decentralizat.)


Did decentralization play a positiverole in the reduction of the debtratio ?


Globally, there remains a strongindication that decentralization inBelgium at least did not hamper thereduction of the public debt, or evenmay have fostered it. Thisconclusion is coherent with the oneof the preceding sections.


Introduction

Three questions


Size of government and fiscal consolidation


(1) Solidarity

19551958

19611964

19671970

19731976

19791982

19851988

19911994

19972000

20032006

2009

50

60

70

80

90

100

110

FL W

89,8

78,8

95,2

75,1

99,2

71,7

GDP per capita; indices : Belgium = 100

1963 2007


100,4

74,2


Impact of “fair return”(Milliard Bef of 1989 or %)

W

Cost of Resp. IT share (%) “F R” Diff.eg

Fl

Brus

Tot

121.1

87.3

26.3

234.7

58.57

30.07

11.36

100.0

137.5

70.6

26.7

234.7

+16.3

-16.7

+ 0.4

0.0




The SFL of 1989 is based on theprinciple of “fair return” but alsosets out a NSM



Fiscal capacity

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

-20

-15

-10

-5

0

5

10

15Brussels

Fl

W



Equalization and paradox ofrevenue

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

2010

80

85

90

95

100

105

110

115

Fl W Bxl



Poverty trap

Fair return and NSM have oppositeeffects; which one is strongest ?



Poverty trap



Poverty trap

Is real but has to be tempered :

- does not exist if Communities areincluded,

- is slowly diminishing

- disappears with the 6th reform


Introduction

Three questions



Solidarity and convergence(1) Solidarity

(2) Convergence



Did the Regions of Belgium ratherconvergence or diverge throughthe decentralization process ?



Standard deviations (/ means) ofGDP per capita

0,6198

0,593

0,5731 0,5727

0,542

0,5148

1960 1970 1980 1990 2000 2010

0,3

0,34375

0,3875

0,43125

0,475

0,51875

0,5625

0,60625

0,65


Introduction

Three questions




Conclusion


Conclusion

Decentralization in Belgium ...

1. Has probably not had anynoticeable impact on growth

2. Has been efficient in preservingculture and language diversity andin preserving (to some extent)polictical stability (at least, at thisstage; for the future, see yourcristal ball...


Conclusion


3. Has probably had a positiveimpact on reducing the size ofgovernment, the deficit and thedebt

4. Had been associated with astrong solidarity mechanismbringing about to largeequalization of revenue per capita


Conclusion


5. Has been associated with arather convergent evolution of GDPper capita

Thus... globally rather bonus thanhandicap for the Belgian society.

Université de Mons

Mons & Charleroi


DG ECFIN WORKSHOP :“Medium-term challenges for

the Belgian economy”

The Current Institutional Setupof Belgium : Bonus or Handicap

for the Economy ?

Thank you very much...

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