Economic impact of the public debt

Following the financial and economic crisis, there was a marked increase in the public debt of the euro area countries, the United States, the United Kingdom and Japan. In addition, without a change of policy, the public debt of those countries would maintain an upward trend, a key factor being the rising costs associated with population ageing. The article analyses the risks and implications of the expansion of the public debt currently evident in most of the advanced countries. The difficulties which certain euro area countries are experiencing in raising finance on the markets illustrate some of those risks. After outlining the movement in the public debt in the advanced countries in recent years, a simulation is produced in view of showing the future debt pattern in the absence of any change of policy. This exercise clearly highlights the potentially exponential growth of the public debt in most of the advanced countries. Next, the impact of the public debt on economic activity and inflation is examined. That impact appears to be very heavily dependent on the circumstances, which may vary greatly over time and between countries. When looking at the impact of the pattern and size of the public debt on economic activity, it is always important to distinguish between the short and the long term. Finally, the article sets out the need for fiscal consolidation and appropriate strategies for achieving that. The strategy focuses on three aspects: fiscal consolidation aimed at reducing the public debt, boosting the employment rate and productivity, and reform of the pension systems, health care and care of the elderly. For most of the advanced countries, large-scale reform programmes will be necessary in order to restore sustainable public finances. Some countries have already implemented consolidation measures, while others have yet to put most of the measures in place.public debt, deficit, economic growth, government expenditure and revenue, taxation, fiscal policies

Trends in taxation of privately held assets

In most advanced countries, the budgetary rebalancing effort to be accomplished is considerable, with the result that new sources of finance are frequently being sought out. In Belgium, where levies on labour are already very high, there are those raising the possibility, in this context, of additional taxes on consumption or activities that cause pollution, as well as that of a rise in taxation on wealth and the income from wealth of private individuals. The article attempts to position Belgium’s existing levies on income from wealth and wealth itself in relation to those applying in the other countries of the EU. Whilst not claiming to be exhaustive in any way, it is intended to present the main characteristics and trends. It takes a look firstly at some statistical and methodological aspects of levies on wealth and the income from wealth. Then, the situation in Belgium is analysed. This analysis is followed by an international comparison, within the bounds of what is possible, of the scope and level of the various levies linked to the assets of private individuals. Lastly, a concise account is provided of advances with respect to cooperation on tax matters at the international level as well as the European directive on the taxation of savings. It is no simple matter to compare levies on the wealth of private individuals, owing to the complexity of the systems and the diversity of the components of wealth. Nevertheless, several general findings can be expressed. Compared to the average in the EU, levies on the wealth of private individuals and the income that they draw from it in relation to GDP are fairly substantial in Belgium overall. This is due in part to the relatively significant volume of assets held by private individuals in Belgium, but also to the rates of certain levies. It should be noted that in Belgium, the annual income from wealth is generally taxed moderately and levies on capital gains are virtually non-existent. On the other hand, wealth-related transactions such as the purchase of housing and the inheritance of estates are taxed relatively heavily. The actual rate of taxation is distributed very unfairly between the different forms of assets. Some are heavily subsidised, by way of tax deductions granted in the context of taxation of natural persons, such as pension savings, whilst some financial products, particularly those with short terms to maturity, are taxed quite heavily. At the international level, it is the case that levies on wealth in the strict sense have disappeared in most countries over the last twenty years. They have persisted in a number of countries and it is not impossible that the need to undertake budgetary consolidation will prompt others to reinstate them. In the last few years, an effort has been made to reduce international tax evasion, particularly tax evasion relating to income from wealth. In fact, the free circulation of capital and the lack of coordination between countries provided private individuals with the opportunity to evade tax on income from wealth. In order to combat tax evasion effectively, the OECD has been encouraging transparency and the exchange of tax information for about fifteen years. In 2009, under international pressure, numerous countries (including Belgium) took measures to comply with the OECD’s tax standards. At the EU level, the member states adopted a directive on the taxation of income from savings in 2003. Omissions in the current text, which has been in effect since 1 July 2005, provide private individuals with various opportunities to get round the directive. In 2008, the EC proposed some modifications to the directive in order to rectify these problems. Nevertheless, the new text has not yet been adopted by the Ecofin Council.