ESPN Flash report 2015/26. Poverty impact of fiscal consolidation measures

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1 ESPN Flash report 2015/26 Poverty impact of fiscal consolidation measures Wouter Schepers & Ides Nicaise April 2015

2 EUROPEAN COMMISSION Directorate-General for Employment, Social Affairs and Inclusion Directorate D Europe 2020: Social Policies Unit D.3 Social Protection and Activation Systems Contact: Valdis ZAGORSKIS Valdis.ZAGORSKIS@ec.europa.eu European Commission B-1049 Brussels

3 EUROPEAN COMMISSION EUROPEAN SOCIAL POLICY NETWORK (ESPN) LISER (LU) AND APPLICA (BE) IN COOPERATION WITH OSE - EUROPEAN SOCIAL OBSERVATORY (BE) ESPN Flash report 2015/26 Poverty impact of fiscal consolidation measures Wouter Schepers & Ides Nicaise 2015 Directorate-General for Employment, Social Affairs and Inclusion

4 Europe Direct is a service to help you find answers to your questions about the European Union. Freephone number (*): (*) The information given is free, as are most calls (though some operators, phone boxes or hotels may charge you). LEGAL NOTICE This document has been prepared for the European Commission however it reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein. More information on the European Union is available on the Internet ( European Union, 2015

5 3 European Social Policy Network Flash Report Social Policies in Brief April 2015 Belgium Theme: Title: Category: Abstract: Description: Taxation, social contributions and fiscal consolidation Poverty impact of fiscal consolidation measures Effects of adopted legislation and reform proposals The fiscal consolidation measures taken by the new Federal and Regional (Flemish) governments are criticised by the opposition, trade unions and social NGOs for widening the gap between low-income households on the one hand and middle and high-income households on the other hand. Following the elections of May 2014, the coalition in power summons in a significant shift in social policies, mainly at the federal and Flemish levels. The general trend consists of wage moderation and tax cuts (mainly for enterprises) combined with cutbacks in social expenditure, with the aim of restoring financial and budget balances as well as the competitiveness of the Belgian economy. (a) A shift from social security to social assistance for large numbers of vulnerable job seekers The current federal government is holding on to the previous federal government s arrangements to lower the benefits for long-term unemployed to the national minimum income level rather than raising them to the at-risk-of-poverty threshold. This reflects a belief of policy makers that reduced social benefits will reduce disincentives to work and boost employment. The reform strengthening the degressivity of unemployment benefits was introduced in The Service for the Fight against Poverty, in collaboration with the Central Economic Council, carried out a poverty impact assessment of the 2012 reform. According to this assessment, the poverty rate among those who have been unemployed for more than 5 years (without being suspended) was estimated to increase dramatically; among single persons in this category, the expected increase was from 12 to 60%; and among household heads, from 61 to 66%. For school leavers, the measures entailed a prolongation of the waiting period to receive the so-called insertion allowances and a limitation of the period of entitlement to these allowances. Starting from January 2015, thousands of (young) unemployed lost their insertion allowances. According to estimates of the National Unemployment Office, 17,879 unemployed were no longer entitled to these allowances during the first two months of These reforms will increase the pressure on the local Public Centres for Social Welfare, since more school leavers and long-term unemployed will apply for (financial) aid. Recent statistics already show a strong increase of expenditure in the context of the Right to Societal Integration (RSI) in all three regions. In real terms, the total expenditure on RSI increased by 12.5% between 2010 and The increase in caseload among young people is twice as high as the average. A further increase is expected in the coming year. (b) Severe cutbacks in (public) employment and expenditure on social and cultural organisations The federal government has also announced large cuts in the number

6 4 of civil servants. It hopes to save 800 million euro in the personnel budget over the next five years by replacing only one in five retiring civil servants. The Flemish government also intends to reduce the staff in its ministries by the end of Recent estimates for the upcoming federal budgetary control exercise revealed an additional financial gap of almost 1 billion euro in the social security budget. According to the Minister for Social Affairs and Public Health, this is mainly caused by the sharp decrease of social security contributions: the accelerated reduction in administrative staff has already resulted in a loss of approximately 750 million in social security revenues. Other cutbacks affect active labour market programmes for disadvantaged groups. The Flemish government revealed its plan to reform the work training enterprises (leerwerkbedrijven). These third sector projects aim to facilitate the step towards the regular labour market by offering on-the-job training and guidance to vulnerable groups of low-skilled and long-term unemployed. Past research has demonstrated the effectiveness (and indeed substantial return on investment) of these projects (Nicaise, 2007). The government argues that the subsidies will be shifted to the commercial sector the question remains whether the social effects will be equally convincing. In addition, the Flemish government will drastically reduce the subsidies for youth, sports and cultural organisations. (c) Austerity measures affecting disproportionately more poor and middle-class households, as well as the nonworking population There is a continued effort towards cost containment in the health insurance budget. The initial growth target for the health care budget was 4.5% in real terms up until It had been reduced to 2% in 2012 and 2013 and increased again to 3% for 2014 and The new federal Government is planning to implement a growth target of 1.5% in real terms, putting at risk ongoing investments. The government is also planning a 355 million cutback in the health care insurance by Related measures include higher patient contributions for specialist consultations and a quicker release from hospital for women giving birth (without supplementary support after returning home). The ending or reduction of subsidies to basic services such as minimum water provision, childcare, higher education and public transportation will have a disproportionate impact on low-income households. Decenniumdoelen (a coalition of civil society organisations) estimated that the average monthly loss of purchasing power caused by these measures amounts to 840/year for the 20% households with incomes below 21,000/year i.e. more than 4% (De Wereld Morgen, 8/1/2015). In parallel to the austerity measures discussed above, the federal government announced a tax deduction for working people, which means that only working households will be (partly) compensated for the austerity measures. The removal of the maximum wages for public sector CEOs was seen as an additional sign of an explicit regressive redistribution policy. (d) (e) Regressive tax reforms (this will be addressed in a future Flash Report) An index leap applied to wages and not to home rents

7 5 The Belgian parliament approved wage restraint legislation by introducing an index leap. Under the new law, Belgian wages and benefits that are linked to the retail price index will not be topped up by 2% (which normally automatically happens when prices rise by 2%). The measure is expected to help to create new jobs. A claim from social organisations, that the index leap should be applied to home rents as well, was rejected by the government. Outlook & Commentary: Further reading: Authors: The government programme has resulted in social unrest, culminating in a general strike on 15 th December 2014 and some of the largest demonstrations in the past decades. The budgetary control exercise in March-April 2015 has provoked new unrest among social organisations and labour unions: they fear that new fiscal consolidation measures will push more people into poverty. Meanwhile, labour unions have organised several strikes and demonstrations. The unions are mainly opposing the inequitable distribution of the burden of austerity. An independent social impact assessment of the recent (and anticipated) government measures would therefore be highly recommended. Decenniumdoelen 2017 (2015), De effecten van de federale en Vlaamse beleidsmaatregelen op gezinnen met een laag inkomen, Brussel: Decenniumdoelen, 15p. Defeyt, P. (2015), Les budgets du Revenu d intégration sociale: évolutions et explications, Sombreffe: Institut pour un Développement Durable, 12p. De Wereld Morgen (8/1/2015), Lage inkomens zwaar getroffen door besparingen: Nicaise I. (2007), Active labour market policies and social inclusion: the case of Flemish social enterprises, in: DE KONING J. (ed.), The evaluation of active labour market policies. Measures, public-private partnerships and benchmarking, Cheltenham: Edward Elgar Publ., pp Wouter Schepers (wouter.schepers@kuleuven.be) & Ides Nicaise (ides.nicaise@kuleuven.be).

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