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On the basis of its short term economic forecast of September and revised figures for the medium-term international economic environment, the FPB has updated its medium-term outlook 2007-2012. GDP growth should reach 2.1% on average and should be driven by both domestic demand and exports, although the structural loss of export market shares should remain significant: while growth in our potential export markets will reach 6.8% a year on average, exports are expected to record an average annual increase of 5.4%.
The growth of private consumption (1.8% on average) should be in line with the growth of real disposable income (1.9% on average). Gross fixed capital formation should continue to register sustained growth, attaining an average of 3.1%, mainly reflecting an increase in business investment, but also an acceleration of public investment in view of the local elections of 2012. Inflation (as measured by private consumption deflator growth) should be below 2% on average during the projection period, despite an acceleration in 2008: inflation could even climb to 2.5% next year, according to the latest update of the monthly inflation forecasts of FPB. Limited wage increases (lower than productivity gains), the increase in interest rates, a negative output gap and a moderate increase in imported costs are the main factors accounting for the low inflation rate in the medium term.
Total employment will increase by more than 40,000 jobs a year on average during the projection period, due to sustained economic growth combined with persistently modest labour productivity (1.4% per year). Due to ongoing structural shifts in the sectoral composition of employment, the manufacturing industry will incur a further loss of 6,000 jobs a year on average, whereas market services should gain 46,000 jobs a year. The employment rate is expected to increase from 62.6% in 2006 to 65.4% in 2012; the fall in the unemployment rate (from 13.8% in 2006 to 11.0% in 2012 -broad definition) should accelerate at the end of the projection period, when baby-boomers will leave the labour force on a massive scale.
The pace of employment growth should have nearly doubled during the period 2001-2012 compared with the previous decade, despite very similar average economic growth rates for both periods.
STU 04-07 was finalised on 10 December 2007.
Although cuts in employers’ and employees’ social-security contributions (SSCs) are designed to enhance the employment of low-skilled and low-productive labour, across-the-board gross wage increases may weaken the effectiveness of these policies. Some of the disincentives on medium-low employment could be remedied by adapting the rules for SSC cuts or by reforming the personal-income tax system.
Following an across-the-board gross wage increase and assuming no adjustments in fiscal and SSC legislation, take-home wages of the medium-low-wage earners will increase by far less in comparison with other wage categories, undermining their supply of labour, while their total wage cost will increase by far more, undermining demand for their labour. The article will break down the overall marginal tax burden into the impact of SSC and personal-income tax parameters.
All rates are defined as a percentage of gross wages, unless stated otherwise. The income levels marked out on the horizontal axis of Graphs 1-4 correspond to the income thresholds spelled out by the legislation on SSC cuts. Wages and SSC cuts are per quarter. The analysis of the SSC rates is based on the 2007 parameters (second quarter) of the “harmonised structural measure” (employers’ SSC cuts) and the “work bonus” (employees’ SSC cuts). Employers’ and employees’ SSC cuts cannot exceed the contributions that are legally due (32.35% and 13.07% of the gross wage). The personal-income tax rates apply to a full-time working single earner without dependents, who qualifies for the tax brackets and tax allowances prevailing in 2006. This tax payer claims only the standard default tax allowances prescribed by law. Additional tax breaks, relating e.g. to mortgages, third-tier pension funding, etc., are ignored. Being mostly lump-sum, these tax breaks would lower the average income tax rate for all income brackets, but also lower the marginal income tax rate for low income brackets at the expense of higher marginal rates for medium- low incomes, exacerbating the marginal fiscal pressure on medium-low gross wages.
The share of taxes on labour in the marginal wage cost rises from 25% to 50% for very low wages, peaks at 78% for medium-low gross wages and flattens down at 68% for high wages (Graph 1). The reasons are that SSC reductions are a mixture of fixed-amount and degressive cuts, causing marginal SSC rates to be particularly high for medium-low-wage earners, and that marginal personal- income tax rates rise fast for medium-low income brackets.
Graph 1 - Overal marginal tax rate on labour and its breakdown (% of wage cost)
Although employers’ SSC cuts apply to all employment in businesses, they are more generous for the lower- paid (see Graph 2). The low-wage focus itself is appropriate because cutting payroll taxes on low-wage labour (broadly defined) creates more jobs than across-the-board employers’ SSC cuts, as demonstrated by e.g. the Federal Planning Bureau1 and a number of UCL researchers2. The basic reduction is an across-the-board cut (€400 per quarter), which is topped up with a low-wage supplement (for gross wages up to €5,870 per quarter – i.e. about 35% of the workforce employed by businesses) or a high-wage supplement (for wages in excess of €12,000). As the differential between the low-wage threshold and the actual wage narrows, the low-wage supplement is phased out (with a slope of 0.162). The high-wage supplement increases with the differential between the actual wage and the high-wage threshold (with a slope of 0.06). Special-category supplements, varying between €30 to €1,000 per quarter, may come on top of that. They are linked to the age of the employee (the youngest and the oldest groups), the nature of the firm (start-ups), the working hour regime (4-day working week), the level of formal education (low formal education), or the employee’s employment history (first-time employed, long-term unemployed). Since most of those additional special-category employers’ SSC cuts expire after a period of time, they are ignored in the analysis here.
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Macroeconomic forecasts and analyses > Short-term forecasts and business cycle