This report was closed on 21 October 2020. As such, neither the start of the second wave of the COVID-19 virus nor the new health and economic policies that followed were taken into account.
The COVID-19 crisis is first and foremost a health crisis, but the pandemic and the measures designed to counter the spread of the virus are also having an unprecedented impact on the economy. This poses significant policy challenges in the short term. However, it is also crucial to ensure that, in the longer term, the already weakened productivity growth does not deteriorate further. Indeed, productivity growth is the main motor of economic growth, which in turn determines the evolution of the standard of living but also for the policy leeway. Furthermore, the financial sustainability of the public finances and social security is largely influenced by the level of economic growth.
As can be seen from the analysis in point 2.1, productivity growth in Belgium had been slowing down for some time, but this trend was exacerbated by the 2008-2009 financial and economic crisis. The slowdown in productivity growth occurred in all major groups of activities, but was most pronounced in the manufacturing sector, where the best-performing industries in particular experienced a sharp slowdown. This is in contrast to the slowdown in productivity growth in market services, which is primarily accounted for by a further decline in productivity growth in the least productive industries.
The impact of the COVID-19 crisis on productivity growth is still difficult to quantify. As such, point 2.2 provides an overview of the various channels through which the crisis may have an impact on productivity growth. The starting point in this regard is the growth accounting model, whereby will be looked successively into the possible effects of the crisis on the composition of labour (e.g. possible hysteresis effects in the case of long-term unemployment, possible effects on education outcomes and training), capital deepening (possible effects on public and private investment, on the nature of investment and on FDI) and into the total factor productivity (possible effects on digitalisation, research and innovation, business dynamics, competition, the organisation of value chains and globalisation).
This listing of transmission channels provides an overview of the potential risks that need to be managed, but also of the opportunities to tackle the persistent weak productivity growth. Taking this analysis into account, the members of the NPB identified in point 3 a number of strategic strands on which future government interventions have to be based. The starting point for this exercise was the recommendations issued each year by the European Council to Belgium in the context of the European Semester. An important motivation for this is the precondition of the European Commission to align with these recommendations in order to receive European support under the European Recovery and Resilience Facility (RRF). For the first time, the Commission may turn to the financial markets to raise the necessary funds to support the economic recovery of the Member States. To call on this aid, Member States must submit a national recovery and resilience plan in line with the objectives of the new European strategy, Next Generation EU. The European Commission also envisages in the implementation of RRF a role for the National Productivity Boards, and this report aims to respond to this.
As was clear from the previous report, there are various factors that have an impact on productivity growth, all of which merit due attention. However, in the current context, the members of the NPB are demanding priority attention, both federal and regional, for the following four strands:
- More focus on STEM and lifelong learning
The COVID-19 crisis is having a major impact on the labour market. Unemployment has already risen and is expected to rise further in the near future. Moreover, the existing mismatch in skills risks becoming even wider because low-skilled people are hit the hardest, while the digital transition - with rapidly changing needs in terms of qualifications - may be accelerated due to the crisis. Especially when taking into account the ageing population, and thus the declining proportion of the working-age population, it is crucial that measures be taken to ensure that as few talents as possible are lost. In the first instance, this requires that today's generation of young people is adequately prepared for tomorrow's labour market. But bolstering lifelong learning is also crucial to facilitate the transition from obsolete jobs, unemployment or inactivity to the emerging professions.
- Importance of green and digital investments, both public and private
Already before the COVID-19 crisis, a number of structural evolutions (in particular, the dynamics of an ageing population and health care) threatened the long-term viability of public finances. These problems have not disappeared because of the current crisis. Furthermore, Belgium has high levels of public debt, which are rising sharply as a result of the crisis. Without a public debt trajectory which remains credible for the financial markets, the Belgian government runs the risk of an increase in her interest rates. Therefore, there is a need for a plan to bring the public finances into structural balance as soon as the economic situation allows. However, contrary to what has happened in recent years, this strategy must not be at the expense of public investment, which is already much lower in Belgium than that in our main European partners.
In choosing investments, it is important to focus on the areas which are essential to support the productivity growth. Additionally, these investments must fall within a long-term digital and green transition. The latter aspect is not only relevant because of the direct impact of the environment on the well-being of the population and the opportunities such a transition offers for economic growth, but the green transition is also necessary to improve the risk management. Environmental disasters such as climate change and loss of biodiversity can have serious social and economic consequences. Without being exhaustive, there is a need for additional public and private investment in the areas of energy efficiency, sustainable transport, protection against climate risks, and digital infrastructure.
Investments in research and innovation will also be important to make the green and digital transition possible. That is why it is important to maintain investment in R&D, while at the same time increasing the efficiency of public R&D expenditures. More generally, on the basis of spending reviews and policy evaluations, ways to promote the efficiency of existing spending at all levels of government need to be considered.
- More intense focus on digitalisation
The COVID-19 crisis has given an extra stimulus to the digitalisation process. The use of digital technologies is a strong driver of productivity growth. Moreover, further digitalisation can also contribute to solutions for a number of complex challenges facing society (e.g. healthcare challenges, achieving the goal of carbon neutrality by 2050, the transition to renewable energy generation, etc.). It is therefore important to take advantage of this momentum to further support and accelerate the digital transition by encouraging all economic actors to invest in the use of these technologies. This calls for a focus on skills, organisational innovation and management capacities, a fast, secure and reliable broadband infrastructure, a digital culture (including among SMEs and government) and regulation that is sufficiently in line with the digital economy. In all this, sufficient attention must also be paid to the potentially negative consequences of digital technologies (e.g. security and privacy challenges) and the aim must be to strive towards a just transition.
- Importance of business dynamics
Sufficient business dynamics are a crucial determinant of productivity growth. Even before the crisis, business dynamics were already declining in many developed countries and the current crisis may exacerbate this phenomenon. As such, it is important to ensure favourable conditions and incentives for young innovative start-ups and for the upscaling of these start-ups. A significant element in this regard is a further reduction of the administrative burden and, more generally, an improvement in the quality of regulation, which ensures the proper functioning of the market, among other things. Besides stimulating the start-up and continued growth of businesses, it is also important that exit barriers for unviable businesses are removed as much as possible. Among other things, this implies avoiding situations where the government continues to support structurally unviable businesses in periods of rising unemployment. Indeed, such a policy is tantamount to an implicit tax on healthy businesses.