Boosting Work Incentives in Belgium

 The proposed reform package in Belgium specifically targets two primary groups—second earners and low-wage workers—to address the country's relatively low employment rates. By refining tax and benefit structures, the reforms aim to remove barriers that currently discourage these demographics from entering or remaining in the workforce.

1. Second Earners

The sources highlight second earners as a critical group whose work incentives are currently hampered by elements of joint taxation.

• The Marital Quotient Reform: Currently, the "marital quotient" allows a portion of a higher earner's income to be transferred to a lower-earning partner for tax purposes. While this reduces a couple's overall tax bill, it creates a "participation trap" for the second earner by making their entry into the workforce less financially rewarding.
• Proposed Action: The reform aims to halve the marital quotient from 30% to 15% for non-pensioners, reducing the maximum transferable amount from EUR 13,050 to EUR 6,525 per year. This change is intended to increase the net benefit for second earners who choose to work.

2. Low-Wage Workers

Low-wage workers in Belgium face a particularly high tax burden compared to other OECD nations, which can diminish the incentive to take on more hours or seek employment.

• Expansion of the Workbonus: The government targets this group by expanding the existing Workbonus, an in-work benefit designed to lower the tax burden for low earners.
• Proposed Action: Two specific adjustments are suggested:
  • Increasing the maximum benefit amount: Raising the personal income tax credit component of the Workbonus.
  • Lowering the withdrawal rate: Increasing the income limits at which the benefit begins to phase out, allowing workers to earn more before losing the support.

3. Impact on Gender and "Flexible Individuals"

While the reforms are framed around income levels and household roles, the sources indicate that the practical impact is heavily gendered.

• Women as a Key Demographic: The increase in labour supply driven by these reforms is largely attributed to women. Women’s share of full-time work is projected to increase by 0.48 percentage points (p.p.), nearly three times the increase expected for men (0.17 p.p.). This is due to both higher participation rates and an increase in hours worked by those previously in part-time positions.
• Flexible Individuals: The analysis focuses on "flexible individuals," defined as main or second earners aged 17-65 who are not retirees, students, or disabled. This group represents 60% of Belgium's working-age population and is the primary source of the projected boost in participation.

4. Distributional and Socio-economic Context

The targeting of these groups is balanced to ensure that work incentives do not come at the cost of social stability.

• Poverty and Inequality: While the reduction of the marital quotient alone might slightly increase poverty and inequality, the sources state that these effects are offset by the Workbonus expansions.
• Income Deciles: The reforms provide the highest income gains to decile 1 (the lowest earners). However, the sources note that in deciles 3, 4, and 10, the gains from the Workbonus may not fully compensate for the losses incurred by the marital quotient reform.

The reform package designed to boost work incentives in Belgium consists of three specific components: one adjustment to the personal income tax system and two expansions of the existing in-work benefit (the "Workbonus"). These components are strategically paired to address low participation rates among second earners and low-wage workers while maintaining a near-neutral impact on the national budget and social indicators.

1. Reforming Personal Income Tax: The Marital Quotient

The first component targets the marital quotient, a system where a portion of a higher earner's income is transferred to a lower-earning partner for tax purposes. While this reduces a couple's total tax bill, it discourages the second earner from working because their initial earnings are taxed at a higher rate as they "replace" the transferred income.

• The Change: The reform proposes halving the marital quotient from 30% to 15% for non-pensioners.
• The Impact: This reduces the maximum amount that can be transferred from EUR 13,050 to EUR 6,525 per year. By reducing this joint taxation element, the reform increases the financial reward for second earners entering the workforce.

2. Expanding the Workbonus: Increasing the Benefit Amount

The second component focuses on the fiscal Workbonus, which is a personal income tax credit for low earners. Belgium currently has a high tax burden on low-wage workers, and this expansion is intended to lower that barrier.

• The Change: The reform increases the Fiscal Workbonus percentage for different wage tiers:
  • Low-wage component: Increased from 33.14% to 41.04%.
  • Very-low wage component: Increased from 52.54% to 65.06%.
• The Impact: This directly increases the net disposable income for the lowest earners, making employment more attractive than remaining on social benefits.

3. Expanding the Workbonus: Lowering the Withdrawal Rate

The third component addresses the "cliff" or rapid phase-out of benefits as earnings rise, which can discourage workers from taking on more hours.

• The Change: The reform lowers the withdrawal rate by increasing the upper income limits for the Workbonus components:
  • The very-low wage limit rises from EUR 2,723.36 to EUR 2,846.29 per month.
  • The low-wage limit rises from EUR 3,207.40 to EUR 3,431.05 per month.
• The Impact: By stretching the benefit over a wider income range, workers can earn more before their total benefits are completely withdrawn, thereby encouraging them to work more hours (the "intensive margin").

Contextual Synergy of the Components

These components function as a "reinvestment" package. The marital quotient reform is projected to generate EUR 478 million in additional tax revenue. This revenue is then used to fund the Workbonus expansions, which have a combined cost of approximately EUR 573 million.

This synergy ensures that while the marital quotient reform might increase poverty and inequality on its own, those effects are largely offset by the Workbonus components. Ultimately, the package is expected to increase the share of "flexible individuals" in full-time work by 0.33 percentage points, with the most significant impact seen among women.

The reform package in Belgium is designed to be nearly budget-neutral, with a relatively small total fiscal cost. The primary strategy involves using revenue generated from reducing joint taxation to fund expansions of in-work benefits.

Total Budgetary Cost

The combined reform package is projected to lead to an annual budgetary cost of EUR 124 million. This represents approximately 0.02% of Belgium's GDP based on 2024 figures.

Revenue vs. Expenditure

The fiscal impact is a balance between one revenue-generating measure and two expenditure-increasing measures:

• Revenue Generation (The Marital Quotient): Halving the marital quotient for non-pensioners is expected to generate EUR 478 million in additional personal income tax (PIT) revenue.
• Expenditure/Revenue Loss (The Workbonus):
  • Increasing the maximum Workbonus amount is projected to reduce PIT revenue by EUR 294 million per year.
  • Lowering the Workbonus withdrawal rate (by increasing income limits) increases government expenditure by EUR 293 million due to reductions in employee social insurance contributions (SIC).

Secondary Fiscal Effects and Interactions

The reforms create several secondary interactions within the tax and benefit system:

• Tax Base Adjustments: Because social insurance contributions are deducted from the PIT base, lowering the withdrawal rate increases the taxable income for some beneficiaries. This is expected to generate an additional EUR 12 million in PIT revenue.
• Special Contributions: The Workbonus withdrawal reform is projected to raise EUR 3 million from special insurance contributions.
• Welfare and Grant Savings: Higher work participation and income lead to small savings in other areas, such as EUR 4 million in child benefits and EUR 0.2 million in education grants.
• Social Assistance: Conversely, there is a slight projected increase in social assistance spending of EUR 4 million.

Fiscal Strategy: "Re-investment"

The sources characterize this package as a re-investment strategy. The EUR 478 million gained from reforming the marital quotient is essentially funneled back into the workforce through the two Workbonus expansions, which have a combined net cost of approximately EUR 602 million (offset slightly by the secondary revenues mentioned above). This approach allows the government to significantly alter work incentives for targeted groups while maintaining a stable overall fiscal position.

The reform package aimed at boosting work incentives in Belgium is characterized by a "re-investment" strategy where the negative distributional effects of one reform are largely balanced by the positive effects of others. While the package has a near-neutral impact on overall poverty and inequality, its effects vary significantly across different income deciles and demographic groups.

1. Overall Income Gains and Losses

The combined reforms are projected to increase the average equivalised disposable income by a modest 0.03%. However, this average masks significant variation across the income distribution:

• The Largest Gainers: Households in decile 1 (the lowest earners) see the highest average income increase of +0.25%.
• Net Losses: Despite the overall package being positive, households in deciles 3, 4, and 10 are expected to experience small average losses of -0.10%, -0.03%, and -0.04%, respectively. In these specific groups, the gains provided by the Workbonus expansions do not fully compensate for the income lost through the reduction of the marital quotient.

2. Component-Specific Distributional Impacts

The three components of the reform package affect different parts of the income distribution in distinct ways:

• Marital Quotient Reform: This measure decreases disposable income across the entire distribution, with an average reduction of 0.20%. The impact is most severe in deciles 3 and 4, where losses can reach up to -0.43% on average.
• Workbonus Amount Expansion: This component generates income gains across the distribution, but the benefits are most concentrated at the bottom, particularly in deciles 1, 3, and 4.
• Workbonus Withdrawal Reform: These gains are more concentrated in the middle of the distribution, reaching their maximum impact around decile 5.

3. Impact on Poverty and Inequality

When viewed as a whole, the reform package has a negligible effect on national poverty and inequality metrics because the components act as counterweights:

• Poverty Rate: The marital quotient reform alone would increase the poverty rate by 0.1 percentage points (p.p.), but the two Workbonus reforms each reduce it by 0.1 p.p., resulting in a net change of 0.0 p.p..
• Inequality (Gini Coefficient): The marital quotient reform would increase the Gini coefficient by 0.0003 points. This is offset by the Workbonus amount reform (-0.0003) and the withdrawal reform (-0.0001), leading to a slight net decrease in inequality of -0.0001.

4. Distributional Effects on Labour Supply

The distributional impact is also evident in how different genders respond to the incentives. The boost in full-time work is primarily driven by women, whose share of full-time employment is projected to increase by 0.48 p.p.—nearly three times the increase seen in men (0.17 p.p.). This is attributed to a significant shift from "no work" (-0.38 p.p.) and "part-time work" (-0.13 p.p.) into full-time roles among women.

The reform package in Belgium is specifically designed so that its components act as counterweights, resulting in a near-neutral impact on national poverty and inequality levels. While the reduction of joint taxation alone would worsen these metrics, the concurrent expansion of in-work benefits is intended to provide an offsetting "re-investment" into lower-income households.

1. Opposing Effects of Reform Components

The sources describe how the different elements of the package push poverty and inequality in opposite directions:

• The Marital Quotient Reform: By reducing the tax benefits for single-earner couples, this measure alone would increase the poverty rate by 0.1 percentage points (p.p.) and raise the Gini coefficient (a measure of inequality) by 0.0003 points.
• Workbonus Amount Expansion: This component acts as the primary counterbalance, reducing the poverty rate by 0.1 p.p. and lowering the Gini coefficient by 0.0003 points.
• Workbonus Withdrawal Reform: This measure further reduces the poverty rate by 0.1 p.p. and slightly decreases inequality by 0.0001 points.

2. Combined National Impact

When these measures are integrated, the cumulative effect on Belgium's social indicators is minimal:

• Poverty Rate: The net change in the poverty rate is projected to be 0.0 p.p., maintaining the baseline level of 9.4%.
• Gini Coefficient: The overall inequality is expected to see a negligible decrease of -0.0001 points, moving from a baseline of 0.2185 to 0.2184.

3. Impact on Low-Income Deciles

While the national averages remain stable, the distributional effects vary for those at or near the poverty line:

• Highest Gains for Decile 1: Households in the lowest income decile are projected to see the most significant average income increase of +0.25%. This is because the gains from the Workbonus amount expansion (+0.23%) and the withdrawal reform (+0.09%) far outweigh the small loss from the marital quotient reform (-0.07%) for this group.
• Vulnerability in Deciles 3 and 4: These groups face the largest relative losses from the marital quotient reform (up to -0.43% in decile 3). While the Workbonus expansions largely compensate for these losses, deciles 3 and 4 still experience small net income decreases of -0.10% and -0.03%, respectively.

4. Secondary Social Effects

The sources also note minor interactions with other welfare programs that influence household stability. The reforms are expected to lead to:

• A slight increase in social assistance spending (EUR 4 million).
• Small savings in child benefits (EUR 4 million) and education grants (EUR 0.2 million) as household incomes rise from increased work participation.

The reform package is projected to boost both labour participation and the number of hours worked among the Belgian population. Specifically, the share of individuals engaged in full-time work is expected to increase by 0.33 percentage points (p.p.). This growth is primarily driven by a reduction in the shares of people who are not in work (-0.23 p.p.) or are currently working part-time (-0.07 p.p.). Interestingly, the sources note a slight decrease in overtime work (-0.03 p.p.), suggesting some adverse effects at the intensive margin where certain workers may reduce extra hours as their net income changes.

The overall labour supply response is largely driven by women, whose transition into full-time work (an increase of 0.48 p.p.) is nearly three times higher than the increase projected for men (0.17 p.p.). For women, this shift results from both higher participation rates (a 0.38 p.p. decrease in those "not in work") and a significant increase in hours worked by those moving out of part-time positions (-0.13 p.p.). Men also demonstrate higher participation rates with a 0.09 p.p. decrease in the "no work" category, but their total shift toward full-time work is tempered by a 0.08 p.p. decrease in overtime.

These outcomes were analyzed specifically for a demographic defined as "flexible individuals," which includes the main or second earners in a household aged 17–65 who are not retirees, students, or disabled. This group represents approximately 60% of Belgium's working-age population. The sources further clarify that while participation and hours worked will shift, the impact on the unemployment rate is expected to be minimal. Ultimately, these projected labour supply gains suggest that the strategy of combining Workbonus expansions with marital quotient reductions effectively targets the "participation traps" currently hindering second earners and low-wage workers.