In autumn 2000 the Belgian government approved a comprehensive personal income tax reform which is being phased in progressively between 2002 and 2005. This reform was motivated by the high levels of taxation that generated adverse labour market effects. In principle, such a tax reduction involves two types of effects. First, in the short run there are possible macroeconomic effects particularly if the tax reductions are perceived to be permanent. Second, in the longer run there are positive microeconomic effects on labour supply and demand.
In the Belgian case there has been no budgetary compensation for the tax cuts. Therefore there will be a negative impact on the government accounts and the public debt. To the extent that this leads to expectations of future increases in taxes, any possible short-term boost to demand would be lowered. As tax wedges are reduced, the reform will have a positive impact on labour supply, employment and output. But these positive effects can only last in so far as the reform is not put at risk by the implied deterioration in public finances.