Government can restore trust by tackling fraud thoroughly
In the first part of our conversation, Peter De Keyzer, Chief Economist and Managing Partner at Growth Inc., calculated the cost of fraud for us. For Belgium, this involved 6.4% of the gross domestic product or an astronomical amount of around 25 billion euros each year. The opportunities are therefore enormous for our government. Although it does not stop at combating fraud alone. Fighting fraud should also bring about a change in mentality in all of us in the longer term. In this second part, he establishes the link between fraud and society.
Some societies are more prone to fraud than others. You took a closer look at that.
“I mainly looked at tax fraud, which to me is the macroeconomic unit. You have the tax burden, you have confidence in the government and you have tax fraud. You could actually assume that the higher the tax burden, the more I try to avoid tax and seek out fraud. And the lower the trust in the government, the less I find it a problem to commit fraud and take money from that government. Or, in a country where the population has confidence in the government and where the tax burden is low, tax fraud will also be less common.”
Belgium is at number 1
If you look at those figures for Belgium, it doesn't look good for our country.
“Unfortunately, Belgium doesn't score that great. The tax burden here is very high and trust in the government is relatively low.”
“Belgium has long been at number 1 in the global ranking that compares the tax burden on labour, income tax and social security contributions with other countries. And if you take into account the ranking of trust in government that the OECD draws up every year, you see Belgium once again dangling behind compared to all other OECD countries. Only in Chile and Poland do people have even less faith in the government.”
6.4% could be an underestimate
At the other end of the spectrum you see countries like Switzerland, the Scandinavian countries, The Netherlands and Luxembourg.
“These are the countries where the government is highly trusted. And the more you trust the government, the more willing you will be to hand over money to that government. You know that they spend your tax money well. Whether that is true or not, that trust is there.”
“While just the opposite happens when confidence is low. Then you try to pay the government as little as possible. Belgium is therefore on the worst part of that triangle. Confidence in the government is low and at the same time the tax burden is very high. That means that the 6.4% we talked about earlier could even be an underestimate.”
Trust and Corruption
Each year, Transparency International, a global coalition against corruption, publishes a ranking from least to most corrupt country. If you look at the top of the list, you will again see the Scandinavian countries and Switzerland.
“The indicator shows that a lot of trust in the government is accompanied by relatively little corruption. You can see that the two are related and it confirms once again that the potential in Belgium to fight fraud is huge. Unfortunately, Belgium is not very well positioned there, so it will have to step up.”
There are still elements that play a role and that ensure that fraud can take place.
“Actually, there are three big reasons why fraud can happen.”
- There is the opportunity. Just think of tax havens, the technical illiteracy of the counterparty, too few internal controls, ...
- There's the incentive. You can make a profit out of it and that will only encourage more fraud.
- Finally, there is rationalisation. Everyone does it, so why shouldn't I? My neighbour pays for his renovation off the books, so I do too.
“Tax burden, trust in government, opportunity, incentives, rationalisation all play a role. And in fact, it can all be reduced to mutual trust in a society. Francis Fukuyama has written a beautiful book about it with 'Trust - The Social Virtues and the Creation of Prosperity'. The bottom line is that a society in which there is a lot of mutual trust and in government, will create prosperity faster than other societies. Just because of the low transaction costs. He refers to Norway, Denmark, Sweden and Finland as so-called high trust societies. These are countries where you find your lost wallet intact at the police station the next day and where standards, values and ethics are therefore still particularly important.”
Order flowers in a high and a low trust society
You have a good example to illustrate the difference between 'high trust societies' and 'low trust societies' in practice.
“In a high trust society, it's no problem if I call a flower shop and ask them to put together a 30 euro bouquet that I can pick up in an hour. The florist trusts that I will come by in an hour, that I will also pay and that he has put together a bouquet that he can no longer sell, for nothing. Low transaction costs.”
“Imagine the same story in a low trust society. That is completely different. The florist may want to know who I am and may ask to forward a copy of my identity card. And if he has seen it, then of course he wants to know if I will definitely come by. He may ask for an advance to build in more security. And so it goes back and forth, so that the transaction costs rise. And in the end I don't need flowers anymore.”
“Ordering flowers in a low trust society therefore costs me more time, effort and mistrust than in a high trust society. It goes without saying that a high trust society with less fraud will create added value faster. In a low trust society I will eventually arrive without flowers. Too much hassle. The opportunity will therefore pass and the added value that is created is much more difficult to achieve.”
You cannot impose a high trust society. You can't say that we all have to trust the government from tomorrow. That should grow gradually. How could you approach that in a country like Belgium, so that we evolve into a high trust society?
“Our government must ensure that it actually fights fraud. The opportunity is already huge, but the crucial question is what our government will do to recover 25 billion euros. Our government can do a lot with that amount. Not just once, but every year. Fraud is timeless and it is an ongoing race between who is cheating and who is being cheated on. But by investing in better weapons you can recover a lot of fraudulent amounts. And then the cost is relatively low in relation to the amounts it can recover.”
“When that happens, trust in government can grow and the willingness to pay taxes will also increase. You also create an environment in which paying taxes is no longer perceived as an injustice. Everyone pays taxes, so do I. So by actively and effectively fighting fraud, you can restore trust in the long run.”
In the meantime, we must all remain vigilant.
“If we really want to live in a free society, where we can enter into transactions with anyone, where we can go where we want, then we must indeed remain constantly vigilant. Freedom without vigilance is naivety. We can therefore enter into transactions with each other, but that vigilance – which Graydon can also intervene in – guarantees that you can do so in complete freedom. The alternative is a government that regulates and controls everything and nobody wants that. We want a free society and a free market, but vigilance is crucial to guarantee that prosperity.”