The Return of the Deficit: Public Finance in Belgium over 2000-2010

Foreword

Foreword 7 Foreword In the 1990s, Belgium’s public finances were dominated by rigorous consolidation which reduced the budget deficits of all government entities from more than 8% of GDP in 1992 to virtual balance in 2000. The primary surplus actually exceeded 6% of GDP throughout the 1998-2001 period. This was necessary so that, in the ensuing 15 years or so, the public debt could be reduced to the 60% target under the European Stability and Growth Pact. It must be said that the pressure to join the euro – resulting from the Maastricht Treaty – was a powerful argument for persevering. In the first decade of the present century, this strategy was abandoned to some extent. While the budget was roughly balanced until 2007, the surplus on the balance of primary transactions (excluding interest payments on the public debt) shrank to 3.8% of GDP. The overall balance was maintained only by taking advantage of the declining interest rate for that purpose, instead of using these ‘windfall’ profits – applicable throughout the euro area – to achieve an even bigger reduction in the public debt ratio, which in fact dropped to 84% in 2007. The 2008 financial crisis negated many of the efforts made in preceding years. Our primary balance dropped to -2% of GDP in 2009, putting us back more than twenty-five years. In the EU, it was agreed that the economy would not be allowed to slide deeper into recession. Hence the argument that we should not just allow 8 The Return of the Deficit the automatic stabilisers to operate on the budgets, but should actually pursue a real recovery policy. When I was appointed Prime Minister at the end of December 2008, I proposed taking no additional measures to stimulate the economy beyond those already decided by the previous government (+/- 0.5% of GDP). And that is what happened. I also proposed starting to bring down the deficit gradually as soon as economic growth became positive again, at a pace tailored to the strength of the growth. When drawing up the budget for 2010-2011 (we produced a budget covering two years) we were already able to start cutting the deficit. The year 2010 – for which I, as Prime Minister, had drawn up the budget – ended with a deficit of 3.8% of GDP (compared to 5.6%. in 2009), which was good, certainly in comparison with neighbouring countries. In 2011, the year without a federal government, the deficit was maintained at roughly the 2010 level (3.7%). The primary balance also improved in 2010, from -2.0% to -0.4%. Once we had a federal government again we could work to achieve the 3% deficit target for 2012 with a view to leaving the Excessive Deficit Procedure. For 2015 we must aim at a balanced budget for all government entities together, which implies an effort of 1% of GDP per annum. The difficult 2015 budget will be drawn up after the June 2014 elections. All in all, the situation today cannot be compared with that of 1981 or 1993. In the latter year, for instance, the difference between our debt and the European average was close to 70% of GDP; in 2012 Belgian government debt would only be 9% of GDP higher than the average for the euro area! In general, Belgium has pursued a cautious fiscal policy since the financial crisis, even though this crisis had a serious impact on us in view of our ‘overbanked’ character: banks too big for such a small country. That caution was necessary because we had learnt some hard lessons in the 1980s and 1990s. ‘Never again’, said all the traditional parties. We could have done even better if we had made wiser use of the interest rate bonus – provided by the strong euro with low interest rates from 2000 to 2007 – in order to reduce the national debt. We could also have done better in apportioning the burden between the federal government and the federated entities, and thus would have been expected Entity II to Foreword 9 contribute more towards the consolidation. We did the opposite. A third mistake was the failure to reform social security. The 2005 Generation Pact was too timid, but fortunately we had the pension reforms of 2012. The growth in health care spending also persisted at too high a level after the rigours of the 1990s. Overall, however, up to the end...