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

2. Overview. Main Developments in Public Finances

Overview 51 Overview main develoPments in Public Finance Maud Nautet and Luc Van Meensel 1 introduction The purpose of this chapter is to give a brief overview of the main developments in Belgian public finances during the 2000-2010 period. It does not aim to provide detailed explanations on the subject, but to establish a general context. It is based on the statistics presented in the annex, up to date at the end of June 2012. The other chapters in this publication will go into more detail on the key facts concerning public finances during the period analysed. The first section focuses on the budget balance and the public debt. The second describes the main changes concerning public revenues. Next come some comments on primary expenditure. The fourth section offers a very succinct account of debt management. The last section briefly describes the developments relating to the budget balances of each subsector for the period analysed. Finally, a set of conclusions is drawn. 1. Maud Nautet is a member of the Public Finance Division of the Research Department at the National Bank of Belgium. LucVan Meensel is Head of the Public Finance Division of the Research Department at the National Bank of Belgium. 2. 52 The Return of the Deficit 1. general government Budget Balance and deBt 1.1 overall balance In 2000, the general government budget was in balance for the first time in decades, and the primary balance exhibited a large surplus of 6.5 % of GDP. That situation suggested an extremely promising outlook for public finances in the future. The April 2000 report by the Federal Planning Bureau embodies this optimism, projecting a budget surplus that would expand in future years2 . With no change of policy, the institute then estimated the surplus at 2.4 % of GDP for 2005. In this context, the federal government of the day made plans to reduce the tax burden on labour, to provide for additional expenditure on some items, to refinance the Communities and to gradually build up budget surpluses. Those surpluses were to be set aside in the Ageing Fund and would cater for the expected rise in expenditure on pensions due to the population ageing which would have an impact primarily from 2010 onwards. This balanced budget was the outcome of many years of fiscal rigour, divided into two phases. The first phase started with the ‘economic recovery policy’, implemented from 1982 onwards. At that time, an austerity policy had become indispensable on account of the ballooning deficit during the 1970s. In 1981, the budget deficit even reached a peak at 15.5 % of GDP according to the actual public finance statistics. During the 1990s, in the run-up to monetary union, a second consolidation phase was implemented in order to satisfy the Maastricht criteria. Due to the substantial budgetary efforts made, Belgium was among the first wave of countries to adopt the euro. 2. Federal Planning Bureau (2000), Economic outlook 2000-2005,April. From 2000 to the outbreak of the financial and economic crisis that dominated the end of the 2000-2010 decade, the budget remained in balance Overview 53 chart 1: Total revenue, total expenditure and budget balance of general government (% of GDP) Source: NAI. 54 The Return of the Deficit overall3 . However, the primary balance, which had recorded a sizeable surplus in the initial years of the decade, declined steadily over the years, reflecting an easing of fiscal policy after the start of monetary union. That trend was not confined to Belgium; relaxation of budget discipline connected with what is sometimes called ‘post-Maastricht fatigue’ was seen in almost all the euro area countries. During this period, however, the deterioration in the primary balance was offset by falling interest charges, so that the overall fiscal balance was maintained. This was the outcome of the steady decline in the implicit interest rate on the public debt throughout that period, combined with the reduction in the debt ratio up to 2008. Thus, between 2000 and 2010, interest charges fell from 6.6 to 3.4 % of GDP. chart 2: General government budget balances (% of GDP) Source: NAI. 1 According to the ESCB methodology. 3. Note that in 2005 an exceptional item caused a serious deterioration in the Belgian overall balance: the reorganisation of the SNCB group and the assumption of a large part of its debt by the Railway Infrastructure Fund led to a large transfer...