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

3. The Fiscal Stance. The Return of the Public Budget Deficit

The Fiscal Stance 65 The Fiscal Stance the return oF the Public budget deFicit Reginald Savage 1 executive summary The 2000-2010 decade got off to a most auspicious start from a budgetary point of view. The Belgian public budget deficit had almost disappeared at the end of the 90s and the economic outlook was optimistic for the coming years, based on the expected dynamics of the “new economy” technological paradigm. In that context, the medium-term projections by the Federal Planning Bureau (FPB) in 1999 and 2000, under unchanged policy assumptions, forecast the gradual emergence of substantive fiscal surpluses and, as a result, significant fiscal margins for expansionary policies. At the beginning of the decade, the fiscal policy framework was thus adopted on a dual basis: a) a policy of long-term sustainability geared towards the pre-funding of the future costs of ageing through the accumulation of budget surpluses in an ‘Ageing Fund’; b) a medium-term expansionary orientation mainly targeted to support employment and reduce the tax burden, this within margins consistent with the sustainability policy. 1. Reginald Savage is General Advisor at the Federal Public Service (FPS) Finance (Research Department ) and Professor at the UCL. He is member of the Secretariat of the High Council of Finance. 3. 66 The Return of the Deficit The slowdown in economic activity at the beginning of the 2000s following the collapse of the dot-com bubble and the 11/9 attacks seriously damaged the economic outlook. The cumulated loss of growth in 2001-2003, combined with the expansionary structural measures decided by the new federal government in its overoptimistic view, undermined the growing budget surplus targets. Deficits were prevented through recourse to one-shot measures (especially in 2003-2004). During the following term of office (2004-2007), the economic recovery and the continuing reduction in interest charges were not sufficient to offset the further deterioration of the structural primary balance. It was essentially from that period onwards that the structural budgetary slippage occurred: budgetary margins for expansionary policies disappeared, as shown by the sustainability gap indicator calculated by the FPB. Still, the expansionary fiscal and budgetary stance was maintained and even reinforced at the federal level (incl. social security), with a pro-cyclical bias in a favourable macroeconomic context. The financial crisis in 2008 spread rapidly to the real economy (with a very severe recession in 2009) and, later, turned into a European sovereign debt crisis. This, combined with a further expansionary budgetary stance, in this case anti-cyclical, resulted in the resurgence of substantial deficits. These are considered largely structural in nature, especially since the crisis led to a sharp downward revision of potential output estimates, even retroactively for 2002-2007. Over the whole decade, the primary balance deteriorated by about 7% of GDP, of which 6% in structural terms (i.e. without the cyclical component or one-shot measures), more than offset the increase in the structural primary balance (3.5% of GDP) that was achieved in the previous decade that prepared Belgium for accession to the single currency area. The structural deterioration of 6% of GDP corresponds roughly to the discretionary fiscal stimuli brought to the economy in the 2000s. These stimuli originated from both structural cuts in taxation and a growth rate of primary expenditure exceeding the pre-crisis estimated potential growth rate of the economy. Based on the methodology presented The Fiscal Stance 67 in Savage (2011) considering the evolution of tax revenue that would have been achieved under unchanged legislation, about three quarters of these stimuli are located on the revenue side (including fiscal expenditure imputed as wage subsidies in the national accounts). Finally, decomposition per sub-sector of general government shows that a more than proportional part of the discretionary stimuli emanates from Entity I (the federal level inclusive social security). This can be put in perspective in view of the fact that, during the previous budgetary consolidation stage (1992-1998), the restrictive effort had been fully carried out at Entity I level. With the benefit of hindsight , one can also suggest that the 2002 structural refinancing of the Communities worsened the coming vertical fiscal imbalance between the federal and sub-federal levels, already identified by the High Council of Finance (HCF) in its July 2004 Report. As regards the ambitions of conducting a policy of long-term sustainability through pre-funding of the future costs of ageing, the failure...