1. Belgium
1.1. Recent developments
Budgetary consolidation continued in 2000 when balance for the general government was achieved compared with a forecast deficit of 1 % of GDP. Higher than expected revenues reflected a positive macroeconomic perfor- mance, as real GDP growth reached nearly 4 % as against 2.5 % previously projected. In 2000, total government revenues remained unchanged as a percentage of GDP compared with 1999, while the tax burden increased slightly. Total expenditure decreased by 0.7 percentage points of GDP, as a result of a moderate decline in current primary expenditures and interest payments. The primary surplus increased from 6.5 % of GDP in 1999 to 7 % in 2000.
As in recent years, budgetary consolidation in 2000 was based on achieving a high primary surplus by placing a 1.5% limit on real primary expenditure growth. In practice, real general government primary expenditure is estimated to have increased by only 1.2%, as significantly higher than expected inflation last year allowed relatively high rates of nominal increases in government spending while respecting the norm of increase expressed in real terms. The cyclically-adjusted balance remained unchanged in 2000, while the government primary surplus to GDP ratio declined slightly.
The general government debt ratio was reduced by 5.5 percentage points in 2000, to 111 % of GDP. In con- trast to the period before 1998 where ad hoc factors, such as privatisation and financial operations contributed a reduction in the debt ratio, the fall in the past two years was entirely endogenous, i.e. arising from the interaction between primary surpluses, GDP growth and interest rates, while stock-flow (deficit-debt) adjustments, arising mainly from exchange rate movements, had a small debt- augmenting effect.
The 2001 budget is projecting a general government sur- plus of 0.2% of GDP, a rather modest objective given the
results for 2000 and the need to reduce rapidly the high general government debt ratio. The reform of police forces is expected to result in an increase in primary expenditure, which together with current projections for healthcare spending in the social security sector, might result in the 1.5 % limit for real spending increases being surpassed. However, the budgetary projections are based on a cautious macroeconomic projection of 2.5% real GDP growth. In the budgetary control exercise of March 2001, the initial budgetary targets for this year were confirmed. The spring 2001 economic forecasts of the Commission are projecting the general government surplus to reach 0.6 % of GDP in 2001 and 0.7 % in 2002. These projec- tions are, however, based on real GDP growth forecasts of 3 % for 2001 and 3.1 % for 2002. Also, for the year 2001, the Commission projections take into account receipts from the sale of UMTS licences amounting to 0.2% of GDP.
Major risks may come from the decline in VAT receipts (– 3.3 % in the first four months of the year) and, on the expenditure side, from health care, which may be exceed- ing so far the targeted growth. However, as noted above, the prudent macroeconomic scenario (GDP growth at 2.5 %) might limit the risk of not achieving the budgetary target. As a matter of fact, projections by the Federal Planning Bureau, based on 2.7 % GDP growth, point to a general government surplus of 0.7 % of GDP.
1.2. Medium-term prospects and policy
issues
According to the 2000 update of the stability programme covering the period 2001–05, Belgium is set to continue a budgetary consolidation policy. A major policy chal- lenge for Belgium in the years ahead is to reconcile the parallel objectives of a fast reduction in the debt ratio and the creation of budgetary margins to allocate to prior- ity policy areas, in particular a reduction in the tax burden.
In the updated programme, the general government surplus is projected to rise from 0.2% of GDP in 2001 to 0.7 % of GDP in 2005. The government debt-to-GDP ratio is expected to decline by 22 percentage points from 11 % of GDP in 2000 to 89 % in 2005. The budgetary projections are based on a cautious macroeconomic scenario, assuming real GDP growth at trend, estimated at 2.5 % from 2001 to 2005. The budgetary strategy of the programme continues to be centred on maintaining high primary surpluses of over 6 % of GDP per year, made possible by limiting the primary expenditure increase in real terms of Entity I (federal government and social secu- rity) to 1.5 % per year; a decline in interest payments is also expected due to the decreasing government debt ratio. The projected general government balance corresponds to the movement in the cyclically-adjusted balance, as GDP growth assumptions are based on trend output growth.
An agreement between the federal government, commu- nities and regions was concluded in December 2000 to support the objectives of the stability programme and secure the commitment of each federal entity to respect the recommendations of the High Finance Council. While the continuation of the budgetary consolidation effort remains a priority, an increase in government spend-
ing in selected areas is projected. The updated stability programme includes a number of projects and policy ini- tiatives to increase public investment in transportation, to implement an active employment policy and to modernise the social security system.
Moreover, a comprehensive reform of the personal income tax is expected to be implemented during 2002-06 implying an overall budgetary cost of 1.3 % of GDP. The reform intends to increase work incentives by reducing the tax burden on labour income. The phased implemen- tation of the reform, and its back-loaded character, are intended to allow for a lower tax burden while at the same time reducing government debt. Social security con- tributions paid by employers will be further reduced in 2001 as part of the effort to increase labour demand and employment, in particular of low paid and less qualified. The most important medium-term challenge is to sustain budget surpluses, and to use the margins brought about by lower debt servicing costs and primary expenditure control to improve the long-term sustainability of public finances. Additional margins, which might proceed from higher than projected growth are expected to be allocated as a matter of priority to debt reduction. Simulations made by the Federal Planning Bureau indicate that such a policy is necessary in order to absorb the budgetary shock of age-
Table 30
Composition and balances of general government, Belgium (*)
(% of GDP) 1999 2000 2001 2002 Government balance(**) – 0.7 0.0 0.6 0.7 Total receipts 50.0 50.0 49.0 48.7 Of which: taxes 30.5 30.8 30.7 30.6 social contributions 16.5 16.2 16.0 15.9 Total expenditure 50.7 50.0 48.3 48.0
Of which: collective consumption 7.7 7.7 7.6 7.4 social transfers 29.4 29.0 28.5 28.4 interest expenditure 7.2 7.0 6.6 6.2 gross fixed capital formation 1.8 1.8 1.9 1.9
Primary balance 6.5 7.0 7.2 7.0
Pm Tax burden 46.4 46.5 46.0 45.9
Government debt 116.4 110.9 104.3 98.5
Pm Cyclically adjusted balance – 0.1 – 0.1 0.2 0.3
Pm Cyclically adjusted primary balance 7.1 6.8 6.8 6.6
(*) Spring 2001 economic forecasts.
(**) Data for 2001(except cyclically adjusted) include UMTS receipts of 0.2 % of GDP.
ing population. Also the government has created an ‘age- ing fund’ to be funded initially by the proceeds from the sale of UMTS licences and in the medium to long term from budgetary surpluses. The creation of the ageing fund needs to be complemented with measures to raise the employment rate and to reform of the pension system so as to form a comprehensive strategy to meet the bud- getary and economic implications of ageing populations.