Belgian Stability Programme

2011-2014

Budget outcomes in 2010

Financing balance

According to the NAI’s initial estimates published on 31 March, the 2010 budget outcomes are much better than the targets set by the Belgian government in 2010, with a general government deficit of 4.1 % of GDP, compared to the 4.8 % of GDP initially expected.

In relation to 2009 (-5.9 % of GDP), the general government balance thus shows an improvement of 1.8 percentage points in 2010, bringing to an end the deterioration in Belgian public finances apparent since 2007. That improvement is also tending to be much better than the average improvement recorded in the euro area (0 % of GDP)⁽¹⁾.

TABLE 5 Financing balance (in % of GDP)
	% GDP				Change
	2009	2010
		Stability programme	NBB - 2010 Annual Report	National Accounts Institute
	Actual figures	January 2010	Estimates (February 2011)	Actual figures (March 2011)	Actual figures for 2010 versus 2009	Actual figures for 2010 versus Stability Programme
General government	-5,9%	-4,8%	-4,6%	-4,1%	1,8%	0,7%
Entity I	-5,0%	-3,8%	-3,4%	-3,2%	1,8%	0,6%
+ Federal government	-4,2%	-3,3%	-3,3%	-3,1%	1,1%	0,2%
+ Social Security	-0,8%	-0,5%	-0,2%	-0,1%	0,7%	0,4%
Entity II	-0,9%	-1,0%	-1,1%	-0,9%	0,0%	0,1%
+ Communities and Regions	-0,8%	-0,6%	-0,8%	-0,7%	0,1%	-0,1%
+ Local authorities	-0,1%	-0,4%	-0,4%	-0,2%	-0,1%	0,2%
Gross debt (Maastricht)	96,2%	100,6%	97,5%	96,8%	0,6%	-3,8%
Sources: National Accounts Institute, National Bank of Belgium.

The movement in the 2010 financing balance is due mainly to:

1) the marked improvement in economic growth;

2) the implementation of a multi-annual budget at the level of Entity I and economy measures at the level of the federated entities;

3) a prudent fiscal policy;

4) downward revision of the local authority deficit as a result of an improvement in the quality of the local authority accounts.

TABLE 6 2010 financing balance and economic growth
In % of GDP	Economic growth	2010 financing balance
Stability programme complement (September 2009)	0,4%	-6,0%
Budget for 2010-2011 (October 2009)	0,4%	-5,4%
Stability Programme (January 2010)+ budget audit (March 2010)	1,1%	-4,8%
Actual figures (March 2011)	2,1%	-4,1%

According to the initial estimates available for the national accounts, economic growth came to 2.1 %, whereas the January 2010 stability programme had predicted 1.1% growth. The Belgian government has thus fully respected its commitment to allocate the benefits of more favourable economic growth to the reduction of the deficit and the public debt.

This improvement in the economic environment is not the only factor contributing to the substantial reduction in the deficit, especially as economic growth in 2010 was driven mainly by foreign demand, which generates smaller tax revenues.

These better results also reflect the prudence displayed by the government in producing its estimates and in drawing up the multi-annual budget for 2010/2011 in October 2009. The government’s approach is relatively conservative in that the budget did not include all the known instances of under-use of expenditure. In that way, the government indirectly created “buffers” which act as a cushion for some potentially adverse developments.

As explained in detail in the 2010 stability programme, the main measures for the consolidation of public finances in 2010/2011 concern:

1) Substantial efficiency gains in the public sector. These efforts seem to be bearing fruit; the measures introduced at the level of federal government personnel are reflected in a 5% reduction in the workforce over the period 2008-2011; also, in 2010, remuneration expenditure was down by 0.3 % in real terms at the level of general government, and 1.8 % in the federal authority (see chapter 7.3.2).

2) Savings on health care and expenditure control in this sector; despite the statutory target of 4.5 % in real terms, the effective real growth of health care expenditure came to 0.5 % in 2010.

3) A tax structure which encourages ecologically responsible behaviour. To that end, the government decided, in particular, to make company car users aware of the CO2 emissions of the vehicles chosen (charging of personal income tax on the benefit obtained, and variable corporation tax allowance depending on the CO2 emission). The ratchet system was also extended to diesel fuel. Moreover, the windfall effects were eliminated from the measures to promote energy-saving investments (restriction of a large proportion of the tax concessions to homes at least 5 years old).

4) A contribution from the financial sector in response to the support given by the Belgian government during the financial crisis; that contribution is tending to exceed the amount initially foreseen owing to the stronger expansion of deposits (+ € 26 million in 2010 and € 150 million in 2011).

 5) Major efforts to curb social security fraud and tax evasion (see chapter 7.3.1).

TABLE 7 Summary of measures taken under the multi-annual budget for 2010/2011 at the level of Entity I
In € million	2009	2010
Expenditure
Primary expenditure
Personnel	100	100
Other	100	100
Social security
Health care	956	1093
Other	107	141
Revenue
Taxes on energy	376	531
Tobacco	59	118
Other	257	249
Other
Tax evasion and social security fraud	172	365
Financial sector	245	751
Energy sector	235	235
Total	2607	3683
In % of GDP	0,8	1,0

Focus: Improvement in the quality of local authority accounts The improvement in the 2010 budget outcomes compared to previous estimates is attributable mainly to the downward revision of the local authority deficit (from - €1.313 million to -612 million). That revision is the first practical result of the September 2009 cooperation agreement between the Federal State and the Regions, which provided for the creation of a working group with representatives from the National Accounts Institute (NAI) and the Regions, to supervise the local authorities in order to ensure that the ESA 95 rules are applied to local authority accounts. On the basis of the new exhaustive data received from the supervisors of the local authorities concerning the accounts of the Belgian municipalities for the year 2009 and the Flemish municipalities for earlier years, the NAI adjusted the calculation of the municipal investments for the period 2004-2009. Previously, municipal investment expenditure for that period was estimated on the basis of the commitments included in the accounts for the actual financial year. While this approach avoided the multiple accounting which would have resulted if all the commitments entered in the accounts for the full year had been included, it nevertheless caused a time bias, since the investments were recorded at the time of signing of the public contract and not as at their effective date. From now on, municipal investments are being estimated on the basis of imputed figures entered in the accounts for the full year. The NAI and the Regions will continue to collaborate in the coming months in order to improve the quality of the statistical data in the local authority accounts, and thus meet the Eurostat requirements on the subject.

At federal level, despite the absence of a government with a full mandate since 26 April 2010, public finances have been kept under control, notably by close monitoring of expenditure and revenue. The federal government thus recorded a small deficit on the primary balance of 0.1 % of GDP in 2010, following a deficit of 0.8 % of GDP in 2009.

Taking account of the nervousness of the financial markets at the time, the excessive deficit procedure which Belgium is undergoing and the continuing high level of the Belgian debt, the federal authorities in fact decided, on 7 May 2010, to implement various measures in order to ensure that Belgian public finances remain under control:

· Creation of a Monitoring Committee, comprising representatives of the heads of the authorities in charge of Finance, Social Security and the Budget ; that committee is intended to conduct regular monitoring of budget developments and to report regularly to the Minister and the State Secretary for the Budget, and to the government.

· Establishment of a budget discipline procedure: that procedure requires all new expenditure by federal State departments with a budgetary cost of more than € 31,000 excluding VAT to be submitted for the approval of the Council of Ministers. Only measures which are vital to the efficient operation of the departments will be approved. This procedure thus tends to slow the growth of primary expenditure by the federal State.

Revenue and expenditure

The improvement in the balance between 2009 and 2010 is due both to a reduction in expenditure (-1.0 % of GDP) and a rise in total revenues (+0.8 % of GDP).

Chart 3: Main factors accounting for the improvement in the 2010 balance

(in % of GDP)

Source: National Accounts Institute (2011)

Primary expenditure declined by 0.8 percentage point to 49.6 % of GDP in 2010. Interest charges were down by 0.2 percentage point to 3.4 % of GDP, taking account of the steep fall in interest rates on the financial markets and active management of the debt.

Remuneration (-0.3 % of GDP) and social benefits (-0.2 % of GDP) account for half of the decline in expenditure. These figures indicate that the economy measures concerning personnel and the efficiency gains in the public sector have borne fruit, as have the measures to control health care expenditure.

Capital expenditure accounts for the other half, with a decline of -0.5 % of GDP. In 2009, that expenditure had been influenced by the repayment, ordered by the courts, of certain taxes unlawfully collected in the past from companies receiving dividends from foreign subsidiaries, on the one hand, and from married unemployed persons on the other.

TABLE 8 Real growth of primary expenditure*
% change compared to the previous year	2009	2010
Total primary expenditure	7,2	-0,2
Remuneration	4,1	-0,3
of which: at federal level	1,9	-1,8
Social benefits	7,2	0,7
pensions	6,0	0,9
unemployment	19,5	-3,2
incapacity	8,6	6,0
health care	7,3	0,5
p.m. economic growth	-2,9	2,1
*deflated by the harmonised index of consumer prices
Source: National Accounts Institute

With an overall decline in primary expenditure of 0.2 % in real terms, Belgium is thus responding favourably to the European recommendations, and in particular to the Annual Growth Survey, which – in the case of Member States subject to an excessive deficit procedure – provides that the real growth of expenditure must be less than the GDP growth. The recorded difference between the rate of GDP growth and primary expenditure is therefore 2.3 % in 2010.

Revenues increased by 0.8 % of GDP to reach 48.9 % of GDP. The revenue growth is due to the rise in both fiscal and parafiscal revenues (0.5 % of GDP) and in non-fiscal and nonparafiscal revenues (0.2 % of GDP), which are increasing mainly as a result of the payments made by financial institutions following the State interventions at the time of the financial crisis.

TABLE 9 Revenues
In % of GDP	2009	2010
Total revenues	48,1	48,9
Fiscal and parafiscal revenues	45,2	45,7
Direct taxes	15,2	15,6
Households	12,5	12,7
Enterprises	2,7	2,9
Other sectors	0,1	0,0
Indirect taxes	12,6	12,9
Taxes on capital	0,7	0,7
Social security contributions	16,8	16,5
Other	2,9	3,2

The increase in direct taxes on households is attributable, at the level of the Flemish Region, to the abolition of the flat-rate reduction introduced in 2007 and to the fact that the “personal income tax” assessments present a smaller negative balance than in 2010. The impact of these two factors on revenues was only partly offset by the impact of the measures taken by the federal government to reduce the tax burden.

Corporation tax revenues picked up slightly after the crisis in 2009, but are still below the level prevailing before that date.

The increase in the weight of direct taxation in 2010 is due in particular to the favourable trend in private consumption and the considerable rise in excise revenues following the introduction of the ratchet system on diesel.

The interventions in the financial sector have the corollary of additional interest charges to finance capital stakes or loans in favour of financial institutions receiving public support. Whereas in 2008 and 2009, the net result – i.e. the difference between the remuneration generated by these interventions and the interest charges resulting from the interventions (excluding the deposit protection fund), was slightly negative, in 2010 there was a positive result of +€ 252 million, or +0.1 % of GDP.

TABLE 10 Impact on the financing balance of the public interventions and guarantees for financial institutions
In € million, unless otherwise stated	2008	2009	2010
Dividends	53	121	192
Guarantee premiums	25	508	682
Interest paid	-96	-655	-622
Other	-10	-7	0
Impact	-27	-33	252
Impact in % of GDP	0,0	0,0	0,1
Deposit protection fund	25	93	251
Source: NBB, Report 2010, Economic and financial developments

Substantial improvement in the structural balance

Sustainable consolidation of public finances necessarily entails a reduction in the structural financing balance.

According to the European Commission’s methodology concerning cyclical effects, the structural deficit declined from -3.4 % of GDP in 2009 to -2.6 % of GDP in 2010, i.e. a 0.8 % improvement, in line with the European requirements. In a more favourable than expected economic context, the “output gap” was revised upwards, tending to increase the cyclical component. The latter is estimated at 1.4 % of GDP. Temporary measures contribute -0.1 % of GDP.

Moreover, according to the methodology developed by the European System of Central Banks (ESCB), the structural balance is assessed at -3.5 % of GDP in 2010 compared to -4.8 % of GDP in 2009, an improvement equal to 1.3 % of GDP, which is almost twice the figure stipulated by the Council.

The difference between the results indicated by the two methodologies is due mainly to the fact that the ESCB methodology takes account of the composition of the growth and of the specific cyclical dynamics of the various tax bases. Conversely, the European Commission methodology is based on a fixed elasticity of around 51 % for calculating the structural balance. As already stated, growth in 2010 was driven more by external demand, which generates lower tax revenues. Among other things, that accounts for the bigger improvement in the structural balance recorded according to the ESCB methodology.

In general, we can therefore conclude that Belgium respects the requirements in regard to 2010.

Halting the snowball effect

Following two substantial consecutive increases of 5.4 % of GDP in 2008 and 6.6 % of GDP in 2009 (partly as a result of the support measures granted to the financial sector, amounting to 6.35 % of GDP, and partly in the wake of the economic crisis which caused both a steep decline in GDP and a significant deterioration in public finances), the expansion of the public debt slowed considerably in 2010.

According to the information currently available, Belgium recorded one of the smallest increases in the public debt within the euro area in 2010, with a rise of 0.6 % of GDP, of which 0.2 % of GDP was due to the loan to Greece under the European support mechanism. In the euro area, the increase in the public debt averaged around 5 % of GDP⁽²⁾ in 2010.

Chart 4: Increase in the public debt in the euro area in 2010

(in % of GDP)

Source: National Accounts Institute, European Commission (2010)

This performance is a significant improvement on the targets originally set in the 2010 stability programme (100.6 % of GDP), despite the loan to Greece under the European aid plan for that country (0.2 % of GDP), which was not planned at the time.

In 2010, the snowball effect diminished rapidly, as is evident from the adjusted nominal differential⁽³⁾ which, thanks to the marked revival in economic activity and the decline in the implicit interest rate, was greatly reduced (from 5.8 % in 2009 to -0.1 % in 2010). Consequently, the primary balance needed to stabilise the debt ratio is down sharply (from 5.2 % of GDP in 2009 to 0.2 % in 2010). The significant improvement in the primary balance (from -2.3 % of GDP in 2009 to -0.7 % of GDP in 2010) therefore strongly restrains the endogenous rise in the debt ratio.

TABLE 11 Debt ratio and its determinants
In % of GDP						Annual averages
	2006	2007	2008	2009	2010	2006-2008	2009-2010
Actual debt ratio	88,1%	84,2%	89,6%	96,2%	96,8%	87,3%	96,5%
Annual differential (% of GDP)	-4,0%	-3,9%	5,4%	6,6%	0,6%	-0,8%	3,6%
Required primary balance (RPB)	-0,5%	-0,6%	1,4%	5,2%	0,2%	0,1%	2,7%
Actual primary balance (APB)	4,1%	3,5%	2,5%	-2,3%	-0,7%	3,4%	-1,5%
(1) Endogenous debt adjustment (RPB) – (APB)	-4,6%	-4,1%	-1,1%	7,5%	0,9%	-3,3%	4,2%
(2) Transactions outside the financing balance	0,6%	0,2%	6,5%	-1,0%	0,0%	2,4%	-0,5%
Technical parameters
Implicit interest rate “I”	4,5%	4,6%	4,6%	4,0%	3,7%	4,6%	3,8%
Nominal GDP growth “n”	5,1%	5,3%	3,0%	-1,7%	3,5%	4,4%	0,9%
Real GDP growth	2,7%	2,9%	1,0%	-2,8%	2,1%	2,2%	-0,3%
Adjusted nominal differential “(i-n)/(1+n)”	-0,5%	-0,7%	1,6%	5,8%	-0,1%	0,1%	2,8%
Source : National Accounts Institute

This small increase is due to more favourable budget outcomes and a larger rise in nominal GDP, but also to active management of the public debt, particularly via swaps.

In fact, during the second quarter of 2010, the Treasury cancelled the interest rate swaps (receiver swaps) which it had contracted in 2009 in order to increase its sensitivity to shortterm interest rates. This concerned a total notional amount of €15.0 billion. The steep decline in swap interest rates had inflated the market value of these positions, so that cancellation of these swaps raised a total of €1.04 billion (0.30 % of GDP). During the same period, the Treasury had also cancelled a series of other historical positions of the same type (receiver swaps) for a total notional amount of € 7.0 billion. Those cancellations raised € 1.12 billion for the Treasury (0.31 % of GDP).

In all, the debt was therefore cut by € 2.16 billion, or 0.61 % of GDP, following the swap cancellations. Part of this amount was imputed to the 2010 public deficit, but most of it will not be imputed until 2011 and subsequent years, in proportion to the residual term of the cancelled swaps.

In addition, the interest rate swaps also had a positive impact on the public deficit since the coupons received exceeded the coupons paid. Thus, in 2009 the swaps contracted in that year already produced an economic saving of € 185.8 million on the interest. In 2010, that saving amounted to € 395.97 million.

    (1)  European Commission (November 2010).

 (2)  European Commission (November, 2010)

 (3)  The adjusted nominal differential is the ratio between, on the one hand, the difference between the implicit interest rate on the debt and nominal GDP growth, and on the other hand, 1 plus nominal GDP growth.