Updated stability programme of Belgium, 2006-2010 - Main contents

EN

Official Journal of the European Union

C 89/2

On 27 March 2007 the Council examined the updated stability programme of Belgium, which covers the period 2006 to 2010 (2).

The macroeconomic scenario underlying the programme envisages that real GDP growth will decrease from 2,7 % in 2006 to 2,2 % on average over the rest of the programme period. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions. The programme's projections for inflation also appear realistic.

The current update of the stability programme is based on the assumption of a balanced budget in 2006. This assumption seems to be broadly confirmed by most recent data, whereas the Commission services' autumn forecast had projected a deficit of 0,2 % of GDP. While cyclical conditions in 2006 turned out to be significantly better than foreseen in the previous update and expenditure developed broadly as expected, revenues were lower than anticipated (notably because of an underestimation of the impact of the final stage of the 2001 direct tax reform, which was aimed at reducing the tax wedge). This shortfall was partly compensated by the fact that planned one-off measures yielded more than expected and by some additional one-offs of a limited magnitude. Therefore the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) significantly deteriorated in 2006, mainly due to revenue reducing measures.

The main goal of the medium-term budgetary strategy in the programme is to ensure a continuous reduction of the still high debt ratio (close to 90 % in 2006) to below 75 % of GDP in 2010, through a gradual build-up of nominal budgetary surpluses (from 0,3 % of GDP in 2007 to 0,9 % in 2010), to prepare for the ageing shock ahead. The primary surplus, which has been decreasing since 2001 (when it was 7 % of GDP), is expected to stabilise at around 4,1 % of GDP. The overall adjustment is nearly entirely due to reduced expenditure (by 1

 percentage point of GDP between 2006 and 2010). The expenditure reduction is attributable to a fall in interest expenditure (

percentage point) which results from the continuous debt reduction as well as to a reduction of primary expenditures (

a percentage point). It is partly offset by a decrease in government revenue (

a percentage point). Beyond 2007 the programme's projections broadly correspond to no-policy change projections, although the programme also (implicitly) seems to rely on further one-offs to achieve the budgetary targets. This strategy is largely similar to the one presented in the previous update of the stability programme against a broadly unchanged macroeconomic scenario.

As the programme does not provide information on the use of one-off and other temporary measures after 2007, the structural balance from 2008 onwards cannot be calculated based on the information in the programme. Assuming that the relative impact of one-off measures remains unchanged after 2007, the structural balance calculated according to the commonly agreed methodology is planned to improve from around -0,4 % of GDP in 2006 to 0,7 % at the end of the programme period. As in the previous update of the stability programme, the medium-term objective (MTO) for the budgetary position presented in the programme is a structural surplus of 0,5 % of GDP, which according to the programme will be achieved by 2008. This is one year later than in the previous update. As the MTO is more demanding than the minimum benchmark (estimated at a deficit of around 1

% of GDP), achieving it should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The MTO lies within the range indicated for euro-area and ERM II Member States in the Stability and Growth Pact and the code of conduct and is more demanding than implied by the debt ratio and average potential output growth in the long term.

The budgetary outcomes could be slightly worse than projected in the programme. This is especially the case for 2007, mainly because the budget appears to be somewhat on the optimistic side and sometimes provides insufficient details about the envisaged measures (including the one-off measures in the area of real estate sales or the take-over of pension obligations from public corporations, which are not further specified). Belgium overall has a good track record of achieving the nominal budgetary targets, but as in recent years a strict monitoring will be necessary to achieve the target for 2007. The upcoming budget control exercises should specify any required additional measures. A worse-than-targeted outcome in 2007 would also carry over to the following years. From 2008 onwards there is also a risk that expired one-offs will not be replaced by structural measures.

In view of this risk assessment, the budgetary stance in the programme may not be sufficient to ensure that the MTO is achieved by 2008, as envisaged in the programme. However, as stated above, the MTO is more demanding than implied by the debt ratio and average potential output growth in the long term. The budgetary strategy seems sufficient to achieve a budgetary position in structural terms that can be considered appropriate under the Pact from 2008 onwards. In addition, the budgetary stance in the programme seems to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations throughout the programme period. The pace of the adjustment towards the MTO implied by the programme should be strengthened to be in line with the Stability and Growth Pact, which specifies that, for euro-area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times and could be lower in bad economic times. In particular, taking into account risks, the adjustment may fall short of the benchmark in 2007 and slow down thereafter.

The programme reports a debt of 87,7 % of GDP for 2006, but this does not include the debt assumption from the railway corporation SNCB in 2005, which according to Eurostat increases the debt level by 1,7 % of GDP in the same year. Therefore the Commission services' estimate of the government gross debt is 89,4 % of GDP in 2006, which is still far above the 60 % of GDP Treaty reference value, although substantially decreasing over the last several years. The programme projects the debt ratio to rapidly decline by around 15 percentage points over the programme period. In view of the risk assessment and in particular the risks to the budgetary targets mentioned above, the evolution of the debt ratio is likely to be slightly less favourable than projected in the programme. However, the debt ratio still seems to be sufficiently diminishing towards the reference value over the programme period.

The long-term budgetary impact of ageing in Belgium is above the EU average, influenced notably by a large increase in pension expenditure as a share of GDP over the coming decades. The initial budgetary position with a high primary surplus, albeit weaker compared to 2005, contributes to easing the projected long-term budgetary impact of an ageing population, but it is not sufficient to fully cover the substantial increase in expenditure. Moreover, the current level of gross debt, while declining, remains well above the Treaty reference value. The steady reduction of the debt ratio requires sustaining high primary surpluses for a long period of time, which would contribute to reducing risks to the sustainability of public finances. Overall, Belgium appears to be at medium risk with regard to the sustainability of public finances.

The stability programme does not contain a qualitative assessment of the overall impact of the October 2006 implementation report of the national reform programme within the medium-term fiscal strategy. In addition, it provides no systematic information on the direct budgetary costs or savings of the main reforms envisaged in the national reform programme but its budgetary projections seem to take into account the public finance implications of the actions outlined in the national reform programme. The measures in the area of public finances envisaged in the stability programme seem consistent with those foreseen in the national reform programme. In particular, both programmes envisage the gradual implementation of the 'generation pact' (a comprehensive plan to increase employment and strengthen the social security), a further gradual reduction of the tax burden on labour and measures to stimulate research and entrepreneurship.

The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008.

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (3).

ensure that the budgetary target for 2007 is met and strengthen the pace of adjustment towards the MTO thereafter, including through a reduction of the recourse to one-off measures;

in the light of the high level of debt and the projected increase in age-related expenditure, to better address the long-term sustainability of public finances by at least achieving the MTO as well as by implementing reforms.