Council opinion of 8 July 2008 on the updated stability programme of Belgium, 2007-2011
Date: 2008-07-08
Institutions: Council of the European Union
Subjects: Belgium, budget estimate, economic forecasting, public finance, stability programme

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I

(Resolutions, recommendations and opinions)

OPINIONS

COUNCIL

COUNCIL OPINION

of 8 July 2008

on the updated stability programme of Belgium, 2007-2011

(2008/C 182/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular
Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

On 8 July 2008, the Council examined the updated stability programme of Belgium, which covers
the period 2007 to 2011 (2).

Over the last 10 years, real GDP has grown by some 2,25 % on average, slightly above the average
growth rate in the euro area. This relatively high GDP growth led to a decline in the unemployment
rate, while the employment rate (especially of the younger and older workers) and the hours worked
remain low, reflecting high labour taxation and labour market rigidities, low job search requirements
and a low effective retirement age.

The budget has been hovering around a balanced position since 2000 (except in 2005), and the debt
ratio, which had fallen from 134 % of GDP in 1993 to 108 % of GDP in 2000, continued its
impressive decline and is now below 85 % of GDP. Increasing the employment rate, together with
ambitious budgetary positions, would contribute to the long-term sustainability of public finances.

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The

documents referred to in this text can be found at the following website:
http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2) The update was submitted once a government with full powers had been installed, thus well beyond the 1 December dead-

line set in the code of conduct.

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(3)

(4)

(5)

The macroeconomic scenario underlying the programme projects real GDP growth to fall from 2,8 %
in 2007 to 1,9 % in 2008 and stabilise around 2 % in the following years. Assessed against currently
available information (1), the scenario for 2008 and 2009 appears to be based on favourable growth
assumptions given the deteriorated external environment and higher inflation since the projections
included in the programme were finalised. Growth assumptions for 2010-2011 are broadly plausible.
The programme update expects inflation to rise to 3 % in 2008, and to slow down to 1,75 % over
the period 2009-2011. The programme's inflation projections for 2008-2009 appear to be on the
low side in view of the marked rise in commodity and processed food prices in recent months.
Furthermore, the employment growth projections of around 1 % per annum in the programme update
appear to be relatively high in view of below-potential GDP growth throughout the programme
period. While the programme's wage growth projections are on the low side for 2008, they appear
high for the following years (3,25-3,5 %), especially compared to the projected low inflation rate.

For 2007, the general government deficit was 0,2 % of GDP, against a surplus target of 0,3 % of GDP
set in the previous update of the stability programme. The worse outturn in 2007 was mainly due
to higher expenditure growth than planned and occurred despite a positive growth surprise.
Higher-than-planned expenditure reflected, in particular, a strong increase in subsidies paid to compa-
nies under the service voucher scheme and a lower-than-expected impact of one-off measures mainly
due to the non-implementation of planned expenditure decreasing one-offs. Social contributions were
higher than planned but this was largely compensated by the non-implementation of a number of
planned revenue-increasing one-offs.

The budgetary implementation in 2007 was thus not fully in line with the invitation in the Council
opinion of 27 March 2007 on the previous update of the stability programme (2) and with the
April 2007 Eurogroup orientations for budgetary policies, since unexpected extra revenue was used
for higher-than-budgeted expenditure.

The main goal of the medium-term budgetary strategy in the programme is to ensure a continuous
reduction of the still high debt ratio of close to 85 % of GDP in 2007 to around 71 % of GDP in
2011 through a gradual build-up of headline budgetary surpluses to 1 % of GDP in 2011, starting
from a balanced budget in 2008. The primary surplus, which has been decreasing since 2001 (from
7 % to 3,7 % of GDP in 2007) in parallel to the progress in debt reduction, is projected to increase to
4,4 % of GDP by 2011. As a result of the worse-than-expected outturn in 2007, the budgetary
targets (both in nominal and structural terms) are below the ones in the previous update throughout
the programme period. The structural balance, calculated according to the commonly agreed metho-
dology, is expected to improve from a deficit of 0,25 % of GDP in 2007 to a surplus of almost 1,5 %
of GDP in 2011. Compared to what was envisaged in the previous update of the stability programme,
the achievement of the medium-term objective (MTO) — a surplus of 0,5 % of GDP in structural
terms (i.e. in cyclically-adjusted terms net of one-off and other temporary measures) — is delayed by
one year to 2009. The adjustment takes place on both the expenditure and revenue side. The planned
expenditure reduction of 0,7 percentage point of GDP in nominal terms is attributable chiefly to a
fall in interest expenditure which results from the projected decline in the debt ratio. The revenue
increase amounts to 0,5 % of GDP and follows from the expected growth of tax bases. In contrast to
the previous update, the programme explicitly foresees no further recourse to one-off measures
after 2008.

(6)

The budgetary outcomes could be worse than projected in the programme. First, the macroeconomic
environment could be worse than projected in the programme update, especially in 2008 and 2009.
In particular, the favourable assumptions regarding employment, wage and consumption growth may
have led to an overestimation of tax revenue. In addition, the expected overall tax elasticity seems on
the high side in 2008. Regarding primary expenditure, the programme does not include measures
that seem necessary to achieve the planned adjustment in a context of rising ageing-related costs and
relatively strong projected wage increases. Moreover, excluding the reduction in interest expenditure,

(1) The assessment takes notably into account the Commission services' spring 2008 forecast and the Commission assessment

of the October 2007 implementation report of the national reform programme.

(2) OJ C 89, 24.4.2007, p. 2.

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the composition of the adjustment is geared strongly to the revenue side, possibly reducing the
sustainability of the adjustment. Finally, whilst the budget remained broadly in balance over the last
years, the achievement of the aimed-for budget surpluses was postponed. In spite of the good macro-
economic conditions in 2007, the budgetary target was not reached in the absence of a government
with full powers following the federal elections in June. In 2008, further measures seem necessary to
achieve the target. In view of the risks to the macroeconomic outlook and the budgetary targets
mentioned above, the development of the debt ratio is likely to be somewhat less favourable than
projected in the programme, although the debt remains on a firm downward path.

(7)

In view of this risk assessment, the budgetary stance in the programme may not be sufficient to
ensure that the MTO is achieved by 2009, as envisaged in the programme. However, a sufficient
safety margin against breaching the 3 % of GDP deficit threshold with normal cyclical fluctuations
will be provided throughout the programme period. Additional structural budgetary measures should
be undertaken in 2008 in the context of the planned budget control exercise to strengthen the pace
of adjustment towards MTO.

This will ensure that the objective of a balanced budget is met in 2008 in the absence of negative
growth surprises. In 2009, it should be backed up by measures, in particular on the expenditure side,
to be in line with the 0,5 % of GDP benchmark improvement specified in the Stability and Growth
Pact and to reach the MTO as planned. The Council also notes that the budgetary plans for 2008 are
not fully consistent with the April 2007 Eurogroup orientations for budgetary policies. Although the
debt ratio may decrease less than projected in the programme, it seems to be sufficiently diminishing
towards the reference value over the programme period.

Belgium appears to be at medium risk with regard to the sustainability of public finances. The
long-term budgetary impact of ageing is above the EU-27 average, influenced notably by a relatively
high increase in pension expenditure as a share of GDP over the coming decades. The effective retire-
ment age in Belgium is one of the lowest in the EU, and raising it is the aim of the Generation Pact
which brought a number of changes to the pension system. Although this represents a step in the
right direction, national projections show that this reform would not reduce the sustainability gaps.
The budgetary position in 2007 as estimated in the programme, though slightly worse than the
starting position of
the previous programme, contributes to offsetting the projected long-term
budgetary impact of population ageing but is not sufficient to fully offset future spending pressures.
Maintaining high primary surpluses over the medium term, bringing the debt ratio below the Treaty
reference value and implementing further measures aimed at addressing the substantial increase in
age-related expenditure would contribute to reducing risks to the sustainability of public finances.

The stability programme seems to be consistent to some extent with the October 2007 implementa-
tion report of the national reform programme. In particular, both reports consider the sustainability
of public finances in light of population ageing as a key challenge for the Belgium economy. The
stability programme however does not contain a qualitative assessment of the overall impact of the
October 2007 implementation report of the national reform programme within the medium-term
fiscal strategy nor systematic information on the direct budgetary costs or savings of the main
reforms envisaged in the national reform programme. On the other hand, the budgetary projections
of the programme take into account the public finance implications of the actions already imple-
mented on the basis of the national reform programme.

(8)

(9)

(10)

The budgetary strategy in the programme is broadly consistent with the country-specific broad
economic policy guidelines included in the integrated guidelines and the guidelines for euro area
Member States in the area of budgetary policies issued in the context of the Lisbon strategy.

(11) 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 (1).

(1) In particular, the data on the sectoral balances are not provided.

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The overall conclusion is that, after an impressive reduction in the debt ratio since 1993 to 85 % in 2007,
the programme envisages a continued and rapid reduction through a gradual build-up of headline surpluses
following the budgetary deterioration in 2007. The budgetary consolidation mainly builds upon a reduction
in interest expenditure and an increase in tax revenue, while efforts on primary expenditure remain small.
There are risks to the achievement of the budgetary targets particularly in view of the relatively favourable
underlying macroeconomic assumptions and the fact that the programme does not specify measures which
seem required to meet the targets. Therefore, in the absence of additional measures, the adjustment to the
MTO in 2008 does not appear to be sufficient and it seems unlikely that the MTO will be met in 2009, as
planned.

In view of the above assessment and also in the light of the April 2007 Eurogroup orientations for fiscal
policies Belgium is invited to:

(i) implement additional structural budgetary measures to ensure that the objective of a balanced budget is
met in 2008 in the absence of negative growth surprises. And ensure that the MTO is obtained in 2009
by carrying out the benchmark adjustment in structural terms of 0,5 % of GDP, including through the
implementation of additional structural measures, in particular on the expenditure side;

(ii) in the light of the still high level of debt and the projected increase in age-related expenditure, continue
addressing the long-term sustainability of public finances by achieving high structural primary surpluses
as well as by implementing reforms to increase the employment rate and potential growth and to
contain the budgetary cost of ageing.

Comparison of key macroeconomic and budgetary projections

Real GDP
(% change)

HICP inflation
(%)

SP Apr 2008

COM Apr 2008

SP Dec 2006

SP Apr 2008

COM Apr 2008

SP Dec 2006

Output gap (1)
(% of potential GDP)

SP Apr 2008

COM Apr 2008 (2)

2006

2007

2008

2009

2010

2011

2,8

2,8

2,7

2,3

2,3

2,4

0,1

0,1

2,7

2,7

2,2

1,8

1,8

1,9

1,9

1,7

2,1

3,0

3,6

1,8

2,0

1,5

2,2

1,7

2,3

1,8

2,0

2,0

n.a.

n.a.

2,2

1,8

n.a.

1,8

n.a.

n.a.

1,9

n.a.

0,3

– 0,1

– 0,4

– 0,5

– 0,8

0,3

– 0,3

– 1,0

n.a.

n.a.

Net lending/borrowing
vis-à-vis the rest of the
world
(% of GDP)

General government
balance
(% of GDP)

SP Dec 2006

– 0,3

– 0,4

– 0,4

– 0,4

– 0,3

n.a.

SP Apr 2008

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

COM Apr 2008

SP Dec 2006

3,4

2,0

3,2

2,0

2,6

2,2

SP Apr 2008

0,3

– 0,2

0,0

2,4

2,4

0,3

n.a.

n.a.

2,7

0,7

n.a.

1,0

COM Apr 2008

0,3

– 0,2

– 0,4

– 0,6

n.a.

n.a.

SP Dec 2006

0,0

0,3

0,5

0,7

0,9

n.a.

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2006

2007

2008

2009

2010

2011

Primary balance
(% of GDP)

Cyclically-adjusted
balance (1)
(% of GDP)

Structural balance (3)
(% of GDP)

SP Apr 2008

COM Apr 2008

SP Dec 2006

SP Apr 2008

COM Apr 2008

SP Dec 2006

SP Apr 2008

3,7

3,7

4,2

– 0,4

3,7

3,3

4,1

0,0

3,8

2,9

4,1

0,5

– 0,3

– 0,2

– 0,1

4,3

4,3

4,1

0,3

0,3

0,2

0,5

0,7

0,0

0,9

0,5

– 0,4

– 0,3

Government gross debt
(% of GDP)

COM Apr 2008

– 0,6

– 0,3

– 0,2

– 0,1

SP Dec 2006 (4)

SP Apr 2008

COM Apr 2008

SP Dec 2006

– 0,4

88,2

88,2

87,7

0,1

84,9

84,9

83,9

n.a.

81,5

81,9

80,4

n.a.

78,1

79,9

76,6

4,1

n.a.

4,2

1,0

n.a.

1,1

1,0

n.a.

n.a.

74,7

n.a.

72,6

4,3

n.a.

n.a.

1,4

n.a.

n.a.

1,4

n.a.

n.a.

71,1

n.a.

n.a.

Notes:
(1) Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the informa-

tion in the programmes.

(2) Based on estimated potential growth of 2,5 %, 2,5 %, 2,2 % and 2,2 % respectively in the period 2006-2009.
(3) Cyclically-adjusted balance excluding one-off and other temporary measures. According to the most recent programme, one-off and
other temporary measures are deficit-reducing for 0,7 % of GDP in 2006 and deficit-increasing for 0,1 % of GDP in 2007. According
to the Commission services' spring forecast, one-off and other temporary measures are deficit-reducing for 0,9 % of GDP in 2006 and
deficit-increasing for 0,1 % in 2007.

(4) The December 2006 update of the stability programme did not provide information on the use of one-off measures in the years 2008

to 2010.

Source:
Stability programme (SP); Commission services' spring 2008 economic forecasts (COM); Commission services' calculations.