Belgium presents its ticket to EMU

Date: 26/09/1996

By Tim Jones

BELGIANS are bracing themselves for yet another year of austerity as the country's centre-left government pieces together its 1997 budget.

Although this is the 14th year of tax increases and spending cuts, the budget to be announced on 1 October should be a milestone: Belgium's ticket into European economic and monetary union.

In a sharp break with previous practice, Jean-Luc Dehaene's ministers are keeping the measures to be unveiled next week relatively close to their chests.

Numerous rounds of talks within the four-party coalition cabinet over how to find savings worth 2.5 billion ecu next year have produced few leaks. However, sufficient information has come out to suggest that the country's extraordinarily expensive health and social security system will bear the brunt of the spending cuts.

Expenditure on health alone is expected to be trimmed by 380 million ecu, with cuts likely to focus on reduced incomes for doctors, cropping subsidies to retirement homes and tougher controls on drugs spending.

Reform of the pensions system will concentrate on equalising the treatment of men and women and, incidentally, saving money. The age at which women qualify for state pensions is set to rise by five years to 65, but this will be phased in over eight years to alleviate the pain.

Spending cuts should account for half the savings package, with yet another round of tax increases making up the rest.

Last year, Value Added Tax rose by 0.5&percent;, while excise duties on petrol went up by 0.05 ecu per litre. Fiscal experts believe VAT will be left at 21&percent; this year, but excise duties on petrol and tobacco will rise again, while savings taxes already imposed on interest income could be extended to property.

The francophone Socialist Party in the coalition has also called for the creation of a cotisation sociale généralisée (CSG) - along the lines of a similar tax in France - to be imposed across the board. This would be a new kind of tax on all income including labour, property and capital.

The money generated could be used to help with the funding of the Belgian social security system which, although no longer in technical deficit, benefits from an annual 2.5-billion-ecu subsidy from the federal government to offset a shortfall in earmarked contributions.

All these measures put together are intended to bring the general government deficit, including that of the federal, regional and local authorities, down to 2.8&percent; of Gross Domestic Product (GDP) next year.

With inflation and long-term interest rates low and a steady currency, Belgium should then be a favourite for the Euro bloc when it gets started in January 1999.

The only cloud on the horizon is the final entry rule enshrined in the Maastricht Treaty: that public debt should be brought down towards 60&percent; of GDP.

Secure in the knowledge that the deficit will be pulled back to less than 3&percent; of GDP, the government is turning its attention to the mountain of debt run up by the public sector during the giddy Seventies.

Touching 250 billion ecu, the debt represents 133&percent; of the country's GDP and meeting the interest payments alone accounts for a large proportion of government spending. Once these are stripped out, the so-called 'primary' public finances are in surplus by 6&percent; of GDP.

Yet reducing the debt as a proportion of national income takes time. Even with consistent primary surpluses, the debt has only fallen from 138&percent; at the end of 1993 to around 132&percent; now. To show willing to its EU peers, the government wants to have cut the debt ratio by ten percentage points between 1992 and the end of 1997.

Following the practice adopted in the most recent French budget, the Belgians are also planning a dose of financial chicanery. National Bank Governor Alfons Verplaetse has confirmed that the 6-billion-ecu surplus his bank has amassed through sales of gold reserves could be used to repay public debt.

Combined with privatisation receipts of almost 1 billion ecu, the government should be able to convince its judges in Bonn and Paris that it is doing enough to cross the Euro threshold.