The first of course in annual fiscal deficit, the other: the debt to GDP long term. Curiously enough the emphasis in the present interpretation of the EU growth and stability pact is on the former. But this is only important so long as it impacts on the latter. Categorising countries on the two measures gives different readings, and this was the basis for Pedro Solbes recent proposal for reform. One of the countruies which seems on the face of it to be a good-citizen in terms of the 3% limit, is in fact one of the worst offenders at global debt level. Fortunately the Belgium debt has not been increasing significantly recently, but the principal reason for this is declining interest rates. All in all the Belgium situation is far from good, which is one reason why the Global Ageing Initiative placed it ninthout of twelve on its Ageing Vulnerability Index. Morgan Stanley's Annemarieke Christian explains:
With markets primarily focusing on budget deficits at the moment, the danger is that they lose sight of the other important pillar of the Maastricht framework, government debt levels (for details, see Chris Lupoli and Vincenzo Guzzo's article “Country-Specific Spreads in Euroland,” Interest Rate Strategy: Global Perspectives, March 20, 2003). But while the deficit provides only a snapshot of fiscal policy, the debt level is key when it comes to the long-term sustainability of public finances. Belgium is an interesting case in this regard, being one of the most virtuous in the euro area on the deficit front, while sporting one of the highest debt levels, well above the 60% of GDP Maastricht limit. At first glance, the Belgian government seems to have been one of the most fiscally virtuous in the euro area lately. Despite the sharp economic slowdown, it has managed to keep its budget in balance, while its neighbours' budgets were running up marked deficits.
A key factor -- in addition to one-off measures -- in this stellar Belgian performance is the continued decline of interest payments in the Belgian budget, which helped to keep the budget balance out of the red zone last year. But on the debt level, the other pillar of the Maastricht framework, Belgium is near the bottom of the league in the euro area. Despite the output gap rising by three percentage points in the last two years, the Belgian government managed to keep its finances in balance, thanks to declining interest payments, spending discipline and asset sales. This is rather impressive, in our view, given that the sensitivity of the Belgian budget (0.65%) is estimated to be well above that of the euro area average (0.5%). As GDP growth fell from an average rate of 2.7% GDP in the second half of the 1990s to 0.8% in the past two years, the automatic stabilisers would have pointed to a budget deterioration of two percentage points. Yet the government managed to expand the budget surplus slightly to 0.2% of GDP in 2001 and kept its budget in balance in 2002. Next to real estate sales of around 0.3% of GDP in the past two years, the government stuck to a strict spending discipline. It even found room in its finances to ease the tax burden for households and companies. Further steps in income tax reform are planned for the next three years. In addition, the corporate tax rate was cut from 40.2% to 34.0% in 2003 and now lies just above the EU average, on our calculations. While corporate tax reform has been devised as revenue-neutral, the income tax cuts are to be financed by interest savings.
With growth to remain sub-par for a third consecutive year in 2003, we believe the budget balance is likely to slip into deficit this year. The Stability Programme target of a balanced budget, postulated in November last year, was based on a growth rate of 2.1% for this year.Large budget deficits, which reached more than 10% of GDP in the mid-1980s, led to the spiralling of debt up to a peak of 137.9% of GDP in 1993. Since then, however, the government has been on a prudent course of debt reduction, bringing down the debt level by around 32 percentage points to 105.4% of GDP in 2002. While one-off measures were the main reason behind the drop in debt in the mid-90s, the sharp pace of decline since then was achieved by strong growth, high primary surpluses and shrinking interest payments. Primary surpluses (government budget balance excluding interest payments) were built up from an average 2.5% of GDP in the decade up to 1993 to sustained surpluses of more than 6% of GDP in the last few years. At the same time, public spending has come down from a peak of 53% of GDP in 1993 to around 46% of GDP in 2002. This decline is largely driven by interest payments, which fell from almost 11% of GDP in the early 1990s to just under 6% of GDP in 2002.
Source: Morgan Stanley Global Economic Forum
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