Chapter

3 Belgium

Author(s):
International Monetary Fund
Published Date:
March 1986
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Following several years of strong growth, real GDP declined by almost 2 percent in 1975; after a sharp recovery in 1976, when over 5 percent real growth was registered, economic activity again turned sluggish. The rate of unemployment rose from 3 percent in 1972 to over 13 percent in 1982. Inflation was also rising; after recording a relatively moderate rise in the latter half of the 1960s, consumer price increases reached a peak of almost 13 percent in both 1974 and 1975. Although the rate abated to a moderate 4½ percent in 1978 and 1979, reflecting in part stringent wage and price policies, it began rising again in 1980, and was close to 9 percent in 1982. The external current account position steadily deteriorated throughout the period—from a surplus equivalent to 3½ percent of GDP in 1972 to a deficit of 4½ percent in both 1980 and 1981. A combination of structural adjustment difficulties in the domestic economy, notably in the important steel industry, expansionary fiscal policies, and adverse external factors contributed to this development. The impact of external factors is particularly strong in the highly open Belgian economy, where foreign trade amounts to over 50 percent of GDP. However, as a result of broad-based measures in 1982 to reduce domestic and external imbalances, the current account deficit dropped to 3½ percent of GDP in that year. Large and persistent fiscal deficits were experienced over the period; their harmful impact on the external current account was substantially mitigated, however, especially in the early part of the period, by an unusually high ratio of private household savings that made noninflationary financing of the fiscal deficit possible.

Expenditure

Probably the most striking feature of fiscal developments in Belgium during the period under review is the explosive growth of central government expenditure; its ratio to GDP expanded by 17 percentage points, from 40 percent in 1972 to 57 percent in 1982. This increase was concentrated in two particular years, namely, 1975, when expansionary fiscal policy coincided with a decline in real GDP and the share recorded an upward shift of over 5 percentage points; and again in 1981, when similar events contributed to an almost 5 percentage-point rise in this ratio. Well over half the total relative increase thus occurred in these two years.

Belgium: Selected Economic Indicators, 1972–82
19721973197419751976197719781979198019811982
Real GDP, percentage changes5.36.24.5–1.95.20.43.02.03.5–1.31.1
Rate of unemployment2.72.83.15.16.67.58.18.49.011.113.1
Consumer prices, percentage changes5.57.012.712.89.27.14.54.56.67.68.7
External current account balance as percentage of GDP3.62.00.4–0.10.1–1.3–1.4–2.7–4.5–4.5–3.5
Source: Organization for Economic Cooperation and Development, Economic Outlook, December 1984.
Source: Organization for Economic Cooperation and Development, Economic Outlook, December 1984.
Belgium: Consolidated Central Government Finances, 1972–82(Year ended December 31)
19721973197419751976197719781979198019811982
Total Revenue
(as a percentage of GDP)35.436.537.440.140.441.742.742.943.643.944.7
Percentages of total revenue100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Income taxes31.233.034.636.835.837.338.839.638.237.639.4
Social security contributions32.232.131.832.332.231.530.630.630.430.729.9
Payroll (manpower) taxes
Property taxes3.03.12.82.52.72.82.93.02.42.01.8
Taxes on goods and services28.727.526.524.425.424.624.523.224.524.423.9
Taxes on international trade1.00.50.4
Other taxes0.30.30.30.30.10.10.10.10.20.10.1
Nontax revenue and grants3.63.63.73.73.83.73.23.64.45.35.0
Total Expenditure
(as a percentage of GDP)39.839.939.644.846.047.749.550.551.356.256.9
Percentages of total expenditure100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Expenditure on goods and services24.924.624.824.724.023.423.222.622.221.420.5
Of which:
Wages and salaries17.617.718.017.517.216.816.315.915.715.214.7
Interest payments6.66.66.96.16.26.77.28.19.811.913.5
Subsidies and other current transfers56.058.057.959.960.160.559.760.157.756.755.6
Of which:
Social security funds33.334.235.337.238.338.237.738.337.536.836.5
Capital expenditure12.010.29.48.38.58.58.18.08.38.68.8
Lending minus repayments0.60.71.01.11.10.91.81.21.91.41.6
Surplus/Deficit
(as a percentage of GDP)–4.3–3.5–2.2–4.7–5.6–5.9–6.9–7.6–7.7–12.3–12.2
Financing:
Abroad–1.0–0.2–0.10.41.32.45.95.3
Domestic5.33.72.34.75.65.96.46.35.36.46.9
Monetary authorities–0.20.10.10.60.6
Deposit money banks
Other15.53.52.24.75.05.46.46.35.36.46.9
Memorandum Items:
General government expenditure and net lending/GDP53.655.354.661.561.9
Central government debt outstanding/GDP45.042.539.040.040.343.246.249.754.865.273.9
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

Includes adjustments.

Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

Includes adjustments.

The major part of the expansion was accounted for by subsidies and other current transfers, especially to social security funds. This category roughly maintained its share in total expenditure at 56 percent over the period. Apart from deliberate policy action to improve real benefits, the growth of social security expenditures is also the result of demographic factors reflecting the aging structure of the population. Furthermore, depressed economic activity has triggered built-in fiscal stabilizers and caused an especially rapid growth of unemployment compensations. This last factor, in addition to generating increased outlays on direct unemployment benefits, has resulted in declining social security contributions from both employers and employees, thus necessitating increased central government grants.

Interest payments on government debt were the second most dynamic element underlying the expansion of the government sector. Their share in total expenditure rose from 6½ percent to 13½ percent over the period as a result of high and rapidly widening fiscal deficits and rising interest rates. While the share of expenditure on goods and services in total expenditure declined, it more than kept pace with GDP growth. Over 70 percent of this category is accounted for by wages and salaries, the growth of which is due, in part, to rising public employment brought about by the Government’s unemployment relief policy. Similarly, while the share of capital expenditure in total government expenditure declined somewhat over the period, it grew in line with GDP. Net lending averaged just over 1 percent of total expenditure over the period.

Revenue

From 1972 to 1982 the ratio of central government revenue to GDP rose by 9½ percentage points to 44½ percent in 1982, among the highest such ratio of the countries in the group. However, in the years preceding the period covered, the tax burden was lower than in many other industrial countries. The high elasticity of the tax system with respect to GDP stems largely from progressive income taxes, which for most of the period were only partially adjusted for inflation. Social security contributions also rose faster than national income. Together, these two sources of revenue accounted for 69½ percent of total revenue in 1982, their share having risen from 63½ percent in 1972. A regime of value-added taxes was introduced in 1971 and accounts for about two thirds of taxes on goods and services, which declined as a proportion of total revenue from almost 29 percent in 1972 to 24 percent in 1982. However, the ratio of this type of tax to GDP has remained almost constant. Other taxes taken together became less significant revenue sources over the period, while nontax revenue increased its share in the total from 3½ percent to 5 percent.

The Fiscal Balance and ITS Financing

In the years 1972–74, revenue increased faster than expenditure and the fiscal deficit declined. Since 1974 the respective growth rates were reversed, with the deficit steadily widening as a proportion of GDP, or from 2 percent in 1974 to 12 percent in 1982. The high private savings ratio that had formerly mitigated the monetary impact of the large and growing deficits became less effective, not only because the deficits were growing, but also because the households’ savings ratio was declining—from 17.3 percent on average in 1972–76 to 15.9 percent during 1977–80. These contrary movements entailed a change in the pattern of deficit financing. Until 1978 the deficit had been financed entirely by domestic sources, mostly in the form of bond sales in the capital market. In that year, for the first time in a decade, the authorities turned to foreign borrowing despite their stated reluctance. Since then, an increasing portion of the deficit has been financed abroad—almost one half in 1982—with only slight recourse to domestic monetary financing, and none since 1977. As a consequence of the mounting fiscal deficits, government debt rose sharply over the period—from 45 percent of GDP in 1972 to 74 percent in 1982. This ratio has since risen further and is one of the highest among industrial countries.

Fiscal Policy

The framework. In 1982 the ratio of general government expenditure to GDP was almost 62 percent. Including transfers to local governments, over 90 percent of total public sector spending was accounted for by the Central Government. Despite the limited size of local governments, their fast growing expenditure resulted in deficits whose financing requirement amounted to 10 percent to 15 percent of the public sector borrowing requirement (PSBR) in the 1980–82 period. In light of this rise, the Government decided toward the end of 1982 to avail itself of special powers and adopted a decree that imposed balanced budgets on the local authorities from 1988. Consequently, local governments were granted greater revenue-raising possibilities by the abolition of the previous limit on the local surtax on personal income tax.

The broad lines of the Government’s economic policy are set forth in an overall plan, the National Plan, which covers five-year periods. According to the provisions of a law enacted in 1970, the plan is to be reflected annually in the budget. In practice, coordination of the budget and the plan pertains especially to public investment, while the plan in general is regarded as indicative. The plan, which is debated and passed by Parliament, sets targets for public investment that may be adjusted over the course of the period in line with short-term policy aims without upsetting the aggregate target.

The Belgian budget is made up of two main accounts: the ordinary budget, containing mainly current expenditure and revenue as well as amortization of debt; and the extraordinary budget, which includes investment expenditure. In the early 1970s, and for several preceding years, the ordinary budget remained in approximate balance; investment expenditure in the extraordinary budget was relied on to provide flexibility in fiscal policy. The flexibility initially derived from a certain part of the Government’s investment program—the so-called tranche conditionelle—which was set aside to be used only when cyclical conditions in the economy warranted; the size of the investment program itself was determined with regard to the economic outlook. Later, the tranche conditionelle was replaced by a supplementary program in addition to the base program for capital expenditures. This innovation, while closely resembling the previous technique, was intended to increase flexibility in adapting expenditure levels to changes in the economic outlook. The supplementary program was first introduced in the 1975 budget and accounted for 0.4 percent of GDP. Widening fiscal deficits have severely restricted the scope for applying these techniques effectively, and vastly increased transfer payments have in particular pre-empted any large-scale use of capital expenditure to stimulate activity and employment. Fiscal multipliers are relatively small in the highly open Belgian economy, and especially so in the case of transfers.

Aims and measures. Until the mid-1970s fiscal policy was largely concerned with inflation. The main emphasis was placed on curbing capital expenditures, but the pursuit of a restrictive expenditure policy was hampered by previous and ongoing commitments in social security programs. Inflation itself was also found to be an obstacle to expenditure restraint, not only on account of salary indexation and transfers, but also because the responsive tax system made it easier to finance new expenditures. Changes of government further weakened effective resistance to pressures for increased public spending. By mid-1975, the prospects for employment and output had severely worsened and policy priorities changed; unemployment became the major concern. Special measures were announced to stimulate the economy and to prevent a further increase in unemployment without adding to inflationary pressures.

In subsequent years, fiscal policy became defensive, seeking to mitigate the impact of the depressed state of economic activity experienced in the remainder of the period. Automatic fiscal stabilizers triggered ever-increasing social security outlays and reduced revenue growth. Discretionary measures included several programs to stimulate employment in the private sector, including providing credit to finance additional hiring to firms that had agreed to cut working hours. Ailing industries also received extensive support. To counteract rising unemployment, public sector employment was increased and early retirement schemes were introduced.

The most dynamic force underlying expenditure growth, however, is the social security system. In addition to demographic and cyclical factors, the system’s rising cost is the result of indexation of benefits to wages or prices and the policy, pursued by successive governments, of improving benefits in real terms and expanding their coverage. The system is quite extensive, and the various schemes are administered by separate commissions—an arrangement that tends to complicate consistent decision making and weakens effective control over expenditure. The result is that social benefits, notably unemployment compensations, have become more generous in Belgium than in most other countries. It is estimated that over 80 percent of Belgian households receive support from the system in one form or another, and that one fourth of all households are entirely dependent on it financially. In response to the deterioration in the financial position of the social security system, the authorities have taken measures to limit the increase in benefits. A comprehensive review of fundamental aspects of the system is under consideration, with the goals of improving efficiency in income redistribution and work effort and eliminating deficiencies in other areas. A change in the method of financing the system is also under consideration: employers’ contributions would be based on the value added by firms rather than on the number of employees or the wage bill. This method would not distort the relative cost of labor as the present system does.

For most of the period, fiscal policy has relied on expenditure rather than tax measures. The observed significant increase in direct taxes was mostly generated automatically by the progressivity of the income tax system. Only toward the end of the period was a more active tax policy applied: certain investment incentives were introduced in 1979, and full indexing of income tax scales for lower income groups, in 1980. Moreover, in 1981 part of employers’ social security contributions, which had become a heavy burden in the depressed economic conditions, was substituted by an increase in value-added and excise taxes. These measures were taken to some extent in the context of incomes policy, but with the exception of a temporary wage freeze, government intervention in income formation has been limited.

A special feature of fiscal policy in Belgium in the early 1970s was the conduct of large-scale open market operations in support of monetary policy. By borrowing domestically in excess of the financing requirement, this debt management policy aimed at sterilizing the liquidity impact of inflows of foreign funds and reducing foreign debt. Also, short-term domestic debt was converted through the sale of long-term bonds in the domestic market. As indicated earlier, fiscal policy subsequently played a reverse role in this respect.

Overview and implications for future policy. For most of the period, fiscal policy in Belgium was conducted against an unfavorable economic background. Also, the political environment was less than conducive to the formulation of consistent long-term policies. The high priority assigned to various social policies contributed to the continued growth in fiscal deficits in the wake of the 1974–75 recession, unlike in most countries in the group where the deficits tended to stabilize or decline. The large and growing deficits implied a sharp rise in the central government debt, which, as a percent of GDP, had become among the highest in industrial countries. A falling private savings ratio entailed increasing monetary financing of the deficits. Nonmonetary deficit financing, mostly by the sale of bonds, exerted upward pressure on long-term interest rates, which remained relatively high in Belgium. The high interest rates were detrimental to the economically depressed private sector, which was also burdened by rapidly growing direct taxes.

Concern has been growing over these and other implications of past fiscal policies, such as the constrictive impact of employment-stimulating measures on structural adjustment and the erosion of work incentives by generous unemployment benefits. Despite delays caused by political controversies, the authorities have in recent years been able to make some headway in implementing a financial reform of the social security system. Moreover, specific medium-term fiscal targets were announced in the 1982 budget which aimed at reducing the total public sector deficit from 14½ percent in 1981 to 7 percent in 1985, largely through expenditure restraint. A slower than expected recovery of domestic and external demand and other subsequent developments, however, obliged the authorities to revise their timetable for reducing the deficit. The task of establishing a fiscal balance that would be consistent with medium-term investment and savings volumes in other sectors of the economy and a sustainable balance on external current account is therefore likely to remain a major preoccupation of fiscal policy for a number of years. The mounting debt-servicing burden will require an especially determined effort, even if external conditions were to improve appreciably.

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