Council opinion

of 27 March 2007

on the updated stability programme of Belgium, 2006-2010

(2007/C 89/02)

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

(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.

(3) 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.

(4) 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 114 percentage point of GDP between 2006 and 2010). The expenditure reduction is attributable to a fall in interest expenditure (34 percentage point) which results from the continuous debt reduction as well as to a reduction of primary expenditures (12 a percentage point). It is partly offset by a decrease in government revenue (12 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.

(5) 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 114 % 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.

(6) 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.

(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 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.

(8) 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.

(9) 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.

(10) 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.

(11) 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.

(12) 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].

The Council considers that the strategy of a continued reduction of the still high debt stock provides an example of fiscal policies conducted in compliance with the Pact. However, while the programme foresees a gradual build-up of surpluses (notably through reduced interest expenditure) starting from a balanced position in nominal terms, there are some risks to the achievement of the budgetary targets. Nevertheless, the medium-term objective is expected to be reached within the programme period.

In view of the above assessment, the Council invites Belgium to:

(i) 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;

(ii) 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.

Comparison of key macroeconomic and budgetary projections.

Notes:

Source:

Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

| | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 |

Real GDP (% change) | SP Dec 2006 | 1,2 | 2,7 | 2,2 | 2,1 | 2,2 | 2,2 |

COM Nov 2006 | 1,1 | 2,7 | 2,3 | 2,2 | n.a. | n.a. |

SP Dec 2005 | 1,4 | 2,2 | 2,1 | 2,3 | 2,2 | n.a. |

HICP inflation (%) | SP Dec 2006 | 2,5 | 2,4 | 1,9 | 1,8 | 1,8 | 1,9 |

COM Nov 2006 | 2,5 | 2,4 | 1,8 | 1,7 | n.a. | n.a. |

SP Dec 2005 | 2,9 | 2,8 | 2,0 | 1,9 | 1,7 | n.a. |

Output gap (% of potential GDP) | SP Dec 2006 [4] | ‘�0,8 | ‘�0,3 | ‘�0,4 | ‘�0,4 | ‘�0,4 | ‘�0,3 |

COM Nov 2006 [8] | ‘�1,0 | ‘�0,6 | ‘�0,6 | ‘�0,7 | n.a. | n.a. |

SP Dec 2005 [4] | ‘�0,8 | ‘�0,6 | ‘�0,6 | ‘�0,5 | ‘�0,4 | n.a. |

General government balance (% of GDP) | SP Dec 2006 | 0,1 ‘�2,3 [] | 0,0 | 0,3 | 0,5 | 0,7 | 0,9 |

COM Nov 2006 | ‘�2,3 | ‘�0,2 | ‘�0,5 | ‘�0,5 | n.a. | n.a. |

SP Dec 2005 | 0,0 | 0,0 | 0,3 | 0,5 | 0,7 | n.a. |

Primary balance (% of GDP) | SP Dec 2006 | 4,3 1,9 [] | 4,1 | 4,2 | 4,1 | 4,1 | 4,2 |

COM Nov 2006 | 1,9 | 3,9 | 3,4 | 3,2 | n.a. | n.a. |

SP Dec 2005 | 4,3 | 4,1 | 4,2 | 4,1 | 4,1 | n.a. |

Cyclically-adjusted balance (% of GDP) | SP Dec 2006 [4] | 0,8 ‘�1,6 [] | 0,2 | 0,5 | 0,7 | 0,9 | 1,1 |

COM Nov 2006 | ‘�1,7 | 0,1 | ‘�0,1 | ‘�0,1 | n.a. | n.a. |

SP Dec 2005 [4] | 0,4 | 0,3 | 0,6 | 0,8 | 0,9 | n.a. |

Structural balance [5] (% of GDP) | SP Dec 2006 [6] | n.a. | ‘�0,4 | 0,1 | n.d. | n.a. | n.a. |

COM Nov 2006 [7] | 0,2 | ‘�0,7 | ‘�0,2 | ‘�0,1 | n.a. | n.a. |

SP Dec 2005 | 0,0 | ‘�0,3 | 0,4 | 0,7 | 0,9 | n.a. |

Government gross debt (% of GDP) | SP Dec 2006 | 91,5 93,2 [] | 87,7 89,4 [] | 83,9 85,6 [] | 80,4 82,1 [] | 76,6 78,3 [] | 72,6 74,3 [] |

COM Nov 2006 | 93,2 | 89,4 | 86,3 | 83,2 | n.a. | n.a. |

SP Dec 2005 | 94,3 | 90,7 | 87,0 | 83,0 | 79,1 | n.a. |

[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://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

[2] The update was submitted almost 2 weeks beyond the 1 December deadline set in the code of conduct.

[3] The general government deficit and debt projections in the programme do not include the impact of a debt assumption from the railway company SNCB/NMBS in 2005 as decided by Eurostat on 23 October 2006. Moreover, the programme also does not provide information on the use of one-off and other temporary measures in 2008-2010.

[4] Commission services calculations on the basis of the information in the programme.

[5] Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.

[6] One-off and other temporary measures taken from the programme (0,6 % of GDP in 2006 and 0,4 % in 2007; all deficit reducing). The programme does not provide information on the use of one-off measures in other years.

[7] One-off and other temporary measures taken from the Commission services' autumn 2006 forecast (2,0 % of GDP in 2005, deficit increasing; 0,8 % in 2006 and 0,1 in 2007, both deficit reducing).

[8] Based on estimated potential growth of 2,2 %, 2,3 %, 2,3 % and 2,2 % respectively in the period 2005-2008.

[] The deficit and debt figures in the programme for 2005 are those notified by the Belgian National Accounts Institute. On 23 October 2006 Eurostat amended the deficit and debt data notified by Belgium as they were found not to be in accordance with ESA95 rules, specifically in relation to the assumption by government (FIF/FSI ‘�Fonds de l'infrastructure ferroviaire/Fonds voor spoorweginfrastructuur) of EUR 7400 million (2,5 % of GDP) of the debt of the railway company SNCB/NMBS in 2005 (see Eurostat News Release NO 139/2006). According to ESA95 rules, the impact on the 2005 government deficit is of the same amount; the impact on the government debt at the end of 2005 amounts to EUR 5200 million (1,7 % of GDP, taking into account a partial reimbursement occurred in that year). Data for 2005 marked with an asterisk are as amended by Eurostat. Debt data marked with an asterisk for years 2006 to 2010 have been "mechanically "adjusted by the Commission services to comply with ESA95. This adjustment of debt figures is based on the technical assumption that the stock of FIF/FSI's debts remains unchanged. In December 2006, the Belgian government challenged Eurostat's amendment of the Belgium data before the European Court of First Instance.

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