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If it depends on the European Commission, the budgetary efforts of the member states will soon be subject to stricter controls again. Serious fines are imminent for Belgium.
The European finance ministers are discussing this weekend the European Commission’s plan to force member states to comply with the budget rules again. The result is of great importance for Belgium and for all of us. Because as it stands now, Europe will force our country to make significant savings in the coming years. Each of us will feel that.
Europe has been monitoring member states ‘ budgets for some time. With the corona crisis, the war in Ukraine and high energy prices, the European Commission decided that the budget rules did not have to be observed so strictly for a while. This allowed governments to spend more money to mitigate the economic and social effects of successive crises. The Commission considers that the crisis is now largely over and that it is time for stricter controls and sanctions if necessary.
In essence, the European budget rules are very simple. A member state may have a maximum debt of 60% of GDP (gross domestic product, which is what we all produce in goods and services) and a budget deficit of no more than 3% of GDP. Both must ensure financial stability in the EU. It is not easy to change something about that, since everything was cast in an EU treaty. However, the interpretation and application of budgetary rules can be somewhat tinkered with.
The Commission wants the budget deficit to fall below 3% within four years. The effort can also be spread over seven years, if the country agrees and implements credible investments and reforms with Europe.
As for the reduction of public debt, until now member states were obliged to reduce the debt above that 60 percent by one twentieth per year, so each year that had to be reduced by 5 percent. That application would lapse, but countries with a budget deficit above 3 percent would have to reduce their debt by at least 0.5 percent of GDP annually. In addition, government spending should not grow faster than the real economy.
That is what the Commission is proposing, but there is still great division within the EU. Germany, the Netherlands and other northern member states find the application of the Stability Pact too lax, southern countries find everything too strict. There will still be heated debate about this, but it is clear that the stricter control by Europe will have serious consequences for Belgium and all of us.
Disastrous
The starting position of Belgium is not good, although Prime Minister Alexander De Croo (Open VLD) keeps waving that away. However, the figures are what they are: our public spending continues to rise, we have a budget deficit of 4.3 percent of GDP and public debt is 107 percent of GDP. We are among the worst students in the European class.
And our situation is in danger of getting even worse, especially since the cost of aging will increase. The government will have to spend more on pensions and health care in the coming years. No financial buffer has been built up for this, even if we have seen the aging wave coming at us for more than half a century. According to the latest IMF forecasts, the debt of the Belgian government (with unchanged policy) will reach 119.5 percent of GDP in 2028. This is by far the largest increase in debt in Europe.
This means that our country will have to make one of the toughest efforts in Europe. Not only to meet European standards, but also not to let our public finances get completely bogged down and not to let our countries around us fall behind. So we should not clean up so much because Europe wants to, but because the state of our public finances is disastrous and is in danger of deteriorating. Also because we will have to pay more and more money in interest for the loans that the government has to take out for the public debt. And that interest rate is rising.
Simulations by the European Commission show that Belgium will have to make an annual effort of 0.8 percent of GDP. That amounts to 5 billion euros of remediation per year and that will have to be done mainly by cutting spending. That shouldn’t come as a surprise. For years, all kinds of institutions, from the National Bank to the IMF to the OECD, have warned that public finances in our country are unsustainable. A quote from the latest Annual Report of the National Bank says it clearly:’the budget situation is worrying and the unsustainable growth in expenditure must be tackled urgently’.
Despite those warnings, the budget was also never taken seriously by the De Croo government. Budget experts such as the Leuven economist Wim Moesen repeatedly denounced the ‘night and rush work, the substandard budget results, the sloppy communication and obscure budget tables’, to conclude: ‘this is not how we get there’.
