Public finances: between 25 and 30 billion deficit reduction in 4 years

First, the economic context. It is a little less good than expected: compared to the latest forecasts, economic growth is expected to decline slightly (1.3% instead of 1.4% for 2024), like productivity gains. Inflation, however, is expected to remain a little higher than expected (3.8% in 2024 and 2.2% in 2025). Given these various parameters, we can well imagine that the impact on our fragile public finances is not particularly favourable. Especially since a few days ago, the European Commission, due to this rather delicate budgetary trajectory (5% public deficit in the coming years with unchanged policy, and a debt rate peaking at 119% of GDP in 2029), opened an excessive deficit procedure against Belgium and made a budgetary trajectory proposal to the authorities.

Two scenarios

The purpose of the meeting of the five parties gathered under the aegis of Bart De Wever (N-VA) with the members of the BNB was precisely to see how to respond during this legislature to this proposal, the content of which is contained in nine short pages. We read a double scenario there, it being understood that the rectification of Belgium’s budgetary trajectory could be 4 years or 7 years; 7 years if structural reforms (labour market, pensions, health care, etc.) which improve public finances are indeed carried out. We are not there yet, since there is not yet a government declaration which gives an overview of the reforms on which the members of Arizona could agree. In short, in the meantime, the hardest scenario put forward by the European Commission, without an extension from 4 to 7 years, postulates a structural reduction of 0.72% of GDP of the deficit each year. That is approximately 3.6 billion per year. The scenario with a 7-year extension assumes a deficit reduction of 0.5% from 2025 to 2027, then 0.59% in 2028, and finally 0.42% from 2029 to 2031. This option is obviously the one that the different parties would like to see followed, but in the absence of a government agreement, we must fall back on the first option over 4 years. This was the subject of the discussion on Monday.

Public finances: 2024, a small clearing in a very cloudy sky

4% deficit reduction in 4 years

According to reliable sources, we are told that given the expected slight deterioration in the Belgian economy, the effort would focus, over 4 years, on reducing the deficit by 1% each year (cumulative). That is 4% in 4 years. That is between 25 and 30 billion cumulative. These are the figures for all entities 1 (federal state and social security) and 2 (Regions and communities, essentially), but the bulk would fall on the Federal. This is obviously not nothing.But the discussion did not end there, specifies one of our sources. It is clear that the distribution of this effort between entity 1 and entity 2 is the most sensitive point. The opinion that will be formulated, and which will be endorsed by the High Council of Finance, will have to take this distribution into account.“The implication is that the Regions, in particular, will have to take on more responsibility. This is not currently the case, at least on paper, since the 2013 cooperation agreement between federated entities does not provide for any real accountability. If this were to be the case, the stakeholders in government formation would necessarily have to review this agreement and discuss sources of funding,”the most important levers remaining in the hands of the federal state“, explains another source.”The issue is sensitive, but it must be understood that financing and institutional adaptations go hand in hand.“