The medium-term outlook for Belgium points towards an average GDP growth rate of 2.1% during the period 2007-2012, which is slightly higher than the potential rate (2.0%) and similar to the average growth rate of the euro area. This pace of growth follows a strong rebound in 2006 (3.0%), mainly driven by domestic demand, in a context of an improvement in international economic activity.
The average yearly growth rate for private consumption should reach 1.8% during the period 2007-2012, which is slightly lower than the increase in households’ disposable income. Purchasing power will especially be underpinned by employment growth in 2007 and 2008 and by higher increases in wages and social benefits at the end of the projection period. Investment growth should reach 2.7% during the period 2007-2012, reflecting the path of business investment growth (supported by high business profitability and stable demand prospects), but also an acceleration in public investment at the end of the projection period. Growth in exports should reach 5.7% on average and the contribution of net exports to GDP growth should amount to 0.2%-points. The external surplus, which was strongly reduced between 2002 and 2005, should (slowly) increase from 2007 onwards and attain 3.1% of GDP in 2012. The combination of moderate increases in domestic costs and limited rises in imported costs should allow the inflation rate to remain below 2% in the medium term.
The expected evolution of employment reflects a favourable macroeconomic context, limited wage increases (mainly at the start of the period) and various measures taken to promote employment. After a particularly high number of new jobs created in 2006 (44,000), employment growth should remain sustained: about 38,000 units should be created every year during the period 2007-2012. Between 2006 and 2012, manufacturing industrial employment should fall by 41,000 units but the number of jobs created in market services should exceed 256,000. As the number of newly created jobs is growing faster than the labour force, the unemployment rate (broad administrative statistics) should fall from 13.9% in 2006 to 12.0% in 2012.
Under the assumption of constant policy, public accounts are expected to present a net public financing surplus in 2007 (+0.1% of GDP) and to deteriorate in 2008 (-0.5% of GDP). During the following years, the net public financing requirement should gradually decline and the equilibrium should be restored at the end of the projection period, mainly thanks to a decrease in interest charges on the public debt. Consequently, the total public debt to GDP ratio is expected to decline from 87.5% in 2006 to 69.5% in 2012.
STU 2-07 was finalised on 18 May 2007.
Generating medium-term budget surpluses to finance the budgetary cost of ageing
In the Belgian Stability Programme, which was submitted to the Commission at the end of 2006, the government outlines its budgetary targets for the period 2007-2010: after an additional year of budget balance in 2006, the overall surplus to be reached by the authorities in 2007 is 0.3% of GDP. That surplus will then have to increase gradually by 0.2% of GDP annually so as to reach 0.9% by 2010. The ‘ageing fund law’ prescribes a budget surplus of 1.3% of GDP by 2012. If those objectives are not met, both the sustainability of Belgian public finances and the funding of future ageing-related expenditure will be undermined.
The budget surpluses planned by the Belgian government were set within the framework of a strategy which aims at enabling Belgian public finances to cope with the long-term budgetary effects of ageing. The targets were set by the government on the basis of an assessment of the budgetary cost of ageing that was carried out by the Study Committee on Ageing. Starting from this assessment, the “Public Sector Borrowing Requirement” section within the High Council of Finance (HCF) sketched a budgetary guideline for the middle and long term.
According to the “Economic Outlook 2007-2012” published by the Federal Planning Bureau (FPB), if policies are unchanged (and if no other one-off measures are taken from 2008 onwards), the objectives set within the Stability Programme will not be met (see Table 1).
Table 1 - Budget Forecasts and Objectives of the Stability Programme (2007-2010, in % of GDP)
|Budget balance (a)
|FPB’s Economic Outlook 2007-2012
|Objectives of the Stability programme
a. The budget balance is defined according to the Excessive Deficit Procedure..
Within a constant policy scenario, long-term prospects for public finances can be computed by supposing that, beyond 2012, the primary surplus is eroded by the budgetary cost of ageing1. In such a scenario, the primary surplus, which is approximately stable in the middle term, gradually loses as much as 5.4% of GDP over the period 2013-2050. Fuelled by declining interest expenses, the budget balance improves up until 2014 when it reaches its highest level at 0.3% of GDP. As a consequence of the erosion of primary surplus, a deficit appears in 2019 and gradually increases thereafter. As a result, the declining debt ratio stops falling as of 2027 and a new snowball effect begins, which sends interest expenses, deficit and public debt spiralling in a most unsustainable way (see Graph 1).
In order to evaluate the sustainability problem, and, above all, to assess the efforts needed to mitigate it, it is possible to calculate – as the European Commission does – an indicator called the “sustainability gap”. The sustainability gap2 measures the immediate and permanent efforts that need to be made in terms of primary surplus in order to avoid a debt that explodes in the long term. If the necessary adjustment is carried out and maintained permanently, the Belgian debt then tends to stabilise towards 20503. At the stationary state (i.e. with primary surplus, economic growth and interest rates stabilised around their 2050 value), budget balance, interest expense and public debt all remain unchanged in terms of percentage of GDP.
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