Council Opinion

of 18 February 2003

on the updated stability programme of Belgium, 2003 to 2005

(2003/C 51/01)

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:

On 18 February 2003 the Council examined the 2002 update of the stability programme of Belgium, which covers the period 2003 to 2005. The programme broadly complies with the requirements of the code of conduct on the content and format of the stability and convergence programmes; the Council considers that the economic policies as reflected in the programme update comply partly with the recommendations of the Broad Economic Policy Guidelines.

The Council notes that economic activity remained weak in 2002 as real GDP growth is estimated at 0,7 % as against 1,3 % projected in the 2001 update. The impact of economic slowdown on public finances was contained in 2002 and the general government accounts reached balance after recording a surplus of 0,2 % of GDP in 2001 (or a surplus of 0,4 % of GDP if UMTS receipts are included). In 2001 and 2002, the decline in the government debt ratio continued, but reached only 3,5 percentage points of GDP, decelerating as a result of low GDP growth but also to debt-increasing financial operations. In 2002, the debt ratio was still at a high level, 106,1 % of GDP.

According to the updated programme, economic recovery is expected to be progressive, gaining momentum during 2003 and remaining robust in subsequent years, supported by recovery in international trade and sustained domestic demand. The programme is projecting 2,1 % real GDP growth in 2003, which appears to be subject to downside risks in light of recent international developments, and more robust but plausible growth, at 2,5 % in 2004 and 2005.

The 2002 update of the stability programme is projecting a balanced general government position in 2003 and surpluses of 0,3 % and 0,5 % of GDP, respectively, for 2004 and 2005. The ground lost compared to the targeted budgetary adjustment in the previous update would be partly recovered by a somewhat faster adjustment during 2004 and 2005.

The Council notes that the cyclically-adjusted balance, calculated by the Commission on the basis of the production function method, after improving considerably, by 0,5 % of GDP, in 2002, is projected to remain practically unchanged during the period 2003 to 2005, reaching an estimated surplus between 0,2 % and 0,3 % of GDP. Consequently, the Council notes with satisfaction that Belgium continues to be in conformity with the requirement of the stability and growth pact to reach a budgetary position of close to balance or in surplus in the medium term.

The Council notes that the government debt ratio is projected to decline by about 4 percentage points of GDP per year over the period considered by the 2002 update, to 93,6 % of GDP in 2005. However, the planned assumption of debt of public enterprises by the State in 2004 to 2005, mentioned in the programme, may temporarily reduce the pace of debt reduction. The Council considers it necessary to maintain the government debt ratio on a sustained declining trend.

The Council notes that the budgetary strategy implied by the 2002 update continues to be based on the achievement of high primary surpluses combined with declining interest payments over the period of the programme; the Council commended, in past opinions, such a strategy which, based on effective control of expenditure growth, has proved successful in eliminating budgetary deficits and allowing a significant reduction in the government debt ratio. The Council notes, however, that the primary surpluses projected in the current programme, at around 5,5 % of GDP per year are lower than those, above 6 % of GDP, realised in recent years; moreover, the Council notes the Government's intention to implement the 1,5 % limit on real expenditure growth for Entity I (including the Federal Government and Social Security), even though no mention is made of it in the current update. The Council urges the Belgian authorities to stick to this limit over the programme period.

The Council considers that the fiscal consolidation projections in the 2002 updated programme represent the minimum effort required in order to meet the challenge of a rapid reduction in the still very high debt ratio and to prepare for the budgetary implications of population ageing. The Council considers that, given projected real GDP growth accelerating to 2,1 %, further budgetary adjustment would be warranted in 2003. The Council recommends to the Belgian authorities to seek every opportunity to realise further budgetary adjustment in 2003 and in subsequent years. The Council urges the Belgian authorities to maintain primary surpluses at around 6 % of GDP per year and to continue to respect the limit of 1,5 % per year on real primary expenditure growth for Entity I, over the period covered by the programme.

The Council welcomes the measures adopted in 2001 with a view to improving the monitoring of the sustainability of public finances as part of the annual budgetary planning process, which include regular assessments of the budgetary impact of ageing populations. On the basis of current policies, and in particular the policy of sustaining high primary surpluses, Belgium should be able to meet the budgetary costs of ageing populations. However, it should be borne in mind that long-run budgetary developments in a high debt country like Belgium are very sensitive to medium-term budget target being achieved and sustained over the long-run. A failure to continue the policy of running large primary surpluses would mean that the risk of unsustainable public finances could not be excluded. To ensure the sustainability of public finances, debt reduction needs to be complemented with measures to raise employment rates, especially amongst older workers as the effective retirement age is one amongst the lowest of all EU countries.

The Council notes with satisfaction the progress made in implementing structural reforms including draft legislation for setting up the framework for supplementary pensions, the simplification of administrative procedures for business activity and continued implementation of tax reform aimed at improving the performance of the economy and encouraging employment creation. The Council deems it important that the budgetary cost of structural reforms, notably those involving tax and non-tax burden reduction, be kept consistent with the targeted budgetary adjustment and the reduction of the government debt ratio be ensured.

The Council welcomes the renewed agreement between the various parts of government to set budgetary objectives and the commitment to ensure their achievement; the Council considers such "internal stability programmes" particularly appropriate in the federal institutional framework of Belgium.

(1) OJ L 209, 2.8.1997.