Against the backdrop of the impact of the COVID-19 crisis on public finances, it is important to examine which aspects of the Belgian fiscal framework perform well and which could be improved.

The decrease in interest rates has created favourable financing conditions for Belgian public debt, which remains high. The lengthening of debt maturity has reduced risks.

The recent international trends in corporation tax prompted the Belgian reform and make further European coordination desirable

Along with monetary policy, fiscal automatic stabilisers remain the most appropriate economic stabilising instruments, but discretionary counter-cyclical fiscal policy has a role to play too, especially in the event of a sharp economic slowdown.

Efficiency is defined as the ability to obtain the best possible results using as few resources as possible. The constant quest for efficiency in public sector management is essential for all constituent parts of the State. So, general government as a whole is expected to make a continued effort to improve services provided to the community or to reduce their expenditure, or even pursue these two goals at the same time. Belgium has a particularly high level of public spending. Among the fifteen West European countries selected, Belgium lies in fourth place in terms of level of expenditure expressed as a percentage of GDP. Along with the Nordic countries, France and Austria, it is one of the States with above-average public expenditure. In view of this high public spending, the results obtained could be better. This, at least, is what emerges from a comparison of budgets allocated and performance in the fifteen countries analysed. This observation is valid for the four functions studied, namely health, education, security and mobility. At the end of the day, the degree of efficiency in Belgium’s public administration can only be described as average. Belgium is generally in a middle-of-the-road position, ahead of the Southern European countries but behind the Scandinavian countries. In Belgium, public action therefore offers undeniable potential for efficiency gains. Guaranteeing more efficient public policies is therefore a priority challenge, which requires continuing efforts to keep down costs while improving service. Over the next few years, greater efficiency of public action should in any case be a key objective for all levels of power in Belgium. But first of all, to achieve this objective, we need to adopt a systematic approach enabling the whole range of public sector missions to be analysed and choices made. Then, we have to look at which level of power is best placed to carry out these missions; any overlap should be avoided and economies of scale aimed for. And lastly, we have to work towards the most appropriate organisation of the way in which the various public services operate, notably by making the best use of IT applications and by simplifying procedures. Any reforms that may be needed must be envisaged from a long-term perspective and be rigourously enforced.

Efficiency is defined as the ability to obtain the best possible results using as few resources as possible. The constant quest for efficiency in public sector management is essential for all constituent parts of the State. So, general government as a whole is expected to make a continued effort to improve services provided to the community or to reduce their expenditure, or even pursue these two goals at the same time. Belgium has a particularly high level of public spending. Among the fifteen West European countries selected, Belgium lies in fourth place in terms of level of expenditure expressed as a percentage of GDP. Along with the Nordic countries, France and Austria, it is one of the States with above-average public expenditure. In view of this high public spending, the results obtained could be better. This, at least, is what emerges from a comparison of budgets allocated and performance in the fifteen countries analysed. This observation is valid for the four functions studied, namely health, education, security and mobility. At the end of the day, the degree of efficiency in Belgium’s public administration can only be described as average. Belgium is generally in a middle-of-the-road position, ahead of the Southern European countries but behind the Scandinavian countries. In Belgium, public action therefore offers undeniable potential for efficiency gains. Guaranteeing more efficient public policies is therefore a priority challenge, which requires continuing efforts to keep down costs while improving service. Over the next few years, greater efficiency of public action should in any case be a key objective for all levels of power in Belgium. But first of all, to achieve this objective, we need to adopt a systematic approach enabling the whole range of public sector missions to be analysed and choices made. Then, we have to look at which level of power is best placed to carry out these missions; any overlap should be avoided and economies of scale aimed for. And lastly, we have to work towards the most appropriate organisation of the way in which the various public services operate, notably by making the best use of IT applications and by simplifying procedures. Any reforms that may be needed must be envisaged from a long-term perspective and be rigourously enforced.

Along with monetary policy, fiscal automatic stabilisers remain the most appropriate economic stabilising instruments, but discretionary counter-cyclical fiscal policy has a role to play too, especially in the event of a sharp economic slowdown.

Public investment is currently at a low level in Belgium and in many other European countries. However, public investment has a very positive impact on economic activity and on an economy’s production potential. It is therefore advisable to boost that investment, though of course without impairing the consolidation of public finances necessary to safeguard their sustainability. The article offers an overview of public investment and the initiatives for promoting it. A first section analyses the components of public investment, describes the trend in that investment and compares the situation in Belgium with the European picture. A second section examines the macroeconomic impact of public investment and sets out numerous arguments explaining why that investment needs to be increased. The last section looks at the various possible ways of encouraging an increase in public investment, which is desirable in the current circumstances. The article ends with some conclusions. As regards the statistical treatment of investment under the ESA 2010 methodological framework, the basic rules are clear and it is not desirable to redraft them. As regards the application of the European fiscal rules under the Stability and Growth Pact, serious consideration should be given to revising the way in which public investment is taken into account, with a view to more favourable treatment of that expenditure. This could be done by replacing investment expenditure with the amortisation of public investment when determining the relevant budget balance.

Public investment is currently at a low level in Belgium and in many other European countries. However, public investment has a very positive impact on economic activity and on an economy’s production potential. It is therefore advisable to boost that investment, though of course without impairing the consolidation of public finances necessary to safeguard their sustainability. The article offers an overview of public investment and the initiatives for promoting it. A first section analyses the components of public investment, describes the trend in that investment and compares the situation in Belgium with the European picture. A second section examines the macroeconomic impact of public investment and sets out numerous arguments explaining why that investment needs to be increased. The last section looks at the various possible ways of encouraging an increase in public investment, which is desirable in the current circumstances. The article ends with some conclusions. As regards the statistical treatment of investment under the ESA 2010 methodological framework, the basic rules are clear and it is not desirable to redraft them. As regards the application of the European fiscal rules under the Stability and Growth Pact, serious consideration should be given to revising the way in which public investment is taken into account, with a view to more favourable treatment of that expenditure. This could be done by replacing investment expenditure with the amortisation of public investment when determining the relevant budget balance.

In contrast to monetary policy, the fiscal policy of the euro area countries has remained a national competence. Since it is important for the countries belonging to the Economic and Monetary Union to aim at fiscal discipline, the Maastricht Treaty and the Stability and Growth Pact made provision for establishing a European governance framework for public finances, accompanied by binding fiscal rules. The framework is one of the cornerstones of EMU, and it is vital that Member States comply with the rules for that union to work well. The article discusses the European governance framework for public finances and subjects it to a critical appraisal. Section 1 looks at the importance of fiscal rules in general, and especially in a monetary union. Section 2 outlines the main stages in the creation of the European budgetary framework. Section 3 describes the current framework. Section 4 details the way in which the European budgetary framework has been applied in recent times. Section 5 presents an appraisal. The European fiscal governance framework has evolved since the foundations were laid by the requirements concerning fiscal surveillance set out in the 1992 Maastricht Treaty. These changes have made it smarter but at the same time they have also increased its complexity. Since the start of European Monetary Union, the most important rules of the Stability and Growth Pact have often been broken. That is undeniably the result of the rather weak support for strict compliance with the rules in some countries, but is also due in part to the complexity of the fiscal rules and the lax supervision over their implementation. Although the measures taken to tighten up the framework over the period 2011-2013 improved public finances in many Member States, there are still many countries, including Belgium, that need to make additional efforts to comply with the fiscal rules. In the short and medium term, the rule-based framework needs to be correctly implemented. In the long term, it is desirable for fiscal policy to become more centralised but that requires more macroeconomic and social convergence, and fundamental steps towards political union. The Five Presidents’ Report published at the end of June contains a number of interesting proposals and in any event forms a good starting point for the reform of the budgetary framework.

In contrast to monetary policy, the fiscal policy of the euro area countries has remained a national competence. Since it is important for the countries belonging to the Economic and Monetary Union to aim at fiscal discipline, the Maastricht Treaty and the Stability and Growth Pact made provision for establishing a European governance framework for public finances, accompanied by binding fiscal rules. The framework is one of the cornerstones of EMU, and it is vital that Member States comply with the rules for that union to work well. The article discusses the European governance framework for public finances and subjects it to a critical appraisal. Section 1 looks at the importance of fiscal rules in general, and especially in a monetary union. Section 2 outlines the main stages in the creation of the European budgetary framework. Section 3 describes the current framework. Section 4 details the way in which the European budgetary framework has been applied in recent times. Section 5 presents an appraisal. The European fiscal governance framework has evolved since the foundations were laid by the requirements concerning fiscal surveillance set out in the 1992 Maastricht Treaty. These changes have made it smarter but at the same time they have also increased its complexity. Since the start of European Monetary Union, the most important rules of the Stability and Growth Pact have often been broken. That is undeniably the result of the rather weak support for strict compliance with the rules in some countries, but is also due in part to the complexity of the fiscal rules and the lax supervision over their implementation. Although the measures taken to tighten up the framework over the period 2011-2013 improved public finances in many Member States, there are still many countries, including Belgium, that need to make additional efforts to comply with the fiscal rules. In the short and medium term, the rule-based framework needs to be correctly implemented. In the long term, it is desirable for fiscal policy to become more centralised but that requires more macroeconomic and social convergence, and fundamental steps towards political union. The Five Presidents’ Report published at the end of June contains a number of interesting proposals and in any event forms a good starting point for the reform of the budgetary framework.

The article compares the fiscal consolidation effort currently being made in Belgium with two other periods of consolidation : the first in the 1980s and a second one in the 1990s. In the first part, the periods of budget restructuring are determined on the basis of changes in the structural financing balance. The second part compares the economic and politico-institutional context in which fiscal consolidation measures were adopted. The third part gives a brief overview of the main measures. The fourth part takes a closer look at the various instruments used for implementing the fiscal consolidation policy and describes the impact they have had. The fifth part explains the consequences of budget restructuring policies on public debt and on interest rates. The first period, which started in 1982 and lasted until 1987, is noteworthy for having begun at a time of recession and major imbalances in the Belgian economy, including a substantial government borrowing requirement. The rigorous restructuring effort made at the time was based on deep cuts in public expenditure and a limited increase in government revenues. The second period, which ran from 1993 to 1998, also started with a recession. The consolidation that took place during this period was achieved mainly through an increase in revenues, but also helped by a reduction in interest charges. The third consolidation period came in the wake of the economic and financial crisis and began back in 2011. This consolidation period was initially characterised by an increase in government revenues, but since 2015 the emphasis has shifted onto cutting expenditure. Moreover, interest charges have continued to shrink thanks to the fall in interest rates. The analysis of the restructuring policies followed since the early 1980s shows that fiscal consolidations have always begun in periods of low economic activity. Likewise, they are always accompanied by structural reforms. Competitiveness has thus recovered and employment has been boosted. Particular attention has also been paid to the financial sustainability of the social security system, not least through the adoption of pension reforms. As regards the current consolidation period, the major restructuring efforts underway are still relatively limited compared with efforts made during the previous two restructuring periods. However, the present fiscal consolidation programme is taking place in more difficult conditions, taking account of lower potential growth, high fiscal and parafiscal pressure, low public sector investment and rising costs of population ageing. So, extra measures still need to be taken as part of the ongoing fiscal consolidation in order to restore a structural budget balance.

The financial crisis that erupted during 2007 and intensified in 2008 and the ensuing economic recession led to a serious deterioration in the public finances of most advanced economies. That resulted in a sharp increase in the fiscal deficit and public debt in those countries, including Belgium. Since then, almost all countries have made considerable efforts to achieve fiscal consolidation in order to end the unsustainable developments. However, restoring sustainable public finances will entail additional efforts in most countries in the years ahead. This article examines the budgetary instruments that can be used to continue consolidating public finances. In the process, it examines in depth the role of public spending. It describes the impact of the various budgetary instruments on economic activity in both the short and long term. Special attention is given to the fiscal position and potential consolidation instruments in Belgium.

The sixth State reform completed at legislative level at the beginning of this year transfers powers from the federal government to the Communities and Regions. The financing of the Communities and Regions is also being adjusted. The State reform therefore has a significant influence on public finances. This article examines the impact of these changes on the future financial position of the Communities and Regions. According to the data from the National Accounts Institute concerning the April 2014 general government accounts, the budget balance of the Communities and Regions as a whole improved from a deficit of 0.8% of GDP to a more or less balanced position between 1995 and 2013. The Flemish Community and the Brussels Capital Region recorded a small surplus in 2013, while the French Community and the Walloon Region showed a small deficit. (1) For 2015, i.e. the first full year in which the sixth State reform will apply, the additional transfer of powers from federal level to the Communities and Regions will amount to roughly € 18.7 billion, or 4.6% of GDP. That includes the whole of the child allowance and various aspects of health care and personal care, as well as some aspects of employment policy. Power over some fiscal expenditure will also be transferred to the Regions, the main item being the housing bonus. The new system of funding the Communities and Regions is based partly on greater fiscal autonomy for the Regions. Thus, they will levy additional percentages on personal income tax revenues. The various mechanisms under the law on the financing of the Communities and Regions will also undergo thorough reform. To ensure that no individual entity receives more or less funding under the new system than under the old one, a transitional mechanism was devised in the form of an equalisation factor. The amounts of that factor will be fixed in nominal terms for a ten-year period; during the following ten years they will be gradually phased out. Some elements are an exception to that because they are not offset by the transitional mechanism and therefore have an immediate budgetary impact on relations between the federal government and the Communities and Regions. This concerns the refinancing of the Brussels institutions for a total of around 0.1% of GDP by 2015, and two responsibility mechanisms – one concerning pensions and another relating to climate – as well as contributions from the Communities and Regions towards the consolidation of public finances. Thus, the new Finance Act for 2014 provides for a one-off deduction of € 250 million in 2014and structural deductions from 2015 onwards in the form of cuts in the tax revenues allocated, so that the Communities and Regions together will make a contribution of € 1.25 billion, increasing to € 2.5 billion from 2016. In addition, from 2017 the Communities and Regions will be required to make a contribution to ageing costs, in that a number of appropriations or tax revenue allocations will be linked less closely to economic growth. The results of two projection exercises based on the new institutional framework created by the sixth State reform are also presented. One exercise outlines the budget balance position up to 2030 with no change of policy. The other calculates the growth of primary expenditure that would be compatible with the restoration of a balanced budget from 2015. That balanced budget objective was recommended in March 2014 by the Public Sector Borrowing Requirements section of the High Council of Finance, and was adopted as part of the indicative path presented in the Belgian Stability Programme of April 2014. With no change of policy, i.e. before the implementation of the measures adopted in the government agreements concluded this summer, the projections indicate a total deficit of around 0.8% of GDP from 2016. The increase in the deficit in 2015 and 2016 is due mainly to the contributions towards the consolidation of public finances. During the ensuing decade the deficit is expected to rise to around 1% of GDP. With the exception of the Brussels Capital Region, which would maintain a small surplus throughout the period, the other main Communities and Regions, namely the Flemish Community, the French Community and the Walloon Region, are projected to record substantial deficits throughout the period. Owing to the contributions towards the consolidation of public finances, the main Communities and Regions other than the Brussels Capital Region are required to make a considerable fiscal consolidation effort in order to achieve the target of a balanced budget. The government agreements concluded for 2014-2019 for the Communities and Regions clearly reflect the fiscal context described above. (1) On 30 September 2014 the National Accounts Institute will publish new public accounts with figures which differ from those used here, partly because of methodological changes caused by the switch from the ESA 1995 to the ESA 2010.