Transcript Slide 1

Challenges and strategies for Belgian public
finances
Seminar “Potential Growth and Fiscal Challenges”
Federal Planning Bureau, October 27, 2009
Henri Bogaert
Michel Saintrain
plan.be
Outline
A. Where do we come from and where are we going to with
unchanged policies?
B. Where should we go to?
C. What would imply the consolidation strategy in the medium term?
D. What would imply the strategy in the long term?
2
plan.be
A. Where do we come from and where are we going to
with unchanged policies?

Caveat about the following figures
 2 FPB forecasts:
 May Medium-Term Projections (2009-2014)
 September forecast in preparation for the budget (without analysis of public
finances)
 Recent public finances projection (budget, HCF)
3
plan.be
Medium-term fiscal prospects
2008
2009
2010
2011
…
2015
FPB in May
1.2
4.3
5.6
6.1
6.1
Budget and HCF
end of July
1.2
5.9
6.5
7.0
7.4
GDP growth
1.2
-3.1
0.4
1.9
2.2
Great uncertainty, especially about revenues
Measures of the 2010-2011 budget would likely reduce the deficit by
1.5% of GDP
I shall use the FPB May projection in the presentation
4
plan.be
Long-term projection with unchanged policy
(% of GDP)
8%
450%
4%
400%
0%
350%
Primary balance
-4%
300%
-8%
250%
Financing balance
-12%
200%
-16%
150%
Debt (right scale)
-20%
-24%
50%
-28%
0%
2000
5
100%
2010
2020
2030
2040
2050
2060
plan.be
B. Where should we go to?

Requirement of the Stability and Growth Pact

Sustainable position

The new German rule

The Belgian consensus
6
plan.be
Requirement of the Stability and Growth Pact

Excessive deficit procedure: deficit below 3% before 2013

Defining a MTO (defined in terms of structural balance): Close to
balance or taking account of the sustainability gap

Transition path towards the MTO: at least a progress of 0.5% of
GDP per year
7
plan.be
Sustainability gap in 2010
Baseline
S2*
Of which: Adjustment
necessary to stabilize
the current debt ratio
Adjustment necessary to
frontload the cost of
ageing
5.9
0.2
5.7
 * S2 means: by how much should we adjust the structural primary
surplus if we want that the projected revenues cover the projected
primary expenditures
 The cost of ageing is the increase of the age-related expenditure in p.p.
of GDP between 2008 and 2060. It is estimated to 8% by the Belgian
Ageing Study Committee.
 S2 is not far from the effort that should be done to reach a balanced
budget in 2015
8
plan.be
German rule

0.35% of GDP structural deficit for the Central Government

0% structural deficit for the Länder

Cyclical deviations are allowed and favoured

The rule is inserted in the Constitution

Alignment with Germany will probably be unavoidable due to
market pressures
9
plan.be
Belgian consensus is close to the German rule

Balanced budget since 2000. Return to balanced budget around
2015

No consensus on the distribution of the budget balance rule
among the government levels

While there is a consensus on the necessity to frontloading the
cost of ageing, going beyond a balanced budget seems politically
unfeasible.
10
plan.be
C. What would imply a balanced budget in the
medium term?

Ideally, 3 types of adjustment should be done:
 Adjustment of the starting point: erasing the structural deficit
progressively
 Make the expenditure growth consistent with the potential growth of
revenue: expenditure growth more or less equal to potential growth
 Let the automatic stabilizers play their role
 Caution: this will not necessarily lead to a balanced budget in 2015
11
plan.be
What is the size of the structural deficit today?
In May 2008, we thought we were « close to balance » but not in surplus
Structural balance estimate
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
-0.5
In percent of GDP
-1
-1.5
-2
-2.5
-3
-3.5
-4
12
plan.be
Actually, structural deficit was worsening and would
continue to worsen with current policies
Structural balance estimate
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
-0.5
In percent of GDP
-1
-1.5
-2
-2.5
-3
-3.5
-4
May 2008
13
May 2009
plan.be
What does explain the present level of structural
balance?
2008
2009
-2.2
-2.4
Revision of potential output since 2000
-1.5
-2.0
New structural measures (stimulus package and others)
0.0
-0.2
Others
-0.7
-0.2
Change in one year in the structural balance estimate for
2008 and 2009
14
plan.be
The level of structural balance is higher than we thought, but the
expected increase in the structural deficit is high...
Level in 2009
1. FPB Potential growth
Structural balance
Change over 2010-2014
1,4
-2.8
-2.6
3.7
0.7
Revenue
46.2
0.2
Expenditure
45.3
2.1
Interest charges
2. OECD Potential growth
Structural balance
1.0
-1.3
-4.0
3.7
0.7
Revenue
46.2
0.2
Expenditure
43.8
3.6
Interest charges
...but there is a great uncertainty about the evolution of the structural balance
15
plan.be
As regards the change over 2010-2015, with unchanged policies,
primary expenditure growth is largely above potential growth
Baseline
Real primary expenditure growth rate
of which: Entity I
Potential growth
16
2,3
2,5
1,4
plan.be
Projections of primary expenditure growth are
largely above potential growth
51
49
47
45
43
41
39
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
37
Primary expenditure (structural) in % of potential GDP
Primary expenditure in % of potential GDP
17
plan.be
Illustrative scenario 1: Adjustment of primary
expenditure growth to potential growth except for
pensions and health care
Real growth rate
of which: Entity I
Baseline
Scenario 1
2,3
1,7
2,5
2,4
Difference with baseline in % of
GDP in 2015
-1,5
of which: Entity I
p.m. increase of the structural
deficit in % of GDP between
2009 and 2015
-0,4
2.6
Assumptions of the scenario:
 Public consumption growth = 0 in real terms
 Pension and health care evolve like in the baseline
 Other expenditure grows like potential growth
18
plan.be
Scenario 2: Adjustment of primary expenditure growth
to a zero real growth rate except for pensions and health
care
Real growth rate
of which: Entity I
Baseline
Scenario 1
Scenario 2
2,3
1,7
1,4
2,5
2,4
2,1
-1,5
-2,5
-0,4
-0,5
Difference with baseline in % of
GDP in 2015
of which: Entity I
p.m. increase in the structural
deficit in % of GDP
2.6
 Scenario 2 allows to globally align primary expenditure growth with potential growth.
 But, most of the effort is done by Entity II, which leads to a strange result: Entity II
should be in surplus and Entity I in deficit
 A balanced budget for both entities in 2015 would imply to reduce social
expenditure, for instance by indexing them to less than the price increase
 Another solution would be a devolution of some competencies to the R&C without
transferring the financial means, which is also strange.
19
plan.be
Conclusion: a balanced budget in 2015 is very
ambitious

The level of the structural deficit in 2009 (-2.8) should be
adjusted in the medium term : if it starts in 2012, it would mean
a structural adjustment of somewhat more than 0.5 p.p. of GDP
until 2015.

In the baseline, the increase in the structural deficit after 2009 (2.6) is due to expenditure growth rates that are not consistent
with potential growth.

Consistency could be obtained by:
 Zero growth in real terms except for pension and health care, but this
implies a surplus in Entity II in 2015 and a deficit in Entity I.
 Higher expenditure growth in Entity II, but with a reduction in social
security expenditure, including pensions and health care.
20
plan.be
D. Is a balanced budget in 2015 a “sustainable”
Medium-Term Objective?

Or, in other words, can increasing aged-related expenditure be
financed…
 With reduced potential growth due to ageing ?
 While revenue and other expenditure keeps growing in line with
potential growth?

21
This is measured by the S2 indicator assuming a balanced budget
in 2015
plan.be
Reaching a balanced budget in 2015 would reduce the
sustainability gap by approximately 5% of GDP
S2
(measured in
2010)
Baseline
5.9
Balancing the budget in 2015
0.8
 But this is not yet sufficient to cover the cost of ageing fully.
 The necessary extra adjustment could be obtained, for instance, by a
smooth increase in the effective age of retirement (+/- 3 years between now
and 2030)
 This would imply a progressive extra adjustment representing a reduction of
the cost of ageing by 1.6% of GDP between 2015 and 2060. With this
strategy, close to the German rule, S2 is approximately zero: there is no
sustainability gap anymore.
22
plan.be
Age-related expenditure and sustainability gap are
mainly under the responsibility of the Federal
government
S2
(measured in 2015)
Of which: Adjustment
necessary to frontload
the cost of ageing
6.2
3.6
Entity I (Federal)
5.3
3.9
Entity II (sub-federal)
0.9
-0.2
General government
No impact of the cost of ageing on Entity II.
For Entity II, S2 represents only the necessary adjustment in order to stabilize debt. There is
no cost of ageing for Entity II and, accordingly, no need to build a surplus.
23
plan.be
Sustainability gap S2 per entity in 2015
Unchanged
distribution of
competencies
between entities
Entity II pays for
the pensions of its
own civil servants
6.2
6.2
Entity I
5.3
3.0
Entity II (sub federal)
0.9
3.2
General government
As for Entity II: S2=3.2 represents now the necessary adjustment to stabilize
debt : 2.7 plus the cost of ageing 0.5).
The impact of the cost of ageing for Entity II is now 0.5% of GDP.
24
plan.be
Conclusions

Reaching a balanced budget in 2015 would reduce the long-term
sustainability gap very significantly

The adoption of an adapted version of the German rule would
require a progressive extra adjustment that could be obtained by
a smooth increase in the effective age of retirement

Fortunately, the burden of the age-related expenditure is located
in Entity I, where the margins created by the reduction of the
debt are also located

The payment of the civil servants’ pensions of Entity II by Entity II
would reduce the necessary adjustment to be done by Entity I by
more than 2% of GDP and would avoid a drastic adjustment of the
social expenditure
25
plan.be
Two difficult trade-offs

Without changing the institutions, between an increase of taxes
and a reduction of social security expenditures; this would
preserve growth enhancing expenditure mainly located in Entity II

By changing the institutions, between taxes located in Entity I and
growth enhancing expenditure that should be compressed by the
necessity of financing the devolution of some expenditure of
Entity I. This strategy would shelter the Social security.

This presentation shows that the exit strategy depends very much
on the estimate of the potential growth and on the present output
gap which are still very uncertain.

So what? Wait and see? What is sure is that the expenditure
growth is structurally too high in Belgium.
26
plan.be