Debt-Laden Belgium's Finances Questioned

The solidity of Belgium’s public finances was called into question on Tuesday after an independent budget watchdog challenged the government’s tax revenue forecasts and warned of higher budget deficits.

The leaked report from the federal government’s monitoring committee raises questions as to whether Belgium can meet commitments to bring its public finances in line with euro-zone budget rules.

Without higher taxes or spending cuts, the would reach 5.2 percent of GDP in 2010, compared with a 4.8 percent target, according to the watchdog.

By 2015, public spending would need to be cut by €25 billion ($32 billion) to balance the budget – another commitment made by Belgium to its European partners in the context of the sovereign debt crisis. This is at least €3 billion more than even the parties advocating fiscal restraint campaigned on in the elections six weeks ago.

Short-term public spending cuts would need to amount to €1.3 billion “within months” to meet its targets agreed with the European Union, according to L’Echo, the Belgian business daily that obtained the report.

Most of the shortfall stems from over-optimistic assumptions on tax revenues by the outgoing government, the budget watchdog said.

“In normal times, taking such measures might be straightforward,” said Philippe Ledent, economist at ING Belgium. “The problem now is that there is no government that can take them.”

Belgium has been ruled by a caretaker government since elections in June produced no clear winner. Up to seven parties are in negotiations to form a coalition, with little or no discussion on how to tackle the country’s sickly public finances, according to press reports.

The way in which public spending could be cut dominated the electoral campaign in Dutch-speaking Flanders, with a consensus for more belt-tightening seen across most of the political spectrum. But the issue hardly featured in Francophone Wallonia, where the victorious Socialist party has vowed to oppose any form of budget austerity.

Belgium’s national debt has ballooned since the start of the financial crisis, exceeding 100 percent of GDP since the start of the year. Only Greece and Italy have higher debt ratios within the eurozone.

Belgian officials have touted the relatively low budget deficit as one reason why investors should retain confidence in its sovereign debt. Yields on its 10-year bonds stand at 3.3 percent, about 56 basis points higher than equivalent German paper.

A government spokeswoman said the leaked figures were a month out of date, and that there had been some improvements in tax receipts in recent weeks. “It is for a new government to take the appropriate action. The current government cannot at this stage invent new measures.”