Briefing: why Belgium public finances are on intensive care

 The political instability of Belgium has at least for the last decades always interacted with its frail financial and institutional structures. Both are in dire need of reform, so dire that questions arise if this is politically still feasible, certainly in these days of voters’ revolt and political fragmentation.

 Slightly more than a century ago, in the early months of 1914, Belgium was no doubt one of the most prosperous countries in the world, the Singapore of its day, with the fifth largest gdp of all the nations on the planet. It was created in 1830 as a temporary compromise between France and Britain, after the king of the Netherlands, who had received the territory from London in 1813, had shown himself incapable of quelling what was after all a small revolt in Brussels. Both the British and French government had good reasons not to wage another war for that territory, that had been a military vacuum since the waning of Spanish-Habsburg power anno 1630 and for which they had been fighting wars with each other since 1689.

 History is unpredictable, and the programmed annihilation of the temporary solution never occurred. The ‘accidental nation’ of 1830 turned into the success story of the nineteenth century after the young liberal hotheads that had created to their own surprise a successful revolution became enlightened statesman. They did so under the clever leadership of the king that had been imposed on them by London, Leopold of Saksen-Coburg, since 1817 the widower of the princess of Wales and as such a burden for the British Treasury. Belgium became the second country in the world to develop an Industrial Revolution, and is today, with its 190 years of age, one of the oldest states of Europe, the third ever in the world to develop a genuine political democracy (after Britain and the US) where political power changes hands peacefully via elections.

 The German army shattered that success story in 1914, with an extremely brutal invasion – executing 6000 civilians, including children, in six weeks time in actions outside the battlefield – and an as brutal occupation till the end of 1918, that destroyed about 20 % of Belgian gdp. From then on Belgium had permanent difficulties to manage its public finances.

 It did not help that since the introduction of some form of universal suffrage in 1893 a new internal political fissure had taken front stage. From that moment it was obvious that the majority of the voters in Belgium (living in Flanders, the northern, most populous part of the country) was largely administered in a language it did not understand: French, that was still the language of civilization, and therefore of the upper classes in Flanders. That started a long political process that would lead to laws regulating the use of the languages in the country, and, from 1970 onwards, to an evolution towards federal structures of government.

 Communal divisions were dominant on the political agenda in the nineteen thirties and nineteen sixties and seventies. The German invaders, both in 1914 and 1940, twice poisoned the whole dispute, by each time heavily promoting and subsidising the extremely small minority of Flemish radical – quite often also fascist - activist that dreamed of an independent Flemish state. Inevitably they each time provoked a backlash from the (mainly French-speaking) Belgian establishment. It was that reaction that made the small radically nationalist minority grow exponentially, not during but after each war.

 When the process of devolution was set in in 1970, three years later a global recession made an end to a quarter of a century of continuous and unseen economic growth in Western Europe. Both crises, the economic and the institutional one, led around 1980 to an exploding budget deficit, a series of unstable governments, the devaluation of the Belgian currency and a global public debt of 130 % of gdp towards 1985. It was with intense budget cuts and numerous new taxes reduced to 85 % towards 2007, then rose again to 110 % after the financial crisis, and is now stagnating at somewhat above 100 % of gdp.

The evolution of global government revenues (black line, linked to the numbers on the left side) expenses (grey line, left side) interest charges  (dotted line, right side) budget deficit (blocks, right) and primary balance (black points, right) in Belgium between 1995 and 2018 (graph from the High Council of Finance)

 Today we are confronted with the results of this institutional and financial crisis that has been going on, with ups and down, and sometimes heavily intertwined, for almost half a century. In the labyrinth of Belgian statistics it is not always easy to detect the scope of this, but we nevertheless want to risk a try. Belgium today is the third largest spender of government money of the EU, with a level of 52 % of gdp, just after France and Finland. With its global debt of again above 100 % gdp it has only Greece (still 180 %), Italy (135 %) and Portugal (120 %) in front.

 But the drama is in the details. Belgium government spending can be divided in federal government, regional governments, local administrations and social security. The latter is the biggest spender, with about 21,5 % gdp, of which it earns itself about two third via social contributions levied on wages. The regional governments spend about 17 % gdp, of which they collect about two fifth as their own fiscal revenue. Local government spends about 7 %.

'Belgium today is the third largest spender of government money of the EU, with a level of 52 % of gdp, just after France and Finland. With its global debt of again above 100 % gdp it has only Greece (still 180 %), Italy (135 %) and Portugal (120 %) in front.'

 The federal government collects the equivalent of 26,5 % gdp in fiscal revenue, but is obliged to give most of it away to the social security and the regional governments. Besides it pays about 90 % of the yearly interest on the global government debt (another 2,2 % gdp) and about 1,3 % gdp to the EU. This leaves it with only 4,3 % gdp to spend for things like the army, the police, diplomacy, the courts and the prosecutors, royalty, the parliament and a dozen of smaller expenditures.

  The turnaround looks at first sight impressive with 17 % gdp having been taken away from the federal government in fifty years time.  But at a closer look the federal government is now by far the most vulnerable, and in a sense even terminally ill in its financing. In the Belgian financial hierarchy the social security always took the first place, since it was created in 1944. Social levies have priority over fiscal ones, and the federal government has always been obliged to guarantee the balance between incomes and expenses in the social security. As in practice it is political difficult to make cuts in social benefits, this usually meant raising its own revenue via taxes or cutting its own services to be able to transfer extra money to the social security.

After it was admitted to the euro, and while the interest payments on its global debt declined with 3 % compared to the evolution of the gdp between 2000 and 2019, Belgium opened the purse again: normal expenditure grew with 8 % gdp since the beginning of the century (with a peak of 12 % in 2012). Five percent of this is due to the social security, one to the bankcrisis (more than 2 % in 2012), one to more subsidies for companies, one to all kind of other expenditures including a still slightly continuing rise of the total salary cost for officials.

 A similar perverse dynamic grew out of the institutional reforms. Initially, in 1970, the Walloons were the most eager for economic decentralisation, whereas the Flemish insisted on cultural devolution. Between 1918 and 1961 the quite radical Walloon socialists and the communist party together always covered a large majority of voters in Wallonia. But as this was never translated into radical left influence at the federal level, separatist tendencies grew, with Walloon leaders in 1945 even going to general De Gaulle in Paris to offer their land (he declined as he had already enough troubles with Churchill and Roosevelt). At the end of the 1960s this evolved into a desire for federalism, whereby the hope was to create an own socialist economic policy.

 Fifteen years later this proved to be an illusion, as even the new French socialist president François Mitterrand accepted to make his country move into a globalising world. The interest for further decentralization in Wallonia rapidly dwindled. Precisely in those nineteen eighties however the Flemish became aware of their far superior economic growth inside the country and wanted to impose their liberal economic policies on what they saw as spending drift, an unwillingness to perform and an attachment to bygone socialist policies in Wallonia and more and more also in Brussels. These were the days when a very young liberal minister of the Budget, called Guy Verhofstadt, pushed for drastic cuts and earned the nickname 'baby Thatcher'.

'The federal government has financially been stripped since 1944 by the social security and at the latest since 1988 by the process of devolution. It is a moribund cash cow for the more popular spending authorities.'

 Out of this grew a new dynamic that was to dominate all institutional reforms (nr. 3 to 6) between 1988 and 2013. Flanders wanted more economic autonomy (if only to reduce the financial transfers via the solidarity mechanisms inside Belgium) via institutional reform. French-speaking Belgium refused every dialogue on further devolution, until it needed money. Then a bargaining process set in wherein at the end new competences were decentralized without touching too much on the transfer mechanisms, except for taking away extra-revenue from the federal level to the regional ones. With that latter shift the French-speaking regions obtained the extra revenue for which they had entered into negotiations, while the Flemish region took with it the surplus for which it had not even asked.

 In other words: the federal government has financially been stripped since 1944 by the social security and at the latest since 1988 by the process of devolution. As both latter systems are only partially dependent on their own revenues, both were better immunized against economic shocks (like the one of 2008) of which the federal treasury each time bore the biggest brunt. In the last institutional reform of 2013 for the first time timid reforms were made to make the regions at least bear some of the financial charges of the growing cost of social security. But this was far from enough: the real spending power of the federal government (4,3 % gdp), after all transfers to the social security and the regions have been deduced, is now far smaller than that of the pension budget on its own or of the combination of health costs and sickness insurance budget.

In this graph, from the National Bank, it is obvious how the yearly growth of the cost of pensions and especially of the sickness insurance has remained the last decade way above the growth of gdp (measured as the average of the last two decades, so it would be even lower for the last decade alone). As both budgets together are more than five times the size of the unemployment budget, the spectacular reduction of the latter has only partially helped.

 Still the federal budget continues to carry by far the largest charge of compensating the ever growing costs of those largest budgets inside the social security. Diminishing costs for unemployment and ever lowering interest rates on the global debt have for the last decade reduced the financial pain of that mechanism, but both evolutions are going to reach and endpoint in the coming years. In the meantime one can easily assume that the cost of pensions and sickness insurance together is on average 1,5 billion euros above the economic growth each year, compared with a federal budget that is only 22 billion euros every year anymore. If the federal government has to absorb this surplus in each of the next years it will either have to operate a fiscal massacre or be halved in spending power in less than ten years.

 To change this is, no doubt, on the crosspoint of the financial and institutional structures of Belgium, the most urgent reform that Belgium needs. It would need to make regions and social security far more – in the best case 100 % - responsible for obtaining their own revenues, which would inevitably also ameliorate the transparency and responsibility of each spending structure. The federal government might then at last develop into a government level in its own right, and no longer be a moribund cash cow for the more popular spending authorities.

 The problem is that nothing obliges anybody to do so, on the contrary. The social security system is in practice administered by employers and unions (the latter organizing the payment of unemployment), with very few interference of the parliament. The regions on the other hand have full autonomy: in the devolution process it was decided around 1980 that no hierarchy would be maintained between the different government levels, that each would be fully autonomous in its own competences, and that conflicts about that would ultimately be solved before the Constitutional Court. That is why the Walloon government in early 2016 could block for months the EU-treaty on free trade with Canada, with the Belgian government being incapable to do anything about it.

 Changing these bad habits of Belgian rule would necessitate to break two of the biggest political taboos of the country: reforming the administration of the social security and creating at least as much federal hierarchy and cooperation obligations as in the Swiss constitution. The paradox of Belgium after 50 years of devolution is indeed that, for instance on budgetary questions, there are less mechanisms on deliberation, cooperation and legal obligations between the regions, than between the member states of the EU.

'The paradox of Belgium after 50 years of devolution is that, for instance on budgetary questions, there are less mechanisms on deliberation, cooperation and legal obligations between the regions, than between the member states of the EU.'

The reason is that underneath the rivalries between communities and the economic differences remain (even if Belgium is, with Switzerland, the sole European country where never in its history such a kind of deep divisions has taken a violent turn): the gap in yearly economic growth in the last decade between Wallonia and Brussels on the one hand and Flanders on the other remained almost constantly 1 % (with the average economic growth in Belgium being about 1,0 %). That is less than a quarter of a century ago, indeed, but still to hard to overcome.

 Although unemployment is now also rapidly declining in French-speaking Belgium, it is still at least 7 % higher than in Flanders. The employment level of people between 20 and 64 is under 65 %, whereas it is above 75 % in Flanders. For immigrants from outside Europe by the way, mostly in Brussels and Flanders, it is just over 40 %, the worst number in the whole of Europe, not the least because too high social levies and minimum-wages have all but prized low skilled workforces out of the official market.

Belgium’s social division visualized, on a map(2019)  from the ministry of social inclusion showing the density of payments of income wages (public assistance) in each village and city (yellow is average, grey strongly under average, green slightly under average, orange slightly above average and red strongly above average). Whereas red in Flanders is confined to five cities (not even its largest one, Antwerp), it is present in the whole long chain of the former Industrial belt in Wallonia along Sambre and Meuse (from Mons in the west to Verviers in the east) and – remarkably – very much also in rural areas. Wallonia is surely poorer than Flanders, probably also more generous in social benefits. The number of people benefitting from an income wage in the whole of Belgium rose with 36 % between 2014 and 2018.

 How difficult a reform would be, is proven in the application of the Stability and Growth Pact of the EU, whereby the Commission can in principle even impose financial sanctions to countries that do not respect the budgetary and economic discipline developed after the financial and Eurocrisis of last decade. To implement this there should be a kind of authority of last resort inside Belgium that can impose the wanted budgetary discipline to all Belgian spending levels.

 But the spending powers in Belgium accepted in 2014 no more than a cooperation agreement (almost a treaty) whereby they promised to follow as much as possible the advises of a special High Financial Council on the execution of the wishes of the EU. Five years later, in its most recent report, that Council complained that ‘ever since the signing of the agreement in 2014 not a single common decision on the budgetary targets has been possible … no budgetary targets have been fixed for each level of responsibility, … the Council has not been able to fulfil its monitoring responsibilities, and so questions will be raised about the credibility of some budgetary scenario proposed’.

 In other words: Belgium political crisis is also – not for the first time - a huge budgetary and financial one.