BELGIUM,S 2007 FEDERAL BUDGET: OLD TRICKS HARDER

UNCLAS SECTION 01 OF 03 BRUSSELS 003715 SIPDIS SIPDIS STATE FOR EB/IFD, EUR/ERA AND EUR/UBI TREASURY FOR OASIA - ATUKORALA USDOC FOR 3133/USFCS/OIO/EUR E.O. 12958: N/A TAGS: ECON EFIN EINV BE SUBJECT: BELGIUM,S 2007 FEDERAL BUDGET: OLD TRICKS HARDER TO SELL REF: A. BRUSSELS 3196 ¶B. BRUSSELS 1201 ¶C. BRUSSELS 3256 -------------- SUMMARY AND COMMENT -------------- ¶1. (SBU) Belgium,s Federal Budget for FY2007 is a mosaic of political compromises, with social benefits for the political left and law and order spending and fiscal conservatism for the political right, funded with a mix of new revenue enhancements. To ensure balanced books, the budget projects 2.2 percent GDP growth for 2007 and strong foreign investment. Plans to reduce public debt to 83 percent of GDP are impressive, given the 113.6 percent debt level when Verhofstadt took office in 1999. ¶2. (SBU) In his presentation to parliament, Verhofstadt painted a glowing portrait of a nation with strong, non-inflationary growth and a balanced budget for the eighth year running. Nonetheless, critics found it full of holes and unrealistic. Several of the proposed taxes may not yield the revenues anticipated. The Federal coalition,s reliance on one-time fiscal gap fillers has come under increasing scrutiny, with 2006-2007 measures challenged under Belgian law by the opposition and 2005 by Eurostat, the EU,s statistical office. ¶3. (SBU) The relatively good news for U.S. companies is that the current budget pays more than lip service to investors, lightening the tax burden somewhat and avoiding most last-ditch additional gouges to corporate budgets. It is not, however, clear where the impact of the packaging tax would fall. -------------- Painting a Good Picture -------------- ¶4. (U) Guy Verhofstadt,s 2007 Budget was the centerpiece of his State of the Nation address to Parliament October 17. Despite a string of financial setbacks that hit the federal government in the months and weeks preceding it (refs A and B),the Prime Minister claimed Belgium,s FY2007 budget would be balanced, offer new benefits to taxpayers, strengthen public security and welfare, and stimulate job creation. He painted a bright picture of Belgium,s economic situation: over 153,000 jobs created since his second mandate began in May 2003 (according to Eurostat),a 0.3 percent budget surplus for 2007 due to strong GDP growth, and public debt reduced to 83.7 percent of the country,s GDP by the end of ¶2007. Verhofstadt admitted a continued fiscal burden in Belgium of nearly 45 percent of GDP, and its negative effect on competitiveness. ¶5. (U) In keeping with his tradition, Verhofstadt offered new benefits for constituents that satisfied the Socialist component of his coalition government. These included: -- More protection for low-income tenants against rent increases; -- Higher health insurance reimbursements for the poor; -- Higher cost of living allowances (raised by 2.3 percent compared to 1 percent in 2005 and 1.8 percent in 2006); and -- Lower taxes for social housing beneficiaries. ¶6. (U) Mindful of his own Liberal party and its economic and political conservatism, Verhofstadt took action to favor their interests as well. Law and order disbursements addressed the recent spate of early release scandals (Ref C) that severely tested the coalition government in September. For the economic liberal, law and order side, the gifts were: -- A bigger budget for the Ministry of Justice (up 4.1 percent); -- 139 new prison wards to ease overcrowding; -- 172 new judicial assistants and social workers to help monitor detainees under electronic surveillance; -- 100 new employees for State Security (Surete) to monitor extremism and Muslim fundamentalism; -- Lower taxes on business for overtime, nighttime and teamwork; -- More consistent (perhaps lower) corporate tax policy for firms benefiting from government assistance (R&D, export subsidies, investor aid). BRUSSELS 00003715 002 OF 003 ¶7. (U) To cover these new commitments and still keep the budget balanced, a litany of revenue enhancement measures were announced: -- An undisclosed number of pension funds would be accessed and their obligations absorbed by the government; -- taxes on cigarettes and cigars would be raised: tobacco by 0.4 Euro/pack, cigarettes by 0.2 Euro/pack, and cigars by 5 percent, to yield the government 330 million Euro; -- over 40 govenment properties would be bundled into a sale-leaseback scheme (this action was not completed in time for the 2006 tax year); -- Companies that fire employees would have to pay the social contributions on refunded vacation bonus money rather than the government paying; -- Taxes on investments made from corporate reserves will be marginally lowered, with the goal of stimulating companies to use idle funds and create more jobs and output. (Corporate reserves are untaxed until either declared as income or invested; the lower tax aims to push companies to invest them rather than keep them escrowed.) The budget projects 350 million euros in revenue from this measure. ¶8. (U) A new tax on certain types of packaging -- drew particular attention. Reportedly, the Prime Minister was quite impressed by his meeting with former U.S. Vice President Al Gore, who was in Brussels promoting his feature movie on climate change, An Inconvenient Truth, when the budget was being finalized. As sketched out by the PM (and open for discussions with the private sector, he said),the new tax would impose a fee on packaging (0.35 euros per kilo of packaging weight) multiplied by a coefficient according to environmental friendliness of the product (zero for paper, 1 for glass, 3 for steel, 7 for plastic, 11 for polystyrene, and 18 for aluminum). Verhofstadt said the tax would favor low-CO2-emitting packaging industries, and further reduce household waste. According to the GOB, the tax would contribute 320 million euros to government coffers in 2007, despite the fact it would only take effect halfway through the year. -------------- Opponents Sharpen Their Knives -------------- ¶9. (U) Opposition to the budget proposal was immediate and strong. Opposition leader Peter De Crem (CD&V) criticized it as quote self-satisfied, non-credible and misleading end quote. He said it lacked real, non-subsidized job creation, and the tax on packaging (nicknamed the Al Gore tax by the far-right Vlaams Belang) was a shameless grab for cash. Consensus among the financial analysts was that the budget was too hastily cobbled together and relies on too many one-time revenue enhancements. An economist from the PM,s own party questioned the strategy of what he called hiding the deficit, noting that taking over pension funds and selling government property would help temporarily, but cost more later. ¶10. (U) Critics of the container tax find both the timing (after the critical May national elections) and the amount suspect. Belgium,s well-ordered recycling system claims to recycle over 90 percent of household waste already. The Belgian Federation of Food Industries (FEVIA) claims the tax will have no positive ecological impact, and may raise some food prices 10 to 15 percent. Environmental groups say the tax fails to address the chief causes of greenhouse gas emissions: transportation and home heating. ¶11. (SBU) The Prime Minister defended the FY2007 budget as relying less on one-time measures (0.4 percent of total revenues) than last year,s budget (0.55 percent of revenues). He also claims the container tax will penalize neither the producer nor the consumer, because the producer can change the choice of packaging to focus on paper-based containers (at zero tax rate) or alternative products chosen by the buyer. (Comment: Post finds this argument facile, in that paper alternative or other substitutes may not be universally available, timely, or cheap.) -------------- Comment -------------- ¶12. (SBU) This is the vaguest of all budgets Verhofstadt has BRUSSELS 00003715 003 OF 003 submitted since 1999. There are so many unknowns, ans so few figures, that previous budgets look well-documented and clearly laid out by comparison. There is a widespread concern among analysts that the GOB is kicking its financial problems down the road, and that the next coalition government will be forced to deal with some unpleasant realities in terms of emptied private pension funds or bills for the expensive sale and lease back of government buildings. The chief of staff of Flemish minister-president Leterme confided to Econoff Flanders, concern that the Verhofstadt government is leading the country towards financial bankruptcy. Indeed, some measures announced to balance previous budgets, such as combating fiscal fraud, were not fully implemented, did not reap the expected revenues, or were subsequently disallowed under European rules. Further, Eurostat recently disallowed improper booking of 7 billion euros of railway debt by the GOB, which turned the 2005 0.1 percent of GDP surplus into a 2.1 percent deficit. ¶13. (SBU) Nonetheless, for the 2007 budget, some of the traditional ritual victims appear to have been spared. Banks, energy majors and pharma companies largely escaped the strong arm for additional revenues they habitually suffer, perhaps in recognition of their increasingly critical contribution to the economy and in hopes of salvaging Belgium,s attraction to foreign investment. IMBRIE .