Identifier
Created
Classification
Origin
07BRUSSELS1892
2007-06-08 13:31:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Brussels
Cable title:  

Belgian Regions and Federal Taxes - Paying

Tags:  ECON EFIN EINV BE 
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VZCZCXRO9896
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHBS #1892/01 1591331
ZNR UUUUU ZZH
R 081331Z JUN 07
FM AMEMBASSY BRUSSELS
TO RUEHC/SECSTATE WASHDC 5608
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHRB/AMEMBASSY RABAT 2353
UNCLAS SECTION 01 OF 03 BRUSSELS 001892 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB/IFD, EUR/ERA AND EUR/UBI
Treasury for OASIA - Atukorala
USDOC FOR 4212/OECA/JLEVINE
RABAT for W. Bush

E.O. 12958: N/A
TAGS: ECON EFIN EINV BE
SUBJECT: Belgian Regions and Federal Taxes - Paying
For Political Devolution In Belgium

Ref: (A) 06 Brussels 3196 (B) Brussels 1201

(C) Brussels 1882

UNCLAS SECTION 01 OF 03 BRUSSELS 001892

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB/IFD, EUR/ERA AND EUR/UBI
Treasury for OASIA - Atukorala
USDOC FOR 4212/OECA/JLEVINE
RABAT for W. Bush

E.O. 12958: N/A
TAGS: ECON EFIN EINV BE
SUBJECT: Belgian Regions and Federal Taxes - Paying
For Political Devolution In Belgium

Ref: (A) 06 Brussels 3196 (B) Brussels 1201

(C) Brussels 1882


1. (SBU) Summary. The "good news" story of Belgian
federal fiscal management is less lustrous than it
appears. Ongoing devolution of responsibilities from
the federal to the regional level since 1993 has
created growing pressure by the regions for more
revenue to perform their tasks, but taxing remains
dominantly a federal purview. Transfer of
responsibility for any major component of Belgium's
social safety net as a result of post-election
federal-regional negotiations would necessitate a
major revision of tax apportionment in Belgium. End
Summary.

Less Healthy Than It Appears?
--------------

2. (U) As the Belgian federal election on June 10
nears, review of eight years of Prime Minister Guy
Verhofstadt?s budgets reveals a tradition of balanced
budgets that mask long-term indebtedness, delayed
repayments, and eroding financial balances. Much of
this has been driven by fiscal pressure from the three
regions that comprise Belgium: Flanders, Wallonia and
Brussels. Since the 1988 Constitutional reforms that
created the Belgian Federal state, the regions have
gained authority through the devolution of
considerable responsibilities from the federal
government to regions, language communities, or lower.
The revenues to fund these growing responsibilities
has come largely from transfers from federal tax
revenues. How to fund the budgets necessary to
sustain any further transfer of responsibilities to
the regions is a crucial question. The existing tax
distribution structure may come under increasing
pressure if devolution is deepened in the post-
election negotiations, as many expect.


3. (SBU) Since 1999, Verhofstadt has made fiscal
discipline his hallmark, passing a string of balanced,
or even slightly surplus, budgets. Facing towering
public debt of 113 percent of GDP when he entered
office in 1999, Verhofstadt brought it down to 87
percent of GDP this year ? an impressive record hailed
by both the OECD and the IMF. In eight years

Verhofstadt worked to cut taxes, keep interest rates
low, and promote investment; he achieved Belgian GDP
growth exceeding the EU average in most years. Aware
of the aging population and the problem it will pose
to Belgium's generous welfare state, Verhofstadt also
structured a surplus to feed a ?Silver Fund? that by
the end of 2007 is supposed to reach a value of 15
billion euros. The low interest rates, courtesy of
the European Central Bank, which lowered Belgium's
interest payments, yielded a small primary surplus
that Verhofstadt could spend on police reforms and
subsidies for Belgian post, railways and Sabena
airlines.


4. (U) The flip side of this shiny coin is a more
tarnished reality. Some years the budget balance was
achieved through a variety of questionable one-off
actions: a fiscal amnesty to repatriate billions in
capital that had fled the high-tax country; the sale
and lease-back of hundreds of government properties at
year-end to create positive cashflow; the absorption
of pension funds from quasi-public entities to cover
twelfth hour revenue shortfalls; and pushing payments
due by the government into the next fiscal year.
According to Belgium?s Cour des Comptes (GAO
equivalent),these actions added 800 million Euros to
the 2007 budget. Many of these actions imply long-
term recurrent expenses to the treasury, such as rents
and pension obligations in outyears. Most troubling
to financial analysts, Belgium?s primary balance, the
surplus of revenues over expenses before interest
payments - a litmus test of government economic
health, has declined from 7 percent in 2000 to 4.1
percent in 2006. This is reportedly the sharpest
decline within the Eurozone, during the period when
most other EU countries realized stable or improving
primary surpluses. The government also demanded

BRUSSELS 00001892 002 OF 003


"contributions" from the private sector to finance new
projects or to cover budget shortfalls, the
pharmaceutical and energy sectors are cases in point.


5. (SBU) The watchdog of federal finances, the High
Finance Council, is slated to present an assessment of
federal financial management over recent years after
the June 10 election. Delayed release is seen as
political favoritism by opponents of the present
government. The High Finance Council is headed by the
Deputy Governor of the Belgian central bank (BNB),Luc
Coene(a former Chief of staff of Verhofstadt),and
consists of previous ministers and academics of party
affiliations sympathetic to the liberals (VLD and MR).

Regional Responsibilities and Budgets Growing
--------------

6. (U) Federal government transfers to the regional
governments are an important reason for the decline in
the primary balance, the government claims. Transfers
to the regions and linguistic communities regularly
exceed budgeted amounts. These sub-national entities
are anxious to take on more responsibilities, arguing
for the location of public policy decision-making
closer to the citizens being served. This shift of
power may well have kept Belgium a single federated
country and kept social peace since the wave of
Flemish nationalism in the 1980s. Regions are now
responsible for agricultural policy, environmental
regulation and oversight, foreign trade promotion,
export control and licensing, and economic
development. The linguistic communities control of
education, cultural affairs, and family policy. Post-
election federal-regional negotiations will consider
granting the regions authority over employment
insurance, health care and labor policy, which could
have deep implications for Belgian federalism.


7. (U) In contrast to the devolution trend, however,
taxing authority is one competence that has not been
deeply regionalized. The bulk of tax revenues are
still paid to the federal government. Regions and
communities are permitted specific taxes (inheritance,
car registration, gambling, media/entertainment) that
add up to only 12 percent of total Belgian tax
revenues. A tax sharing agreement which dates from
the early 1980s apportions to the regions the rest of
their operational income. While constitutional
reforms in 1993 enhanced the regional share, the
regions complain they need more resources. From 2000
to 2006, Belgian regional and community spending has
increased from 1.4 to 5.6 percent annually, averaging
3.5 percent growth each year. In 2005 this totaled
34.5 billion Euros, equal to 32 percent of the total
Federal budget's disbursements.


8. (U) The rising demand for regional budgetary
resources has been met in part by the regions
themselves. Strong economic growth in Flanders has
yielded higher receipts for the region in its narrow
taxing authority. As a result, Flemish authorities
have been able to keep balanced or slightly positive
budgets, and paid down their regional public debt from
2.5 billion Euro in 2000 to less than 480 million
Euros by 2006, and they expect to nearly retire it by

2008. Brussels Capital region has seen its public
debt shrink by two-thirds from 2000-2006. In the less
economically dynamic Walloon region, however, deficit
financing has had to cover increasing public
disbursements, and Walloon public debt rose from 2.1
to 3.6 billion Euros over the same period.

Take the Job Without the Money?
--------------

9. (SBU) The differences between the regions in terms
of economic health, industrial composition, and fiscal
management have made budget issues a lightning rod for
regional politicians this election. A Flemish study
of 2006 claims Flanders subsidizes Wallonia to the
tune of 6.5 percent of Flemish regional GDP annually,
over 10 billion Euros. This supports sentiment in the
north of Belgium to ask for further devolution of
responsibility such as healthcare, childcare

BRUSSELS 00001892 003 OF 003


allowances, pensions and unemployment benefits to the
regions ? and the share of federal budget to pay for
them. Walloon politicians, while denying that a
Flemish subsidy exists, are reluctant to risk losing
the deep federal pockets that cover the high
unemployment and social service costs of their region.
The federal government spent almost 210 billion Euros
on social security and healthcare in 2005, one-fifth
of the federal budget. If transfer of any major
component of Belgium's social safety net is attempted
during the post-election federal-regional
negotiations, it would necessitate a major revision of
tax apportionment in Belgium.

Comment
--------------

10. (SBU) Revising the federal-regional tax structure
at the same time as governance competencies are
redistributed would be logical, but may be less
popular in Wallonia than in Flanders, despite demands
by all regional leaders for more revenue. Comfortable
with their regional economic strength and fiscal
management, Flemish politicians would welcome the
independent authority and funding to execute it. In
Wallonia, still buried in public employment scandals
(Ref C),18 percent unemployment, and weak budget
discipline, party leaders may be loathe to take on
major responsibilities ? and accountability -- without
the fallback of federal coffers. Whether the federal
fiscal problems can fully be blamed on regional
demands is questionable, since allocation of tax
revenues to the regions was part and parcel of the
constitutional reforms of 1988, 1992 and 1993. What
is beyond question is that raligning tax revenues
with the distribution of competencies in Belgium is a
messy job awaiting the new government.
FOX