BELGIUM REGISTERS FIRST BUDGET DEFICIT IN EIGHT

UNCLAS BRUSSELS 000103

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON BE
SUBJECT: BELGIUM REGISTERS FIRST BUDGET DEFICIT IN EIGHT
YEARS; 2008 MAY BE WORSE



1. (U) Belgium registered its first budget deficit since
1999 for the year 2007. The deficit came in at a level of
0.3% of GDP, or 260 million euros (USD 390 million). GDP for
year was 80 billion euros (USD 120 billion),up 2.7 %.
Economic growth is expected to slow to 2.1 % in 2008 and the
budget deficit is expected to worsen as the new government
implements its spending priorities.


2. (U) Vice Prime Minister and Budget Minister Yves Leterme
stated at the beginning of January that reducing this deficit
during his current term as minister (which runs until March
23 pending installation of a permanent government) is his
number one priority.


3. (U) Analysts attribute the first budget deficit in eight
years to several factors. High oil prices, uncertainty over
the exposure of Belgian banks and investors to the subprime
crisis, and the strong euro helped depress expected economic
growth. Belgium's tax authorities collected 900 million
euros (USD 1350) in tax revenues less than in 2006. In
addition, the lack of a government for much of the year
prevented the final sale of a number of government assets
which would have helped increase revenues. Ironically, other
analysts believe the lack of a central government helped
reduce the deficit because the provisional government was
working under the equivalent of a continuing resolution.


4. (U) One well-informed academic observer of the
government's finances admitted noted that the small size of
the deficit was more worrisome than at first analysis. This
was because the government had planned to continue with a
series of budget surpluses in order to prepare for the aging
of the Belgium population and strengthen the social safety
net. He also attributed much of the deficit to the notional
tax facility put in place by the Belgian government in 2007.
Under this scheme, an investor is allowed a tax deduction for
risk capital equal to a certain percentage of their net
equity (capital and reserves) located in Belgium. (NOTE: The
notional tax deduction has helped Belgium attract subtract
inflows of foreign investment in 2007. END NOTE).


5. (U) Belgium's three regions and its communities continued
to register surpluses in 2007, especially in Flanders. The
deficit, therefore, was due solely to the federal government.



6. (SBU) COMMENT: For the moment it does not appear that
Belgium's on-going government formation crisis affected
economic growth or foreign direct investment in 2007.
Indeed, the notional interest deduction appears to be more
than sufficient to continue to attract foreign investment to
Belgium. However, the notional interest deduction certainly
hit the government's tax revenues.


7. (SBU) COMMENT (Cont.): As for reducing the budget
deficit in 2008, the government will be hard-pressed.
Economic growth is expected to continue to slow and no one is
talking about ending the notional interest deduction.
Furthermore, many of the easy moves have already been made
and there are no more opportunities to take over pension
funds or sell government buildings, moves which papered over
cracks in the fiscal picture over the previous eight years.
The government, or its successor, will continue to confront
critical decisions on the roles of the federal government and
the regions in Belgium as well as looming regional elections
in 2009. Making the difficult decisions needed to reduce
the deficit, let alone register a surplus, will be a supreme
challenge.
.