Belgium: 2010 Budget: First Step on Long Road Back to

UNCLAS BRUSSELS 001503 STATE FOR EEB/IFD, EUR/ERA AND EUR/WE Treasury for OASIA/OIN - Atukorala USDOC FOR 3133/USFCS/OIO/EUR SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EFIN EINV ELAB ENRG BE SUBJECT: Belgium: 2010 Budget: First Step on Long Road Back to Sustainability REF: Brussels 1357 ¶1. (U) This cable is for internal U.S. Government use only and is not to be posted on the Internet. SUMMARY -------------- ¶2. (U) The Belgian federal government (GOB) is counting on the country's three regions to help reduce the country's overall budget deficit to 18.7 billion euros (usd 28 billion)by the end of 2011. Although the deficit will still be at 5.2 percent of Gross Domestic Product by then, Prime Minister Herman Van Rompuy told Parliament October 15 that his government has done all it could in the current international macroeconomic climate: "We cannot change the wind, but have adjusted our sails." Overall, the Belgian federal budget measures for 2010 include 1,639 million euros (usd 2,458 million)in new revenues, 1,100 million euros (usd 1,650 million) in cuts and 1,925 million euros (usd 2,888 million)in structural measures. Some stimulus measures worth 782 million euros (usd 1,173 million) also still remain, almost identical to the amount the GOB is hoping to receive from the regions. ¶3. (U) The most prominent cuts are a 97 million euros (usd 150 million) reduction in the defense budget and a 900 million euro (usd 1,350 million)freeze in social security spending. On the revenue side, the notional interest deduction has been reduced, along with higher excise taxes on fuels and tobacco and assumed returns to be earned from combating tax fraud. Belgian banks are supposed to pay 890 million euros over a two year period, while the GOB expects the commercial nuclear energy sector to provide 565 million euros 9usd848 milllion) over that same period-but the French parent company has given an initial firm 'Non.' End summary. Taking Slow Road Back to Fiscal Sustainability -------------- - ¶4. (U) In presenting his budget to the Belgian parliament, Prime Minister Herman Van Rompuy stressed that it is still too early for Belgium to balance its budget. He repeatedly said the overall macroeconomic climate was still too fragile to warrant a return to austerity. Therefore, despite all the cuts and new revenues, he also announced a reduction of the Value Added Tax (VAT) in the construction and restaurant sectors (from 21 to 6 percent),as well as 85 million euros of new funding to cover costs of technical unemployment for white collar workers, i.e. allowing companies to keep personnel on the payroll during periods of slack economic activity. ¶5. (U) New cuts are to come from the Defense Department, where Minister De Crem is expected to reduce his 2.8 billion euro budget by some 97 million euros, mainly through a reduction in force (from 37,000 to 34,000 soldiers) and by closing about 40 percent of military barracks in Belgium. De Crem pledged that Belgium's involvement in international missions will not be affected by these scheduled cuts. ¶6. (U) For social security, the government plans to inject some 5 billion euros (usd 7.5 billion) in the next two years, without specifying where it will find the money. Some of it, though, is expected to come from not utilizing the annual 4.5 percent real growth criterion for social security spending that was agreed upon in 2005, while pharmaceutical companies are expected to make stronger cuts in off-patent drugs (i.e., generics). But question marks remain as how the money will be allocated to non-pharma spending within the health care budget. ¶7. (U) The GOB is also planning to reduce from 4.4 to 3.8 percent the notional interest deduction, a popular investment measure concocted by the GOB in 2006 allowing companies to deduct from tax payments the "notional" interest on their investments in Belgium. Finance Minister Reynders has indicated he hopes to save some 250 million euros 9Usd 375 million)annually through this reduction. He also indicated excise taxes on polluting diesel fuels would go up, for both private individuals and commercial users. ¶8. (SBU) The biggest impact on the budget is to come from the financial sector. Banks will be expected to pay an insurance premium in exchange for the government guarantees they obtain against the event of bankruptcy. In all, the GOB is scheduled to receive some 890 million euros (usd 1,335 million)during the next two years from the banks, but an internal discussion is still raging whether the above premium will be calculated on deposits or on (the much riskier) interbank activities, or both. Also, as a result of its dismal performance during the 2008 financial crisis, the Belgian Commission for Banking and Finance (the Belgian equivalent agency to the U.S. Securities and Exchange Commission) will be stripped of its micro-prudential oversight over banks, insurance companies and pension funds. That oversight will move to the National Bank of Belgium, which already had macro-prudential oversight as well as liquidity monitoring. ¶9. (SBU) The Belgian government is also looking at the energy sector--the commercial nuclear plant operators in particular--to help reduce its deficit, and says Electrabel (owned by the French energy concern GDF-Suez) will need to pay 235 million euros (usd 353 million) a year. The GOB sees those payments as due recompense for its announced intention to extend by 10 years the life of the three oldest commercial nuclear plants (operated by Electrabel),from 2015 to 2025 (reftel). Since those plants are old, the perception is that they have been depreciated and that an additional revenue stream of 10 years will mean healthy continued profits for Electrabel, some of which the GOB wants to receive. However, GDF-Suez CEO Gerard Mestrallet told the French press on October 16 that GDF-Suez will pay 'zero euros' to the GOB. The company paid the GOB 250million euros (usd 375 million) in 2008 but has taken the GOB to court in 2009 to contest a 500 million euro payment due this year (if the company wins, the GOB could lose the 250 million 2008 payment as well, according to Belgian press reports). Finance Minister Reynders has not been amused by such talk, and told the`he weeken d of October 17-1remarks show "bad form,n choose a voluntary p, or the GOB will pass @ents. The story continuesith press articles on Octhe Prime Minister was hrtfolio from Energy Min`ently failed to get ahe French company on paper ¶10. (SBU) The GOB hashe course by avoiding le the economy struggle `rrh`l thinking on behalf o communities are expected to make. ¶11. (SBU) Begium is in a tough fiscal situation - hurt by tQe financial crisis (with large bailouts to banks in 2008 and 2009) and the resulting economic crisis (which brought higher spending viaautomatic stabilizers, and reduced tax revenuesQ; it doesn't want to prematurely squeeze moretaxes out of households and the business sector in general. But faced with probable overal debt to GDP levels rising above 100 percent Qn coming years (from around 83 percent in 2007),the GOB had to do something, and has made a calculated bet that it begin to try to turn things around fiscally by soaking 'winning' pharma, energy and financial sectors without doing too much damage to the country's investment reputation. GUTMAN