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