By Arnaud Dessoy and Pierre-Emmanuel Noël
This “old” idea reconnecting with Keynesian theory has never elicited such unanimous consent. In recent months, many mainstream economists and fiscally-conservative international organisations (IMF, OECD) have been pleading in unison for an increase in public investment in infrastructure – not to mention the many colloquium initiatives that have sprung up to support this idea (Construction Federation, Brussels Parliament, Union of cities and municipalities, etc.).
On the political front, the “Juncker Plan” at European level and the “national pact for strategic investment” launched by Belgium’s Prime Minister last September, are clearly in line with this approach. Even the new President of the United States has placed an ambitious investment stimulus programme at the very core of his future economic project, a target nobody challenged.
The context is particularly favourable by all accounts. The economy (mainly in Europe) is sluggish, interest rates are at historically low levels, the financing offer is overabundant and last, but far from least, the societal and modernising needs for our infrastructure must urgently be addressed to tackle future challenges (energy, mobility, health, education, housing, sustainable development, etc.). The needs are all the more pressing in Belgium as our country is suffering from structural under investment, not since the last economic and financial crisis of 2010, but for more than 25 years. Since 1995, public investment accounts for 2.2 percent of GDP in Belgium on average, compared with more than 3 percent in Europe.
Paradoxically, this impressive unanimity runs up against an incomprehensible deadlock situation in Belgium and in Europe. The fiscal straight jacket imposed by European regulations is constraining public investment. The answer is to be found primarily in the European System of Accounts (or the “ESA standards”, as they are known in the jargon), which penalise the implementation of public investment projects.
Indeed, these standards fail to distinguish between the “bad” public debt (which stems from the financing of current expenditures) and the “good” public debt (which corresponds to investments in infrastructure). This budgetary criterion thus totally ignores a “balance sheet” vision of the State as the condition of a country’s infrastructure and facilities is not taken into consideration in the overall assessment of the economic situation of the State concerned, the sole focus being on its debt-to-GDP position.
Another aggravating feature is that investment expenditures have to be recorded in one go and in full for the accounting period, thereby impacting the result, irrespective of the economic lifetime of the asset and without regards for the financial reserves established from surpluses in previous financial years.
The logical consequence of this “double punishment” in the accounting treatment of public investment is to discriminate against investment by governments that have embarked on a process of fiscal consolidation, which leads to the creation of a “hidden debt,” as recently illustrated by the saga of the Brussels tunnels.
The ESA standards are not the only culprits, however. The euro crisis and above all the battery of new European governance measures – Known as “six pack” in the European jargon (i.e. consisting of 5 regulations and one directive) and “two pack” (2 new additional regulations), supported by the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union – and the adoption of the supposed “golden” rule have hardened the budgetary framework even more, further discouraging investment and compounding the above-mentioned penalising effects of the ESA standards: The significant tightening of budget targets, which henceforth limits the annual structural deficit to 0.5 percent of nominal GDP maximum, whereas the traditional 3% offered a relative budgetary leeway to finance investment; There is a growing trend to address budgetary targets per level of government and even individual entities within the framework of the internal stability pact .
Belgium is particularly affected, inasmuch as it has the distinguishing feature of combining two characteristics, namely (1) a very high public debt/GDP ratio, and (2) fragmented budget appropriations due to the multiple tiers of government in Belgium, making them less apt to absorb a greater debt burden (unlike France or Italy, for instance). Applied on the scale of a given public entity in Belgium, the requirement for a balance according to the frame of reference of the EAS standards will often stand in the way of implementing an investment project.
Finally, in the aftermath of far stricter interpretation rules, the scope of consolidation of the public sector was significantly expanded through the re-qualification of a large number of public entities (alternative financing entities, PPPs and social housing financing companies and municipality-controlled companies at local level), with an inhibiting effect on public investment as a result.
Towards a smarter definition of the balanced budget criterion?
The European authorities have in recent months become gradually aware that this regulatory framework victimised their own policy stimulus plan (“Juncker” Plan, “Europe 2020” Strategy, etc.). Some limited efforts have admittedly been made: the Commission introduced an “investment clause” (albeit of very limited scope and inapplicable to Belgium) in the budgetary framework, whereas Eurostat and the EIB jointly developed a PPP Manual to make the consolidation rules clearer and more transparent in the case of infrastructure projects set up as public-private partnerships (“PPPs”). Though clearly laudable, these initiatives have nonetheless proved insufficient.
To find a way out of the investment deadlock and reinvigorate public investment, Europe has to change its budgetary paradigm and accept a differentiated treatment for the debt relating to investment projects, of course based on rigorous criteria to do with feasibility, added value for the community and financial sustainability (because gold-plated or “white elephant” projects are to be carefully avoided).
Concrete and detailed proposals have already been set forth by authoritative think-tanks, like the CERPE, having regard for the sustainability of public finance and taking due account of the net increase in aggregate asset value (i.e. post-depreciation) to offset the corresponding debt increase.
This seemingly technical subject is nonetheless of fundamental importance, because beyond public investment as a stimulus tool (and its well-known multiplier effect), sustainable competitiveness and inter-generational fairness are at stake on a more fundamental level, and the strategic infrastructure (mobility, digitisation, research, etc.) that will guarantee the prosperity of tomorrow and preserve our social model has to be built today. Ironically, during the drafting of the Maastricht Treaty that introduced EU’s common fiscal framework, the differentiated treatment of investment debt had been envisaged but eventually dropped due to the lack of agreement on the scope of the investments to be considered.
Now is the time for the political world to reclaim this seemingly hermetic subject that is nonetheless of crucial importance for the future of Europe.
Arnaud Dessoy is Director of Public Finance and Social Profit Studies at Belfius bank.
Pierre-Emmanuel Noël is Professor at Sciences-Po Paris and College of Europe, and a member of the Stand Up Support Committee
Disclaimer : This text reflects the views only of the authors, not the institutions for which they work
 Article 13 of Council Directive 2011/85/EU on requirements for budgetary frameworks of the Member States provides for the establishment of: “appropriate mechanisms of coordination across-subsectors of general government to provide for comprehensive and consistent coverage of all sub-sectors of general government in fiscal planning.”
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