Home Society Devils in the red: Energy rescues push Belgium toward the debt danger zone

Devils in the red: Energy rescues push Belgium toward the debt danger zone

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Belgium’s budget was already sliding off the rails before the coronavirus pandemic. And now a raft of emergency measures to cushion consumers from soaring energy prices are pushing the government into even more precarious territory.

The balancing act between energy doleouts and the creaking national debt burden is dominating the country’s budget discussions before Prime Minister Alexander De Croo delivers his annual State of the Union on Tuesday.

State Secretary for the Budget Eva De Bleeker told POLITICO the country had no choice but to try to tackle the debt bomb “but at the same time, we have to provide one-off resources to support citizens and businesses during this crisis.”

Belgium has announced a series of measures to help consumers, including shaving €392 off electricity and gas bills in November and December, and is now turning its attention to what can be done to help industry — which looks set to be whacked by obligatory pay rises linked to inflation.

All this government largesse means that economists — and some politicians from the more fiscally conservative Flemish nationalist camp — are now ringing alarm bells.

The country has the sixth largest debt burden in the EU at around 108 percent of gross domestic product in 2021. If current trends continue, Belgium will hit a debt burden of 116 percent by 2027. This is extra worrying given rising interest rates, which are rapidly leading to higher costs, said De Bleeker.

The European expenditure rules, known as the Stability and Growth Pact, normally limit the annual budget deficit to 3 percent of GDP, but Belgium’s annual budgetary overspends are 6.1 percent of GDP.

“Belgium’s dramatic debt problem is quickly becoming even more dramatic,” said Sander Loones, a parliamentarian for the Flemish nationalists. “Once the public debt hits 120 percent, you risk a snowball effect on the financial markets. The current government doesn’t realize how big this problem is.”

Less leeway

State Secretary for the Budget Eva De Bleeker told POLITICO the country had no choice but to try to tackle the debt bomb | Benoit Doppagne/Belga Mag/AFP via Getty Images

The delicate budgetary situation leaves little leeway to go all-in on spending to help cushion energy prices.

As a liberal politician, De Bleeker sees it as her duty to keep a close eye on the books. But in a fragile coalition of seven ideologically diverse parties, that isn’t easy, she admitted.

“It may not be the nicest job to keep warning my colleagues,” De Bleeker said in her office in Brussels’ Finance Tower. “But I do it with a lot of conviction.”

Some of her colleagues have a different perspective, however. The Greens and socialists have fired warning shots that debt-reduction measures are a no-go given the economic turmoil. On the contrary, they argue, the government has to help limit the impact of the current crises.

They are not alone. Too many cuts now will undermine the economy and society, one of Belgium’s unions said. Some economists also argue that the current crisis calls for Keynesian measures. “You have to fix your roof when the sun shines, not when there’s a storm,” said André Decoster, a public finance professor at Katholieke Universiteit Leuven.

“Temporary, targeted responses will melt away again as the economy grows again. After that, the government has to tackle its debt levels, which are indeed unsustainable,” he added.

The current budget negotiations will prepare the budgets for both next year and 2024 — to avoid prickly discussions ahead of the 2024 elections. But they risk focusing more on extra spending measures instead of extra cuts, officials admitted.

One of the big challenges is that Belgium still has a system of mandatory pay rises linked to consumer prices. Employers are panicking as surging food and energy prices are translating into big wage hikes.

In January 2023, for example, most employees in the private sector will see their wages rise more than 10 percent. The issue is politically so sensitive that an exemption is taboo, but the government is considering ways to cushion the effect for companies, De Bleeker said, such as spreading the costs for companies over time.

In the long run, Belgium has to scrutinize the mandatory pay rises, De Bleeker said, although she admitted now is not the time to do so. The same goes for measures to get more people employed to tackle rising pension costs.

To take such painful measures in a coalition government, it helps to be able to point a finger at the bad cop, and that’s where the EU Stability and Growth Pact can take some of the flak.

“If you have such an instrument, you have a framework to work in and you can also enforce it from the various political parties in the government,” De Bleeker said.

Paola Tamma contributed reporting.

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