Belgium Reaches 2013 Budget Agreement

Last week saw the Belgian Federal Government reach a new budget agreement. It was announced on Tuesday morning at 7:00 am after a 17-hour marathon negotiation session, after a month of discussion. Budget talks initially got underway in the aftermath of the October 14 local elections.

“With 2013′s budget we are reinforcing our position in the advance peloton of Europe, ahead of the U.K., France and the Netherlands in terms of deficit.” Di Rupo told reporters.

The ministers from the six parties the Di Rupo’s coalition government slashed a total of €3.7 billion from Belgium’s 2013 budget, keeping in line with Belgium’s EU goals, including a balanced budget in 2015 and a budget deficit equivalent to 2.15% of gross domestic product in 2013. The new budget outlines reductions in a number of areas. This includes cuts on military spending, postal service and state railways. Furthermore, there has been a partial wage freeze which will leave index and previously agreed pay increases unaffected.

The new budget deal also includes new tax measures. Taxes on cigarettes will increase by approximately 20 cents per pack. In addition, taxes on holding company profits will be introduced, increases in capital gains taxes, and changes to tax breaks granted to business are also included in the budget. Interestingly, a positive impact from interest fees received for guarantees relating to the bailout of Dexia is also included in the deal.

“Given the length of time the budget discussions took, we are happy,” Prime Minister Di Rupo told reporters. “We will reinforce the confidence of the outside world in our country.” Given that Belgium has already been able to reduce its debt service costs due to sharp increases in confidence since the formation of the Di Rupo government, it is no surprise that the current administration considers confidence of the outside world in Belgium to be critical. In June the Wall Street Journal reported that Belgium’s lower funding costs would save Belgian tax-payers €100 million this year.

According to projections issued in June, the National Bank of Belgium is projecting a 1.4% increase in Belgium’s GDP, placing Belgium’s growth within the NBB’s 1% to 2.2% GDP growth forecast for the Eurozone as a whole. Altogether, since the projected deficit will be larger than the country’s GDP growth, Belgium debt will grow slightly in 2013. Furthermore, there is a certain risk that the cuts made to transportation and the postal service, as well as plant closures and the reduction in purchasing power due to the pay freeze, could undermine the projected growth figure, leaving Belgium ultimately worse-off.

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