July 21, 2024

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Budget expert Wim Muesen: “Europe will force us to reduce our government debt”

Budget expert Wim Muesen: “Europe will force us to reduce our government debt”

On June 19, ten days after the elections, Europe will confront us with the facts: our public finances are in bad shape and interventions are inevitable. “This amount is still significantly underestimated in the run-up to the elections,” says Wim Muisen, a budget expert in Leuven.

“We can only conclude that our public finances have gotten off track over the past five years,” says Wim Muisen, a leading public finance expert in Leuven. This may not be a topic in the election campaign, but it will soon become the main topic after the polls. Only because Europe will force us to take measures. Moiesen looks at the numbers: “Every year in 2020-2024, our budget deficit was larger than the eurozone average. Our average annual deficit was 5.7 percent, which is a third higher than that of other EU countries. The result is that government debt rose from 98% to 106% of GDP.

Prime Minister Alexander De Croo (Open VLD) always points out that we have had two big shocks, the Corona crisis and the energy crisis, which have cost the government a lot of money.

Wim Mussen: Our neighboring countries were also affected by these two shocks, right? They didn’t go any further in terms of funding their government, but we did. How did this happen? Our government wanted to achieve two goals: to preserve the purchasing power of households and to protect the industrial fabric. This is desirable and appreciated, but the measures taken have been too broad and its phase-out has been too slow. As a result, the budget cost in our country was higher than the average in Europe.

Where did the error mainly occur?

Moisin: Spending, in particular, drove the budget deficit: while revenues remained stable, our spending ratio, how much the government spends relative to GDP, increased by 3.3 percentage points between 2019 and 2024. The eurozone average was almost half lower. In addition, we were also very generous by giving everyone an automatic wage index right away.

“The government is poor, but not all Belgians are rich.”

Shouldn’t we do automatic indexing of wages?

Moisin: In normal times, the automatic linking of wages to the index is justified, but these times were not normal times as the inflation rate rose to more than 10 percent. By applying automatic wage indexation to everyone at the time, excessively high incomes were compensated for by the rise in life expectancy. Because they save more and spend less of their income on energy, which has been the main cause of inflation – their homes are better insulated, have solar panels, heat pumps, etc. Let me put it this way: thanks to wage pegging, low incomes were able to get through the winter without getting too cold, but for high incomes it was an unnecessary gift.

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What could have been better?

Moisin: It would have been better to set only the minimum wage. After some time, it was possible to index middle and high incomes, but in cents rather than percentages: these wages could have been increased by the same amount as the minimum wage, as the Martens V government did in 1982 after the devaluation of the Belgian franc. . This way we could have maintained our competitiveness better, and it would have been much better for our overall finances. Because now, in addition to social benefits, the wages of all civil servants and teaching staff were immediately significantly adjusted. Therefore, the spending side of the budget had to swallow a huge bill. The budget will continue to bear these additional expenditures for years to come, which will further harm our public resources in the years to come.

We’ve been very generous by automatically indexing all wages. For high-income earners, this was an unnecessary gift.

Europe usually closely monitors the development of public finances.

Moisin: But during the years of crisis, Europe was resilient, and there is a lot to be said for that. During exceptional crises such as Corona and the rapid rise in energy prices, it is justified for the government to spend more money to avoid the crisis. But Belgium used this temporary budgetary leniency very enthusiastically.

Now that European leniency is over, Europe will once again monitor our public finances more stringently.

Moisin: This is still largely underestimated in our country, even in the run-up to the elections, because the poor state of our public finances forces Belgium to intervene in any case, and Europe will again be closely watching this happen. This will certainly require a completely different budgetary approach from our country, for the first time by October 15, 2024, when we will have to present a new budget to Europe. So it will be there soon.

How different will the budget approach need to be in the future?

Moisin: In the past it was a principle One Size fits all: The budget deficit can reach a maximum of 3 percent of GDP and the debt ratio up to 60 percent for all member states. Europe is now taking a different approach and charting a course for each member state individually. Compare it this way: In the past, every cyclist was given the same bike to ride the Tour de France, with the result that a small cyclist couldn’t reach the pedals with his feet, and a tall cyclist had his knees on the handlebars. Now every cyclist gets a bike designed specifically for them, which will better enable them to complete the Tour de France.

It may come as a surprise, but Belgium spends slightly less on social protection or healthcare than our neighboring countries.

What does that mean concretely?

Moisin: The first important point is that any country with debt above 60% of GDP, and we are certainly among them, will have to agree with Europe on a path to reduce this debt over four to seven years and keep it sustainable. . Therefore, it will not be enough to look ahead with the budget for one year, but rather we must plan for at least four years. This will take some getting used to for Belgium, because we have a good reputation.Vision navigation expert‘To be, we navigate by sight. We will also have to agree structural adjustments with Europe, for example reforms to our tax system, pensions and labor market. The consequences are underestimated, and Europe will force us to reduce our government debt and implement serious reforms.

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What is the second key point that will change the way we have budgeted so far?

Moisin: Europe used to look at a budget deficit that could not exceed 3 percent of GDP. Now a spending standard will be applied to each country, and Europe will set the maximum amount that Belgium’s expenditures can increase. Europe has already taken this path and takes it seriously. This was already clear from the initial assessment distributed on 21 November in response to the draft budget for 2024: Belgium subsequently received a low rating for “risk of non-compliance with recommendations”. Then we ended up with a temporary punishment seat because the increase in budget spending was almost double what Europe recommended.

On June 19, ten days after the election, it will become clear whether we are really sitting on the backseat, as everyone fears, and what we need to do to eliminate excessive deficits and debt. what should we do?

Moisin: Whether we want it or not, we will have to intervene in budget revenues and expenditures. On the revenue side, the next government must work on tax reform, which requires tackling fiscal nonsense. All kinds of interest groups in our country have succeeded in obtaining specific preferential tax regimes for their supporters, in the form of tax breaks, deductions and rebates. This must be addressed.

And on the spending side of the budget?

Moisin: In 2019, before Corona, Belgium’s spending at 52 percent of GDP was 4.5 percent higher than the average of neighboring Germany, France and the Netherlands. This suggests that it is certainly possible to cut spending. A study by the National Bank indicates the areas where Belgium spends the most. This is not in the area of ​​social protection or health care, where some now want to make cuts. It may come as a surprise to many, but in these areas we spend slightly less than our neighboring countries.

Many see the budget as a bag to grab and assume that everything is done with “other people’s money.” But other people’s money is everyone’s money.

What do we spend more money on?

Mosen: We spend much more on economic matters, such as subsidies to NMBS and De Lijn, service vouchers, night and shift work, etc. It can definitely remove weeds. We also spend a lot of money on our public administration, which is very complex. Our political elite also seem to be doing very well for themselves, think exit payments, expensive ministries, extra compensation for all sorts of parliamentary positions and so on. Something must be done about this too. Our politicians can set a good example and use taxpayers’ money more economically. Then we also spend a lot of money on education.

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This is surprising.

Moisin: Yes, we spend a lot more money on education than our neighboring countries, and we don’t realize enough how great our education system is with many schools within a short distance offering many courses. Something could happen there too. However, many of us view the Budget as a grab bag, looking for tax cuts and subsidies for their supporters. This must end until public finances are healthy again. Viewing the budget as a grab bag leads to what economists call the “tax illusion.”

Tax illusion?

Moisin: Yes, everyone is moving towards this barrel and trying to get their own benefit out of the budget. This is based on the misconception that all this is done “with other people’s money.” But other people’s money is everyone’s money. Because if an interest group succeeds in obtaining a tax cut or subsidy under the slogan “benefit to us, tax cost to someone else,” other interest groups will also try to obtain such an advantage. At the end of the day, everyone pays for everyone. Then the dog bites his tail.