The deficit dilemma: Belgium's ballooning budget explained

Less than a month out from polling day, Belgium’s political parties have set out their stalls about what they would deliver if they get into government.

Though not the most glamorous of campaign points, Belgium’s budget deficit is on target to become one of the largest in Europe this year and is set to grow unless corrective policy action is taken.

Even less appealing are the policies that might be taken to address the issue – higher taxes, lower public spending, or even raising the retirement age (already set to rise to 67 by 2030).

But what exactly is the budget deficit, why is Belgium’s so large, and does it really matter?

Key terms

While many in Brussels pride themselves on multilingualism, economic jargon is less common parlance. To come to terms with the challenge, understanding the terms is key:

Budget

An overview of a government’s annual income and expenditure, usually prepared each autumn for the following year.

Deficit

Much like when pay-day can't come soon enough and your current account edges into overdraft, a budget deficit is when government expenditure exceeds its income and the State is left looking for lenders to make up the difference.

The deficit can be expressed in terms of the monetary amount a country has come up short (in the case of Belgium, the deficit was just under €26 billion in 2023), but to help compare countries of different sizes the deficit is often expressed as a percentage of GDP.

Last year, Belgium’s deficit was 4.4% of GDP, which as we’ll cover later makes it one of the worst students in the metaphorical EU class in terms of overspending.

Wait, what’s GDP?

It stands for gross domestic product and it measures the value of all the goods and services produced within a country in a given year. It’s generally used by analysts to gauge the health of an economy (although it’s not a perfect measure).

National Debt

The total amount a government owes to lenders at a given time, including the build-up of money borrowed by the State to plug the deficit hole each year.

Again, this can be expressed as a total in euros (€614.9 billion for Belgium in 2023) or as a percentage of GDP (Belgium’s stands at 105.2%).

Inflation

How the value of money decreases over time, which in reality means the prices of goods and services going up.

A small amount of inflation is considered a sign of a healthy economy but if it gets out of control it can lead to a cost of living crisis – like the one we’ve seen globally in the last few years.

Interest

When inflation starts to rise bank regulators will raise base interest rates to discourage borrowing and cool down activity in the economy.

The opposite happens when the inflation rate is low or negative – interest rates will be lowered to make borrowing more attractive and help boost the economy.

Inflation has surged in recent years, fuelled by factors like the pandemic, disrupted supply chains, and increased energy costs following the invasion of Ukraine by Russia.

As a result, the European Central Bank has raised its benchmark deposit interest rate ten times since July 2022, from 0% to a record high of 4%, where it has remained since September of last year.

Sovereign debt crisis

This is when a country defaults on its loans and can’t pay them back.

In the fallout from the financial crash in 2008, European countries such as Greece, Portugal, Ireland, Spain and Cyprus were unable to repay their debts and had to be bailed out by third parties like the European Central Bank and the International Monetary Fund (IMF).

The IMF estimates that more than a third of all countries in the world are currently at risk of defaulting on their loans.

The main entrance of the Belgian National Bank building/ Credit: Belga/ Herwig Vergult

The situation in Belgium

Latest figures from Belgium’s National Bank show that the country’s deficit was 4.4% of GDP last year “widened significantly” from 3.6% in 2022.

Belgium saw a spike in overspending in 2020, when a deficit of 9% came as the State invested in pandemic-focused measures. But as the temporary pressures of the pandemic and the subsequent energy crisis have lifted, the National Bank has said it is a “cause for concern” that Belgium’s deficit is still rising.

The Belgian banking regulator has said the outlook for the country’s finances are “far from rosy”, as almost all forecasts predict that unless policy changes are introduced, Belgium’s budget deficit and national debt will continue to increase.

It added that the incoming government will have to cut overspending by €2.5 billion each year just to stablise the deficit. By 2025, Slovakia is the only EU country projected to have a larger budget deficit than Belgium.

An ageing population comes at a considerable cost to the State. Credit: Canva

Bertrand Candelon is a professor specialising in economics at the Louvain School of Management, UC Louvain. He highlights one factor at play in Belgium that makes the budget deficit particularly high.

“The first reason that the forecast of the deficit is high in Belgium is because of ageing. An ageing population has a cost. You have to pay for pensions and older people go to hospital more often so it’s logical to increase the spending for the health system,” he tells the Brussels Times.

According to one report published by the IMF, the pace of ageing in Belgium has been accelerating in recent years. Between 2016 and 2022, the population of people aged 65 and over grew nine times faster than those below 65.

As a result, almost one in five Belgians is now at least 65 years old and this acceleration is set to continue as the baby boom generation reaches retirement age.

Automatic indexation of wages and social benefits to match inflation has also contributed to a continued rise in Belgium’s public expenditure.

Why does the deficit matter now?

Running a budget deficit is nothing new. In the decade between 2012 and 2022, central bank interest rates were at zero or in negative territory, meaning countries could borrow money cheaply to cover excess expenditure. However as interest rates have risen sharply since July 2022, the cost of borrowing has become more expensive.

Benoît Bayenet, President of Belgium’s Central Economic Council (an independent economic advisory body that represents the interests of workers and employers), tells The Brussels Times that unless a solution is found soon, rising interest charged on Belgium’s public debts could cause a “snowball effect”.

As the amount Belgium has to pay each year just to service the interest on its debts increases, the total national debt also starts to grow rapidly and there is less money to spend elsewhere. If growth in GDP is sluggish (as it is currently across the EU), this means the debt to GDP ratio also begins to rise.

“There’s an increase in public expenditure but it’s just to pay the bank, to pay the interest on the debt. For normal people, it means a situation with less spending on public services,” Bayenet explains.

From left to right: Pierre-Yves Dermagne (Belgian Minister for the Economy and Employment), Vincent Van Peteghem (Belgian Minister for Finance, Frank Vandenbroucke (Belgian Minister for Social Affairs and Public Health, Belgium). Credit: Belga

As the snowball gathers momentum and a country’s deficit and total debt continue to increase, lenders might become wary of the stability of that country’s finances. To account for the riskier investment, they could charge even higher interest rates – or refuse to lend money to a State at all, putting a country at risk of default and sovereign debt crisis.

Professor Candelon says that while Belgium is not facing an immediate sovereign debt crisis, the bigger a country’s debts grow, the more likely such a crisis becomes. “If there are no more investors that want to finance Belgian debt, there is a default, an impossibility to pay for the debt, and that has direct, concrete consequences on people.”

“Look at Argentina which faced a sovereign debt crisis in 2001. That created big issues because government spending was limited. Public servants were not easily paid, the number of public servants was reduced, pensions were reduced, social benefits were reduced, and systems were not financed.

“In Lebanon people are limited from withdrawing cash. And ten years ago in Cyprus, all the savings of people were taken to finance the debt of the government – so it can have very clear consequences.”

EU budget rules

Aside from the economic theory of what could happen if Belgium does not reduce its deficit, there are very tangible rules at an EU level that the State is signed up to.

The Maastricht Treaty sets out the rules for countries in the eurozone and includes a requirement that governments limit their deficits to 3% of GDP and public debt levels to 60% of GDP.

These ceilings were lifted to accommodate emergency spending during the pandemic and other economic shocks, but are fully applicable again this year.

Under controversial new rules approved last month by MEPs, Member States which run deficits greater than 3% of GDP will be forced to trim their budgets by around 0.5% to 1% per year until they fall below the 3% threshold.

Other possible penalties for those who continue to breach the EU budgetary framework include financial sanctions and withholding of regional EU subsidies.

So what happens next?

With all of this on the horizon, it will be up to the incoming government to make decisions on how to deal with the deficit.

In a recent report on Belgium’s public finances, the CEC has called for “decisive budgetary efforts” to reduce the deficit, including an analysis of public spending to weed out inefficiencies, rather than putting in place blanket austerity measures.

It suggests that the Belgian Government implements a seven-year budgetary adjustment period to make spending more efficient, as well as balance the need to boost labour productivity and economic growth with the need to invest in and support the green transition.

Belgium’s National Bank has also pointed out that across almost all studies and indicators, Belgium’s “very high” public spending “comes with relatively modest quality and efficiency”.

But, as Professor Candelon points out, “elections are not good for reducing debt” and it could be some time before a Belgian government is formed and ready to tackle the issue.

“In the political cycle, before an election you promise a lot to be elected. Promising to spend, to increase welfare and so on. It’s difficult before an election to have a stabilisation programme because if you are speaking frankly, you are not making people dream.”

“That’s why this time it’s really necessary for Belgium to form a government [quickly] after the election, to take the decisions for reform,” he added.

But Belgian politics is not known for its expediency. It took 592 days to form the current coalition, breaking the previous record of 541 days without an elected government following the 2010 elections.